FS Super Vol13 i02 by financial.standard

Volume 13 Issue 02

Featurette

Women’s budget Opinion

Zuper’s end

REDESIGNING THE GAME Andrew Moore, Spaceship

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Contents

www.fssuper.com.au Volume 13 Issue 02 | 2021

COVER STORY

REDSIGNING THE GAME Andrew Moore, Spaceship

16 NEWS HIGHLIGHTS

FEATURES

AMP LOSES DEFAULT KIWISAVER MANDATE

The New Zealand government’s review of KiwiSaver providers resulted in AMP not being reappointed.

RETAIL FUNDS TAKE OUT MYSUPER PERFORMANCE

The $30 billion fund Alex Dunnin

Retail superannuation funds, with some exceptions, led the MySuper tables to March end.

LGIASUPER MARCHES AHEAD WITH MERGERS

Women's budget

LGIAsuper, which is merging with Energy Super and recently bought Suncorp’s superannuation assets, has appointed a new custodian for the total $28 billion in assets.

MERCER TAKES OVER TAL SUPER FUND

TAL Superannuation and Insurance Fund members were set to be handed over to Mercer.

GUILDSUPER CHOOSES NEW ADMINISTRATOR

The industry fund moved from Mercer to IRESS, to enhance member experience.

ESG OPTIONS GAIN TRACTION WITH FUNDS

For news updates like this follow us on social media

There are now 36 super funds that collectively offer 171 ESG options, with $160 billion in assets.

FS Super

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Contents

www.fssuper.com.au Volume 13 Issue 02 | 2021

News

FUNDS SLAM BUDGET’S SUPER GAP MEASURES STATEWIDE WON'T CONTEST ASIC CHARGES

Published by a Rainmaker Information company.

A: Level 7, 55 Clarence Street, Sydney, NSW, 2000, Australia T: +61 2 8234 7500 F: +61 2 8234 7599 W: www.financialstandard.com.au Associate Editor Kanika Sood kanika.sood@financialstandard.com.au Design & Production Shauna Milani shauna.milani@financialstandard.com.au Technical Services Roger Marshman roger.marshman@rainmaker.com.au Ian Newbert ian.newbert@rainmaker.com.au Fiona Brillantes fiona.brillantes@rainmaker.com.au Advertising Stephanie Antonis stephanie.antonis@financialstandard.com.au Director of Media & Publishing Michelle Baltazar michelle.baltazar@financialstandard.com.au Director of Research & Compliance Alex Dunnin alex.dunnin@financialstandard.com.au Managing Director Christopher Page christopher.page@financialstandard.com.au

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The Journal of Superannuation Management ISSN 1833-9573 All editorial is copyright and may not be reproduced without consent. Opinions expressed in FS Super are not necessarily those of Financial Standard or Rainmaker Information. Financial Standard is a Rawinmaker Information company. ABN 57 604 552 874

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AUSTRALIANSUPER AND CLUB PLUS TO MERGE SUPER FUND ADVICE NOT USEFUL: RESEARCH

News

REST IN-HOUSES ADVICE, PARTS WITH LINK UNISUPER BECOMES PUBLIC OFFER

News

LGIASUPER BUYS SUNCORP'S SUPER ASSETS RAIZ ACQUIRES SUPERANNUATION PLATFORM

News

EISS SUPER, TWUSUPER EXPLORE MERGER INSTITUTIONAL MANDATES SHRINK

News

VANGUARD APPOINTS BOARD FOR SUPER FORAY DISABILITY INCOME FACES RECKONING

Opinion

WITH $160K IN SUPER, I AM AN OUTLIER

1300 884 434 THE JOURNAL OF SUPERANNUATION MANAGEMENT•

FS Super

White papers

www.fssuper.com.au Volume 13 Issue 02 | 2021

WHITE PAPERS

Investment

FROM HURDLER TO HERO

By Raewyn Williams, (formerly of) Parametric

The author considers a hypothetical merger of two superannuation funds to show how they can effectively consolidate their investment pools.

Investment

TRADING AT LONDON 4PM AND THE ILLUSORY BENEFITS By Stuart Simmons, QIC

This white paper argues why trading at the London 4pm WM/Refinitiv benchmark fix (Fix) gives Australian institutional investors only illusory benefits of liquidity.

Insurance

LIFE INSURANCE IN SUPERANNUATION By APRA

APRA lists concerning developments it sees in the sector including premium volatility, data availability and provision, and tender practices.

Technology

STRIKING THE BALANCE By Daniel McKean, Chandler

How can superannuation funds strengthen themselves against cyberthreats while maintaining good customer experience, the author explores.

Retirement

A NEW CONTRIBUTION CAP FOR 2021/22 By Meg Heffron, Heffron SMSF Solutions

Administration & Management

DO YOU HAVE TO PAY SUPERANNUATION TO CONTRACTORS? By Angus Morrison, Morrison ABS

A handy checklist of employers' superannuation contribution obligations under ATO rules.

The author breaks down the new superannuation contribution caps that came into effect on July 1, including double-deduction strategies.

Retirement

REVISITING GRANDFATHERED ACCOUNT-BASED PENSIONS By Mansi Desai, Challenger

Using two examples of pre-2015 ABPs, the author demonstrates their impact on the Age Pension and Commonwealth Seniors Health Card.

For more news and updates, visit www.fssuper.com.au

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FS Super

Welcome note

www.fssuper.com.au Volume 13 Issue 02 | 2021

Alex Dunnin executive director, research & compliance Rainmaker Information

None shall pass overnments and regulators should be careful what G they wish for on fund scale and getting rid of smaller super funds. At May’s Conference of Major Super Funds, the outgoing APRA superannuation tzar Helen Rowell stunned the audience in an emotional farewell speech when she said to be viable, super funds need $30 billion in funds under management or more. At least in telling an audience full of super fund executives and stakeholders that the regulator she works at wants 90% of super funds to disappear means we can guess that she probably left many attendees worried. Nevertheless, it was an extraordinarily arbitrary thing to say that $30 billion dollars is now the magic number for how big a super fund should be. Just a few short years ago we had some research groups saying $2 billion was the magic number. But showing how silly all this is, just a few days before the conference, a major management consulting group upped the bidding when it was reported that $50 billion was their magic number. In declaring $30 billion as the threshold beyond which none shall pass, APRA was saying that of the 155 super funds at June 2020 end, it wants 137 of them, almost 90%, to get off the island. It must be said though the surviving 18, and maybe a few more that will make the cut after they bulk-up following their own mergers, already hold a near 75% market grip on Australia’s APRA-regulated superannuation FUM. So, in practical terms, while it may add some scale to particular funds, it’s unlikely to do too much for the scale efficiency of the superannuation sector as a whole. But the bigger issue is that I’m not too sure the folks announcing such radical fund cull have thought things through too much. Like how, for starters, it will radically slash competition, unless lots of the cull victims reorganise themselves

FS Super

into sub-funds of larger prudentially regulated funds; and if so, it’s kind of like what’s the point? This matters because it’s taken decades to get even a little bit of competition happening in superannuation. To now be deliberately trying to get rid of it doesn’t seem the smartest idea going around. And in case anyone is naïve enough to think this will only hit not-for-profit (NFP) super funds, they better think again. Australia’s superannuation legislation applies equally to NFP and retail funds alike. Brands like Mercer, Macquarie, Netwealth, Russel, AON, HUB24, Future Super better get ready to bid their adieu to superannuation. But the acid test is surely what it will do to boost overall investment performance. And here’s where home truths bite hard. Looking at Australia’s top performing MySuper products as at end March 2021, only three of them would pass the APRA $30 billion threshold test. Sure the pass rate doubles to six in 10 if we look at the five-year figures, but it’s hardly an overwhelming result. Looking at how the $30 billion club is going in its own right, paints an even bleaker future. Only two made it into the one-year top 10 and four into the five-year top 10. Culling the number of super funds would, however, make life so much easier for regulators. But the damage it will cause to such things as competition, market concentration and performance outcomes means that this comes at a very high price. Let’s hope this is not what regulators and their government overseers actually want. fs

The quote

...I’m not too sure the folks announcing such radical fund cull have thought things through too much.

Alex Dunnin executive director, research & compliance Rainmaker Information

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News

www.fssuper.com.au Volume 13 Issue 02 | 2021

Statewide not contesting ASIC charges

Super funds slam budget’s gender gap measures

The $10.8 billion industry fund will not contest ASIC’s March allegations against the fund regarding administration of group insurance policies. On March 4, the corporate regulator commenced civil penalty proceedings against Statewide alleging it had been misleading or deceptive in its correspondence with members for about three years between May 2017 and June 2020. Statewide filed its response to ASIC’s claims on May 7. “In the circumstances, Statewide Super considers that your interests, as a member, are best advanced by not contesting the allegations,” it told members in a statement. Statewide’s letter to members referred to the incident as a “selfreported insurance administration error”. However, ASIC’s March 4 allegations said although Statewide became aware of the mischarging in May 2018, it did not notify members, nor did it act to prevent the premiums being charged again. In doing so, ASIC says, Statewide breached its obligations as an AFSL holder. It is also accused the fund of breaching its obligation to report such breaches to ASIC within 10 days. The matter relates to the fund sending annual statements and warning letters to about 12,500 members detailing their insurance cover at a time when they did not have cover under a Statewide insurance policy. The regulator also alleged the fund deducted insurance premiums to the tune of $1.5 million from the super accounts of 1300 members who did not hold cover. fs

Kanika Sood

The quote

For too long Australian women have paid the ‘motherhood penalty’ for the time they take out of the workforce to care for children.

uperannuation funds welcomed the budget’s move to dump the $450 threshold, but called out a lack of measures to close the super gap. The May 11 budget included five key decisions on superannuation. These were abolishing the $450 per month income threshold to receive superannuation guarantee contributions, abolishing the work test for voluntary super contributions for 67 to 74 yearolds, lowering the downsizer contribution age limit to 60 from 65, providing a two-year amnesty for exiting legacy retirement products, relaxing residency requirements for SMSFs and small APRA-regulated super funds. However, it was quiet on increasing Commonwealth Rent Assistance, and on requiring employers to pay SG on parental leave. “HESTA has been calling for the scrapping of the unfair $450 super threshold for more than 10 years so

it’s pleasing the government has taken this long overdue step as it will help improve financial security for women and the lower paid,” HESTA chief executive Debby Blakey said. “However, the fact that super continues not to be paid on parental leave remains a glaring gap in our super system. “For too long Australian women have paid the ‘motherhood penalty’ for the time they take out of the workforce to care for children. More needs to be done to improve their retirement outcomes. Paying super on paid parental leave is an easy and obvious fix.” The Actuaries Institute said the budget had not leveraged the Retirement Income Review report’s findings. “…such as measures to help nonhomeowners (renters) in retirement, in particular some of the most at risk of poverty in retirement – single female renters,” the Actuaries Institute said. fs

AMP loses default KiwiSaver mandate Elizabeth McArthur

The New Zealand government’s review of default KiwiSaver providers has resulted in AMP not being reappointed. New Zealand’s default retirement savings scheme KiwiSaver works by having a network of default providers which manage client money in balanced funds. Under an overhaul of the default provider scheme aimed at slashing fees and improving returns, the number of default providers was cut from nine to six. This resulted in AMP, ANZ and ASB being cut. Bank of New Zealand, Booster, BT Funds Management, Kiwi Wealth, Simplicity and Smartshares retained their mandates. AMP Wealth Management chief executive Blair Vernon said he was disappointed to not be reappointed as a default KiwiSaver provider. “Our current default portfolio represents less than 7% of our total assets under management and around 3.5% of total revenue so this decision doesn’t have a major impact on our business or our commitment to KiwiSaver,” he said.

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“We continue to invest extensively in the ongoing strengthening of our offer to clients and focus on supporting them to achieve a great retirement.” Currently, AMP is “renovating” its KiwiSaver scheme after appointing BlackRock as key investment manager. New Zealand finance minister Grant Robertson and consumer affairs minister David Clark said the changes were made to provide KiwiSaver account holders with better bang for their buck. “The six default providers were selected because they offer the best value for money for their members in terms of lower fees and higher levels of service,” Clark said. Robertson added that the New Zealand government wants to see default funds invest responsibly. “We know many Kiwis care about where their money is invested, so we are excluding any investments in fossil fuel production," he said. "This reflects the government’s commitment to addressing the impacts of climate change and transitioning to a low emissions economy." fs

FS Super

News

www.fssuper.com.au Volume 13 Issue 02 | 2021

Super funds to merge AustralianSuper and Club Plus Super are working towards a merger, which would see the creation of a $207 billion fund. Club Plus Super identified AustralianSuper as the right strategic, cultural and operational fit for its members and reached out to discuss combining the two funds, according to a statement. Club Plus Super chief executive Stefan Strano said a merger is in the fund's members' best interests. "While most of our members join us at the start of their working lives, we recognise they need support across all stages of life, through careers that may span multiple industries," Strano said. "We have been very impressed through this process with the steadfast member-first culture of AustralianSuper." Club Plus was established in 1987, with a large proportion of its 65,000 members working in the hospitality and community clubs sectors. AustralianSuper chief executive Ian Silk said initial discussions between the two parties have been positive. "Members of the two funds have many similarities coming from a wide range of workplaces and being focused on the delivery of strong long-term performance," Silk said. "This is a great opportunity for our two funds to get to know each other better as we work through the due diligence period." Recent research from KPMG found that ongoing merger activity in Australia's super sector will likely result in just 12 funds managing close to 80% of all retirement savings. All 12 funds would also have more than $50 billion in funds under management. The research takes into account mergers that are yet to be finalised. fs

FS Super

Retail funds take out MySuper performance Annabelle Dickson

R The numbers

33.3%

Respondents in a Smart survey who expect to work parttime in retirement.

etail superannuation funds, with the exception of one industry fund, led MySuper performance for the three years to March end, according to latest Rainmaker analysis. Virgin Money Lifestage Tracker 1973-1983 returned 9.3% over three years, followed by UniSuper’s balanced option and GuildSuper Lifecycle Growing at 9.1%. They were followed by two more retail funds: smartMonday PRIME – MySuper Age 40 (9%) and Australian Ethical Super balanced (8.9%). The industry funds followed with AustralianSuper balanced achieving 8.6%, while LGS Accumulation Scheme - High Growth, Mine Super aggressive and retail fund BT MySuper Lifestage 1980s all returned 8.5%. Over five years industry funds still reign supreme with LGS Accumulation Scheme - High Growth returning 9.8%, followed by Hostplus balanced (9.6%) and AustralianSuper balanced (9.5). Rounding out the top five, smartMonday PRIME – MySuper Age 40

came in at 9.5% and Telstra Super Corporate Plus MySuper at 9.2%. Over 10 years, the top performers were Hostplus balanced (8.9%), AustralianSuper balanced and Cbus MySuper (8.8%). They were followed by UniSuper balanced (8.7%) and Telstra Super Corporate Plus MySuper at 8.7%. Overall, the Rainmaker MySuper Index returned 20.2% for one year, 7.4% over three years and 7.7% over 10 years. This was a better outcome than February, when default options hit then one-year high since COVID-19 of 6.1% returns for the 12 months ending February. The performance outcomes vary from the previous month which saw UniSuper come out on top over three years (8.3%) followed by Australian Ethical Super Employer (accumulation) with 8% and Tasplan - OnTrack Build with 7.4%. Over five years, LGS Accumulation Scheme - High Growth took out the top spot (9.8%), followed by AustralianSuper - Balanced (9.5%) and Hostplus balanced (9.5%). fs

Super fund advice not useful: Research Jamie Williamson

While 50% of Australians expect superannuation funds to advise them on retirement, only 16% of those who have sought advice from their fund believe it was useful. That’s a key finding of UK fintech Smart’s The future of global retirement report, looking at how those in the world’s most advanced defined contribution pension markets think about retirement. The research was conducted by YouGov via online interviews. The results are based on 2014 responses from Australia, 2004 from the UK and 2654 from the US. In the Australian market, half of the respondents said they would expect to receive advice on retirement from their super fund but less than a fifth said the advice they had received from their fund was useful.

Meanwhile, 53% of Australians said they would expect to seek retirement advice from a financial adviser but of those over 55 years of age who had, just 29% found that advice to be useful. In comparison, 42% of respondents from the US said they would seek advice from their retirement plan provider. Of the 34% that had turned to their provider for advice, just 9% rated it as most useful, while friends and family rated higher. In the UK, 39% of respondents said they would expect to receive advice from their pension provider. However, of those who had received advice, again just 9% said the advice their pension provider gave was most useful. In Australia, 55% of respondents expect retirement to be an event with several stages. About a third expected to work part-time in retirement, while 7% said they don’t ever expect to retire. fs

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News

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LGIAsuper picks custodian

Rest in-houses advice Karren Vergara

Kanika Sood

LGIAsuper, which is merging with Energy Super and recently bought Suncorp’s superannuation assets, has appointed a new custodian for the total $28 billion in assets. The merged industry fund will use NAB Asset Servicing as its custodian, siding with Energy Super and Suncorp Portfolio Services’ current custodians and moving away from LGIAsuper’s current custodian J.P. Morgan. LGIAsuper reviewed custodians for the merged fund, including the two incumbents. NAB Asset Servicing was slated for a June 1 start. It will provide custody, administration, middle office services and centralised portfolio management. The Energy Super merger was slated for a July 1 completion while the Suncorp acquisition will be finalised on 31 March 2022. “NAB’s client-centric model and ability to improve operational efficiency for members were key factors in our decision, along with the organisation’s strong trackrecord of excellent client service,” LGIAsuper chief executive Kate Farrar said. “As the custodian of both funds, NAB’s extensive knowledge of SPSL will be invaluable as we transition the business.” NAB Asset Servicing is the only remaining custodian aligned with a big four bank. It was the largest custodian for Australian investors’ assets until June 2016. It has since slid to the fourth spot ($538.5 billion) at the most recent count from December 2020 end, and has been overtaken by J.P. Morgan ($973.2 billion), Northern Trust ($660.9 billion) and Citigroup ($589.7 billion). fs

The quote

It's important that employers are abreast of any changes to their obligations...

he $59 billion industry superannuation fund is shaking up its advice and employer units by internalising its general advice service and hiring several managerial positions to the employer division. From July, Rest’s general advice team will work in-house, a service currently provided by Link Advice. The changes were slated for a July start, with the fund planning to move away from Link Advice to in-house. The general advice team will sit within the advice and education unit, and the broader umbrella of the employer and industry engagement group. Group executive for employer and industry engagement Deb Potts said providing general advice in-house will build the fund’s internal capabilities and help connect members with the full range of advice and information on offer. “This team will support our members according to their needs, whether it’s providing them with information, directing them to our online

tools, or booking them in for a session with our personal advice team. It’s another step toward maximising the reach of our services,” she said. Rest also announced its efforts to build a workplace superannuation unit. Rest has created the role of national manager of business solutions, which will be responsible for supporting the fund’s long-term new business growth aspirations. The leadership roles will report to general manager of workplace superannuation Richard Millington. These changes will be complemented by a new phone-based service team to aid and information to small-and-medium-sized employers, Potts said. “There have been significant changes to superannuation and insurance in the past two years, and there are potentially more on the way in the coming months. It’s important that employers are abreast of any changes to their obligations and are able to access the right information to share with their employees,” she said. fs

UniSuper opens fund to public amid travel ban Annabelle Dickson

The $95 billion industry fund for higher education and research sector has opened the fund to the general public. From July 5, UniSuper allows new members to join the fund, growing its 450,000-member base. UniSuper chief executive Kevin O’Sullivan said as the fund opens to all Australians its purpose remains to deliver greater retirement outcomes for all members. “We’re delighted to offer more Australians the opportunity to join one of the country’s largest and best-performing super funds. We create real value for our members with strong long-term performance, excellent service and low fees,” O’Sullivan said. “We are focused on, and driven by, members’ best interests in everything we do. That singularity of focus is embedded deep in our DNA and culture.” O’Sullivan said opening the fund coupled with

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the fact that the higher education sector and super industry are undergoing disruption, will allow current and new UniSuper members to benefit from scale. “Regulatory change and industry consolidation will significantly reshape the super sector in coming years. As the fifth largest super fund in the country and largest investor in ESG-themed strategies – with more than $10 billion in funds under management across these options – UniSuper is well placed to navigate the changing environment and welcome new members from outside the sector given our strong investment performance, leadership in sustainable investing, low fees and strong member focus,” he said. The latest Rainmaker Information analysis recorded UniSuper balanced returning 22.6% per annum over one year, 9.1% over three years, 9.2% over five years and 8.7% over 10 years. In May, UniSuper named Aware Super's Peter Chun as O'Sullivan's successor, effective September 6. fs

FS Super

News

www.fssuper.com.au Volume 13 Issue 02 | 2021

Suncorp sells superannuation assets to LGIAsuper Karren Vergara

S Mercer takes over TAL fund Elizabeth McArthur

TAL Superannuation and Insurance Fund members were transferred to a new fund under a successor fund transfer. On 31 May 2021, all members of the $1.3 billion TAL Superannuation and Insurance Fund were slated to be transferred to Mercer Super Trust by way of a successor fund transfer. TAL Life will remain the insurer but Mercer will become administrator. In November 2020, TAL moved most Accelerated Protection customers with their insurance through the fund to TAL Super by way of a successor fund transfer. Now, those customers will be with Mercer. The trustee for the fund recently reviewed the super and insurance arrangements it offers, determining that it is in the interests of members to transfer their benefits to the Mercer Super Trust. There will be no impact to insurance premiums. However, fees are likely to reduce for most members. For example, the admin fee in the Australian Shares option will reduce from 1.20% to 0.39% p.a. Mercer was recently the beneficiary of another successor fund transfer when the Factory Mutual Insurance Company Super defined benefit fund moved members to Mercer Super Trust. It had $77 million in funds under management. fs

FS Super

The quote

The values and purpose of LGIAsuper, which is also headquartered in Queensland, align closely with those of Suncorp.

uncorp will divest its wealth division to the industry fund, transferring $6.4 billion in assets under management and 137,000 members. LGIAsuper will pay $45 million for the acquisition for Suncorp Portfolio Services and will retain about 130 staff that work within the wealth business. LGIAsuper will have $28 billion in assets and 250,000 members after its Energy Super merger and Suncorp acquisition are completed. "This acquisition, combined with the Energy Super merger, will achieve an ideal, sustainable fund size, while maintaining our status as a boutique and personal superannuation provider," LGIASuper chief executive Kate Farrar said. "With the superannuation industry consolidating rapidly, we want to see our Queensland-based funds thrive in an increasingly complex and competitive national market, and the best way to do that is together."

The merged entity promises that all members will see fees reduce. Suncorp banking and wealth chief executive Clive van Horen said: "After extensive engagement with a number of potential acquirers, we believe that LGIAsuper is best placed to deliver sustainable member outcomes. "The values and purpose of LGIAsuper, which is also headquartered in Queensland, align closely with those of Suncorp. This transaction will also enable the combined business to take advantage of size and scale benefits." Suncorp began scouting for potential buyers in February 2020. Suncorp Portfolio Services landed in hot water at the banking Royal Commission for withholding tax benefits from members, not being transparent about intra-company payments and dragging its feet in transitioning members to MySuper. Its lifestage funds copped red ratings in APRA's 2020 heatmap for charging 1.68%p.a. in administration fees. fs

Raiz acquires superannuation platform Kanika Sood

ASX-listed Raiz paid $9.5 million to acquire a firm with a $70 million choice superannuation fund. Raiz bought Superestate, whose business includes superannuation, a residential property fund, and a property data platform. Under the deal, its founder Grant Brits and Superestate’s staff will join Raiz. It was expected to close in late May subject to conditions including Raiz completing due diligence, continuation of material contracts and Superestate being debt free. Raiz chief executive George Lucas said the acquisition added scale, residential property to its asset mix in superannuation and outside it, and operational and growth synergies. “This acquisition, the first in our five-year history, marks an important milestone for the group by demonstrating organic growth is not our only option to increase funds under management (FUM) and active customers. Other acquisitions are on our

radar as we actively look for opportunities in Asia Pacific region,” Lucas said. Raiz said the two businesses will continue to operate separately until an integration strategy that is the best outcome for all customers is implemented. Raiz’s pre-acquisition superannuation assets sat at $92.5 million at March end, growing 14.6% in the quarter. In the March quarter, it also rolled out portfolios for the self-managed superannuation fund sector which has $730 billion in assets. Superestate’s superannuation fund is a choice product and a sub-plan of Tidswell Master Superannuation Plan. It had about $80 million in assets at FY20, up from $22 million the year before. It offers three superannuation multi-asset portfolios. Of the $80 million in assets, about 73% was outsourced to Macquarie Investment Management while about 26% was invested in Superestate residential property fund as at June 2020. fs

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News

www.fssuper.com.au Volume 13 Issue 02 | 2021

GuildSuper chooses new administrator

EISS Super, TWUSUPER explore merger Kanika Sood

Elizabeth McArthur

GuildSuper, the $1.8 billion retail fund catering to childcare workers, has chosen a new administrator which it says will enhance member experience. GuildSuper, which also trades as Child Care Super and offers Guild Pension for retirees, was slated to switch to IRESS in May. Previously, GuildSuper outsourced its administration to Mercer. A significant event notice to both Guild Super and Child Care Super members explained that by using IRESS as administrator, the fund could enhance its digital offerings. Members will be able to make contributions by direct debit by logging in online, they will be able to submit requests to change investment options or personal details online and will be able to receive electronic communication from the fund. The fund had also previously offered members access to Mercer Financial Planning services. With the change of administrator, members will no longer have access to a personal advice service. Rather, GuildSuper provided members with a phone number for general advice enquiries. Meanwhile, GuildSuper also altered its investment fees – resulting in slightly lower fees for most options. For example, the Building and Growing MySuper options fees decreased by one basis point each and the Consolidating MySuper option investment fee decreased by three basis points. Additionally, GuildSuper changed its policy on partial rollouts. Members can now only partially roll out their balance to another super fund if at least $6000 stays in their account. fs

The quote

We have an obligation to our members, to consider the benefits of a potential merger and to proceed with that merger if it is in their best interests.

he two industry funds have signed a memorandum of understanding to weigh a potential merger. In a joint statement, they said they will commence due diligence, and initial discussions have been “very positive”. If the merger proceeds, the combined fund will have about 130,000 members and $12 billion in funds under assets. “We have an obligation to our members, to consider the benefits of a potential merger and to proceed with that merger if it is in their best interests. It’s early days, but we’re seeing a lot of potential benefits for members, so a merger looks promising,” EISS Super chief executive Alexander Hutchison said. TWUSUPER chief executive Frank Sandy said: “Although early in the process, there appears to be a strong synergy between the funds operationally, which should translte to better member outcomes, as well as an alignment of our values and culture which is important for members. “This merger can provide greater scale for both funds and has the potential to deliver cost savings to members across trustee services, administration

and investments, while also providing members with better services, solid long-term investment returns and improved financial outcomes at retirement,” Sandy said. EISS Super's MySuper option has returned: 3.8% over the year to February, 5.6% p.a. over three years, 7.2% p.a. over five years, 6% p.a. over seven years and 6.7% p.a. over 10 years. TWU's MySuper has slightly better performance: 7.1% over 12 months to February end, 5.7% p.a. over three years, 7.9% p.a. over five years, 6.8% p.a. over seven years, and 7.4% p.a. over 10 years. Both are below the median MySuper option's annual returns of above 8% over all time periods mentioned. In February, the Australia Post Superannuation Scheme (APSS) signed a non-binding heads of agreement to explore a merger with Sunsuper, which is committed to a merger with QSuper to create a $200 billion plus fund. Aware Super signed a Memorandum of Understanding with the $855 million Victorian Independent Schools Superannuation Fund (VISSF). Aware last year, completed mergers with VicSuper and WA Super. fs

Institutional mandates shrink in 2020 Local institutional investors appointed 313 mandates totaling $43 billion in 2020, down from $51 billion the year before, according to Rainmaker’s latest Mandate Chaser report. State Street was the biggest winner in institutional mandates in 2020, taking $5.1 billion from institutional investors, mostly across local and global equities. IFM Investors was next, winning $2.5 billion. Majority of this was across international equities and alternatives ($1 billion each), with smaller wins in cash, fixed income and Australian equities. It was followed by Macquarie ($2.4 billion), Alphinity ($2.1 billion), Lend Lease ($2 billion), First Sentier ($1.7 billion), WMC ($1.5 billion) and Robeco ($1.5 billion). Rainmaker’s Mandate Chaser report collects mandate data via investment surveys with non-profit

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superannuation funds (including industry, corporate, government funds), investment managers who appoint sub-advisors and implemented consultants. By asset classes, the individual managers winning the most mandates were: Australian equities (Alphinity, Macquarie and Hyperion), international equities (Robeco, State Street, BlackRock), Australian fixed income (Macquarie, Ardea, Coolabah), alternatives (LGT, Ardea and IFM). Asset consultant Frontier was associated with the mandates. Superannuation funds Australian Catholic Super (34, up from 23 in 2019), Aware Super, ESS Super, LGIAsuper and NGS awarded the most mandates in the year. Hostplus awarded the most mandates in 2019 with 35, but in 2020 it only gave out 12. fs

FS Super

Opinion

www.fssuper.com.au Volume 13 Issue 02 | 2021

Andrew Baker partner, NMG Consulting

Zuper's end and D2C entry hurdles he closure of superannuation T challenger Zuper is a reminder of the difficulties of making a successful D2C [direct to customer] entrance into super and wealth in Australia (and indeed elsewhere). Entry success stories exist for offers with adviser channel distribution – particularly platforms such as Netwealth (now >$10 billion in super AUM) – and for new advice and asset management propositions focused on wholesale segments. The post-Royal Commission fragmentation of bank and insurer-owned wealth businesses has shaken loose customers and advisers, which has helped entrants gain traction. For D2C focused entrants, success has been hard to find. There's something poignantly sad about it. Often launched by enthusiastic management teams in a blaze of publicity, armed with the belief that consumers were waiting for new propositions, on a mission to take on the big dinosaurs of collective super...but so far the dinosaurs have been pretty much untroubled. The anticipated pent-up consumer demand for new offers has largely failed to materialise. Some entrants also found operational execution much harder than expected. Failure wasn't for lack of passion, that's for sure. Some years back, I was almost lynched at a Brisbane fintech panel by an audience of zealous would-be disruptors, when I predicted that most D2C entrants at that time were doomed, unless they pivoted to B2B (business to business) (well done, Grow Super). Some D2C entrants had

FS Super

technology or IP [intellectual property] which big super incumbents need, and a B2B strategy of supplying, rather than competing, always looked more likely to pay off. Why is a successful D2C entry in super so hard to pull off? • Yes, it's a huge market, tick. But it's highly concentrated – a relatively small percentage of customers has a majority of assets. Those segments are attractive. But some have SMSFs and are likely uncontestable. For those in existing collective funds, you need to find and acquire them amongst the very long tail of small and unprofitable customers. • Industry product margins are just not that high. The days of 2-3% MERs [management expense ratios] are long gone on new business. There are legacy products still in this zone, and SMSFs can offer a rich value chain, but collective super typically works on a total cost ratio of well under 100bps and falling. That doesn't leave a lot of room for a materially lower price offer (particularly for an entrant without scale which can't spread rising fixed costs such as regulation widely enough). If anyone can pull that off, it will probably be Vanguard in its second attempt – we shall see soon enough. • Investment performance has been pretty good: no low hanging fruit here. It's not hard to find a well-performing collective super fund; indeed industry funds position on strong performance. So there's not a lot of room for a materially better performance offer either, unless much higher risk is involved. For example tech stock strategies at the

The quote

...I was almost lynched at a Brisbane fintech panel by an audience of zealous would be disruptors, when I predicted that most D2C entrants at that time were doomed...

saner end, SMSF crypto strategies for hose feeling lucky. • Super is not a high engagement product category for many. It's compulsory, it's jam in the distant future, it's pretty boring – not exactly a recipe for winning the competition for customer attention vs their next holiday, or indeed most anything else. A favourite quote of mine is from an FT journalist who described cleaning the lint filter on their clothes dryer more appealing than reviewing their pension arrangements. A recent FCA (Financial Conduct Authority) report on UK self-directed investors describes three archetypes: "having a go", "thinking it through", and "the gambler". None of those archetypes are particularly likely to back a new D2C super entrant, other than high risk offers to the gambler archetype. Thanks to all of the above, D2C acquisition costs are punishingly high. There is useful UK data here too. The UK features a big and highly profitable D2C success story in Hargreaves Lansdown, but most entrants (including Schroders' original Nutmeg proposition) have experienced years of losses, and acquisition costs which imply needing to retain customers for many years before achieving break-even. fs To keep reading go to fssuper.com.au.

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News

www.fssuper.com.au Volume 13 Issue 02 | 2021

Disability income faces reckoning

Vanguard tilts towards alumni for super board Kanika Sood

Karren Vergara

The former chief executive of TAL slammed life insurers' ineptitude in managing disability income products, invoking the industry to come together and find a solution by the end of the year. Speaking at the 2021 Actuaries Summit, Jim Minto reflected on the "broken" state of disability income benefits, which are increasingly unaffordable and shunned by people who need it the most. "The community suffers in a wider sense from poorly designed and over-engineered products. Including products, I designed when I was chief executive. They delivered generous benefits in most cases to some, while policyholders generally faced cycles of price increases as companies looked to recoup losses from unsustainable products," he said. The market is littered with legacy disability products deemed expensive and poorly valued. For example, products created in the 1990s with lifetime benefits had "disastrous consequences" and many of these policies are still in force charging large premiums. The current chair of Swiss Re Life & Health Australia told insurers to get their act together and provide a solution by the end of the year – or else face another scenario similar to the Life Insurance Framework. "The Life Insurance Framework came about because the industry could not commit to unified action when we were being told by the regulators and government we had to," Minto said. "We complain about the framework, but we caused it. We couldn't act. Here we are again with disability income. Can [the industry] act?" Minto said if insurers don't find a solution by 2021, the entire industry faces higher capital risk charges. fs

The quote

We will continue to refine our superannuation offer in the coming months, with the guidance of the board, and look forward to bringing it to Australians later this year.

anguard has appointed a fourperson board for its forthcoming superannuation product, to be chaired by Peggy O’Neal. The board for Vanguard Super Pty Ltd will include Jeremy Duffield, Anne Flanagan and Cynthia Lui. O’Neal is a former partner at law firm Herbert Smith Freehills specialising in superannuation and financial services law. She was also a consultant to the Cooper Review, and a member of Vanguard Investments Australia’s external compliance committee. Duffield was the founding managing director and chair of Vanguard Investments in Australia – the first international market where Vanguard put its presence. He later co-founded SuperEd Pty Ltd, and chaired the board of Retirement Essentials. Flanagan was an alternate director and member of audit compliance and risk management committee at AustralianSuper for about six years, ending in February. She was also a non-executive director at ANZ Staff

Superannuation, and the chief financial officer of RACV. Lui is Vanguard’s head of international legal and compliance and has 18 years of experience. “The board brings decades of local and global experience to Vanguard Super. I am confident they will successfully lead our entry into the Australian superannuation market with a compelling offer that best serves our future members,” Vanguard Australia head of superannuation Michael Lovett said. “…We will continue to refine our superannuation offer in the coming months, with the guidance of the board, and look forward to bringing it to Australians later this year.” Vanguard Super Pty Ltd’s launch is subject to regulatory licences and successfully registering the fund, the company said. In April, it appointed GROW Inc as the administrator for super offering. It has also returned institutional mandates in Australia and New Zealand in the lead up to the launch. fs

Rainmaker names best super ESG options Rachel Alembakis

There are now 36 super funds that collectively offer 171 ESG investment options, with about $160 billion in total assets, according to Rainmaker Information. Australian Ethical Investment, Cbus Super, AustralianSuper, HESTA and Aware Super have the highest scores against a range of factors including diversity, ESG reporting, portfolio holdings disclosure, the investor groups or affiliations it belongs to, the use of positive and negative screens and other factors. LGS, UniSuper, Future Super, Hostplus and Mercy Super round out the top 10. Rainmaker Information published the findings in its inaugural ESG superannuation study. Rainmaker assesses the elements of being a quality ESG super fund against five dimensions – governance, or how the fund declares its

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commitments to ESG principles; investment transparency, or portfolio level disclosure and disclosure on engagement with invested companies; publication of ESG reports; disclosure of the investment process and how a fund implements ESG principles; and performance, or whether the fund achieves its investment objectives and satisfies the Sole Purpose Test. Rainmaker also estimates there are 57 ESG super funds in Australia that collectively oversee $1.6 trillion being 71% of Australia's superannuation APRAregulated market. This makes Australia's ESG super coverage ratio among the highest in the world. Almost three-quarters of these funds are not for profit (NFP) funds, meaning they are either corporate, industry or public sector funds, with the remaining 30% being retail funds. fs

FS Super

Opinion

www.fssuper.com.au Volume 13 Issue 02 | 2021

Karren Vergara senior journalist, Financial Standard

With $160k in super, I am an outlier a nearly 40-year-old female Ition.am with over $160,000 in superannuaThat makes me an outlier. Measure after measure corroborates the woeful fact that as a woman, I am expected to retire with about 45% less than men and that my balance should currently sit at $60,000. After 22 years in the workforce, my super balance has never received an additional cent in contributions. I recently came back from maternity leave after one year. During my 20s, I took months off to travel and had sporadic but protracted periods of unemployment in between jobs that string together to leave an indelible hole in my bank and super account. I've taken hard-to-swallow pay cuts to switch industries. I've silently sat through salary negotiations, fearful to ask for more or the same as my male counterparts. Topping it all off, I had multiple superannuation accounts with costly retail funds running simultaneously with insurance cover I did not know I was entitled to – which I probably would not have been able to claim. How I managed to more than double my nest egg compared to the average balance is nothing short of a superannuation-gender gap miracle. Entering the workforce at 16, I remember being bewildered with filling out my first-ever superannuationapplication form. What was a binding death nomination? I have a younger brother. Does that mean he's my dependent? Or was I a dependent? When it came to the investments section, there was an option to "default". I didn't like the sound of that, so

FS Super

I opted to split my contributions across eight asset classes to add up to 100%. I distinctly recall that Australian shares was at the top of the list by happenstance and allocated a nice, neat figure of 40% to it, followed by international shares, which also received 40%. With my year 10 commerce education in tow, I knew leaving my cash in the bank would guarantee interest, so I put the remaining 20% in cash. That was a fun exercise, I thought to myself, and oddly gratifying to have a vague level of control for something I had not enough understanding for. So, for every job I started and super fund application form I had to fill out thereafter, I never deviated from splitting my money across 40% Aussie and international shares each and 20% in cash. At the onset of the Global Financial Crisis, I was working for an investment bank when the financial world started to implode. As stock markets and capital markets crumbled, a sage colleague told me that he moved all his superannuation to cash. I did the same thing. In mid-2009, as signs of recovery began to flicker, he told me that he went back to equities. I did the same thing. When the coronavirus pandemic hit and ravaged the markets, I moved everything to cash. Four months later, I reverted to my 40-40-20 split. You could hardly say that I was 'engaged' with my super. I left multiple accounts open only to bleed fees for a decade. Prior to becoming a financial journalist for the super fund and investment sectors four years ago, I had no idea what industry or retail funds were, or what a MySuper product was.

The quote

...a sage colleague told me that he moved all his superannuation to cash. I did the same thing.

Even after years of studying and working in accounting, the concept of 9.5% superannuation did not leave the confines of my employment contract. The critical importance of superannuation to me now is the by-product of occupational hazardry. I took my Gen-Z brother out of a pitiful lifecycle product and yanked my husband out of a crummy industry fund that took 10 business days to implement investment switches (it was 20 March 2020 by the time the fund moved all his savings to cash and, by that stage, the market had plunged 30%, leaving me infuriated). The fact that I will retire with a hefty nest egg propped up by an overreliance on equities and unsolicited intra-fund advice is underwritten purely by kismet. To think what could have been if I knew my way around the system back then – to understand what ‘Superannuation Guarantee’ meant or the difference in bonds and equities from as young as 14 years – would solve the current financial literacy gap that is much-decried about. I wish that all hard-working, low-income women who leave jobs to have kids; don't have the confidence to ask for a pay rise; or cannot work because they are experiencing domestic violence have the same luck. fs

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Featurette

www.fssuper.com.au Volume 13 Issue 02 | 2021

The women’s budget disappoints The May 11 federal budget overpromised and underdelivered on women's economic security measures. Kanika Sood writes. his year’s federal budget came T against a backdrop of multiple allegations of sexual harassment inside the Liberal party. Towards the end of March, Prime Minister Scott Morrison had already shuffled some cabinet positions to increase the headline visibility of women among ministerial roles. By April end, the newspapers were reporting on “women-friendly” budget measures that could include spending on childcare subsidies. Some stories went as far as to suggest the budget may force employers to pay superannuation guarantee contributions on parental leave. Come May 11, the treasurer announced two key economic measures it pitched at women, as the ‘women’s budget statement’ made a return after its last appearance in 2014. After nearly a decade of lobbying from superannuation funds, the government finally dropped the $450 a month minimum wages that an Aus-

tralian worker must earn to be eligible for the superannuation guarantee. It said doing so would improve the economic situations of 200,000 women. The government also promised a $1.7 billion spend on childcare subsidies, which it classified as a women’s economic security measure. Still nowhere to be seen was an increase in Commonwealth Rent Assistance, a change in superannuation tax concessions, paid parental leave or superannuation guarantee on parental leave. These matter because older single women who are not homeowners often live in poverty, the superannuation tax concessions are geared towards male high-income earners, and women are usually the primary child carers. “I don't know that I'd go so far as pink-wash,” Aware Super chief executive Deanne Stewart said of the budget in a panel organised by the fund. “I would certainly say that there are elements in the budget that I think

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The quote

I don't know that I'd go so far as pinkwash. Deanne Stewart

were a really big, positive step forward and I think…you've absolutely got to acknowledge that,” Stewart says, referring to the childcare subsidies, abolition of the $450 threshold and $1.1 billion dollars towards women’s safety. “I think the key word that you just said there though is are they meaningful to structural difference? And I would say that they are really good, but they're probably an inch deep versus a mile deep to really solve some of these issues.” Economist Nicki Hutley agreed that it was easy to be critical and call it pink washing, when childcare being framed as a women’s issue is a cultural problem. “I think this is the bigger thing and possibly budgets can't do anything about this other than perhaps to allocate funds

FS Super

Featurette

www.fssuper.com.au Volume 13 Issue 02 | 2021

for education [and] for cultural change to actually say how do we address this problem,” Hutley said. She said what gets in the way of real reform is that the government often looks at the upfront costs of measures without considering the lifetime benefits. “People think that it's costs but if you have a look at the childcare package from this budget, for example, $1.7 billion over four years – the government's own modeling said that will produce an additional $1.5 billion in GDP each and every one of those four years,” Hutley said. “So, your return on investments, it's a bit of a no-brainer.” The government’s plan is to remove the $10,560 cap on the childcare subsidy which it says will help 18,000 families. It will also increase subsidies for families with two or more children under five years old by 30 percentage points to a 95% cap. Potentia Capital managing partner and Business Council of Australia president Tim Reed said the BCA would have liked to see more in the childcare column in the budget. And that the government had a good environment to get it through. “Three months ago, we were all worried about unemployment, we're now worried about skills shortages, and the budget fell right in the middle,” Reed said. “And so, it would have been a really opportune time because it [higher childcare spending] would have got universal support, because it would have freed up capacity in the economy at a point in time when there was a real need.” Reed also said the budget could have provided economic incentives around parental leave, that encouraged both parents to share the child-rearing responsibilities. Stewart agrees.

FS Super

The quote

Three months ago, we were all worried about unemployment, we're now worried about skills shortages, and the budget fell right in the middle. Tim Reed

“…parental leave is absolutely a ticket to the game, both parental leave for male and female, and then paying superannuation on it…[to] actually make sure we can close the gap. You go back to the bigger issues and it's not rocket science,” she said. The ones that stayed evasive were Commonwealth Rent Assistance or affordable housing – an omission that will be especially felt by older, single women. “This group of individuals, we have to do something to support them, and the budget did nothing…so how do you actually do more around things like housing affordability, build-torent where you can actually have a 10-year lease or a 20-year lease, that's actually below market rates, for example,” Stewart said. “These are the sorts of things we need for that particular demographic, together with rental assistance.” Women’s retirement outcomes were also discussed at the annual Conference of Major Superannuation Funds in Adelaide from May 18-19. It’s well known that women retire with about 45% less than men. A panel that included Retirement Income Review panel chair Mike Callaghan, Cbus trustee director and Women in Super chair Kara Keys and McKell Institute chief executive Michael Buckland discussed women’s retirement security as part of a broader panel on the review and the budget. Bucklands said McKell modelling showed the removal of the $450 threshold wouldn’t have a material impact on women’s retirement outcomes. Women in Super was at loggerheads with the Treasury in 2019, when the latter ignored the group’s call for women’s retirement security to be included in the terms of reference for the Retirement Income Review with a letter endorsed by industry heavyweights. Callaghan said improving women’s retirement income was an issue of getting them to spend longer in the workforce and in better paying jobs rather than simply seeing the superannuation system as a solution. “The removal of the $450 monthly threshold in SG is welcome…but

[this is] not going to have a major impact on women’s retirement income outcomes,” Callaghan said, adding increasing childcare subsidies may have a greater impact if they result in more women staying longer in the workforce. “…We should also be looking at other female-dominated industries that are underpaying.” Keys agreed with Callaghan on female-dominated professions but disagreed on most other things, including SG’s rise to 12%. “I agree with Mike that we should be looking at highly feminised industries…and giving them more money because the gender gap is pernicious,” she said. “But it's not just in that industry. The finance sector has one of the highest gender gaps in the country. It's still about 30%.” She called for SG’s legislated rise to 12% to go ahead – to the benefit of women and everyone’s retirement outcomes. Callaghan’s report said increasing SG would depress in-pocket wages, when workers often already had enough to retire on. Keys called attention to the difficulties in superannuation splitting in couples, and the tax concessions, where women get only about a third of the total benefits paid out each year. “If anyone tells you that we shouldn't do any of these things because it won't close the gap because men will gain [from] them too, it’s a red herring because what we actually need to be striving for is increasing women's retirement outcomes, and with a view to that yes, we absolutely do need to have an objective super, but that objective needs to recognise that the system is stacked against Australian women,” she said. Australian women’s wins for retirement equality were small, if not insignificant in this budget. With the Prime Minister widely expected to call the next federal election in October or March (before the next budget), it may be some time until paid parental leave and SG on parental leave are back on the agenda. fs

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Cover story

www.fssuper.com.au Volume 13 Issue 02 | 2021

REDESIGNING THE GAME Andrew Moore, chief executive, Spaceship

Andrew Moore leads one of the more successful superannuation challengers. He talks to Kanika Sood about growth opportunities ahead.

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FS Super

www.fssuper.com.au Volume 13 Issue 02 | 2021

FS Super

Cover story

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Cover story

ndrew Moore remembers reading about Spaceship in the newspapers in late 2017. The superannuation fund, which was targeted at millennials, had already made a splash in 2016 when Atlassian co-founder and billionaire investor Mike Cannon-Brookes ploughed some of his family office money into the startup – and his retirement savings into the fund. At the time, Moore was taking a break after a decade at Westpac and looking for opportunities in fintech in a mid-life sea change as he turned 50. His last role at Westpac was revamping the New South Wales branches. He had never worked in superannuation directly, unless you count training Westpac’s branch staff on BT’s Super for Life retail offering, but he did have decades of experience in mergers and acquisitions and running businesses. “Of course, at that point in time, I didn't know I was going to become involved with the company because it's only December 2017,” Moore says. “I remember thinking to myself, this is really interesting what this business is looking to do, because they were absolutely on the money as it relates to younger people…recognising that they were thoroughly disengaged with superannuation.” Moore’s call from Spaceship didn’t come for a few months. In May 2018, as AirTree Ventures and some other Spaceship shareholders looked to install an independent chair, they chose him. “You know, I can't describe myself as someone that has grown up

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www.fssuper.com.au Volume 13 Issue 02 | 2021

in the startup world or in the venture capital world, or the world of smaller scaling businesses,” he says. “I nonetheless had a really good understanding of what you need to do to build and grow a challenger brand that was looking to be digitally disruptive.” He eventually became the chief executive in August 2019, as Spaceship’s last remaining co-founder Paul Bennetts left the business [he still retains a shareholding]. The other three co-founders had left in the early stages of the business. Spaceship is what gets called a “challenger” or “disruptor” superannuation fund – newer superannuation offerings that are looking to break the industry-retail duopoly by focusing on younger and digitally savvy members. It is not the only one. As of June 2020, there were about 23 of them, according to Rainmaker Information. Most new superannuation funds are geared towards younger investors, have choice offerings rather than MySuper products, and use a third-party responsible superannuation entity (RSE) licence. While they were growing seven times faster than the broader market, their assets totalled only $2.5 billion or less than 0.09% of the then $2.7 trillion superannuation systems – proving they still have to earn their “disruptor” label. So far, they have attracted less than 2% of the $140 billion in total superannuation assets held by millennials. Industry funds like Hostplus, Rest and AustralianSuper still own the bulk of younger accounts.

FS Super

www.fssuper.com.au Volume 13 Issue 02 | 2021

Most disruptors have failed to gain traction. A few, like Zuper, have folded while another player Grow Super pivoted away from a direct-to-consumer super offering towards providing back-office services to other superannuation funds. Spaceship is the third largest of the cohort, behind Future Super and Virgin Super. Together they held about 68% of the total assets in disruptors. In the four years since it started Spaceship has grown its superannuation fund to $470 million and 9,500 members at May end. In May 2018, it launched a low-cost lineup called Spaceship Voyager which now has $440 million in assets and 175,000 users – and is an important source of customers for the higher margin superannuation business. The person in charge is Moore. He arrived at superannuation via roles in mergers and acquisitions, home lending and retail banking. Moore grew up in Western and South Australia, as the family moved for his father’s job in mining. Eventually, the Moore patriarch switched careers to work in commercial lending for State Bank of South Australia, which morphed into Bank SA – this was a part of younger Moore’s remit in his St George career. But his first job was as a chartered accountant at Coopers & Lybrand, which merged with Price Waterhouse in 1998 to create what is now called PwC. He then worked at Bankers Trust in its mergers and acquisitions and corporate finance teams in the early 1990s. Taking a break to study an MBA at INSEAD in France was the springboard for Moore to switch from investment banking to general management. He joined General Electric next and worked on financial services acquisitions for it across Europe. This led to a senior management role at British lending and mortgage business First National, which GE had acquired during Moore’s time there. “My career moved more into general management because what I found is that working on deals can be tremendously exhilarating but the challenges associated with leading a business, I think are a much more all embracing ones, where you're having to think about all of the complexities of scaling a business, managing risk, managing technology, and interacting with customers,” he says. Moore returned to Australia to lead GE Money’s reportedly $400 million acquisition of Mark Bouris founded Wizard Home Loans, which at the time had a mortgage book of $4 billion. “That was a very disruptive business in the home lending space. And the opportunity to work on that acquisition and ultimately to be the managing director of the business was great,” he says. He left GE in 2008, for St George’s Bank soon after Wizard Home Loans was bought by John Symond’s Aussie Home Loans. His new employer was also getting bought out, by Westpac in an $18.6 billion all-scrip merger.

FS Super

Cover story

At the time that Moore accepted the job, he didn’t know the merger was on the cards. “I remember waking up one morning and seeing that St George was about to be acquired by Westpac and wondering what that was going to mean for the role. But I think the good news out of that was it created a lot of opportunities for me.” Moore spent the next nine years there, across roles that included running the retail bank, and serving as St George's chief operating officer. In some of these, he worked in St George’s digital capabilities in sales and services – experiences that he says drove home the end of old-school banking. “That helped me understand that certainly the future of banking and much of financial services was clearly going to be delivered digitally. And that world of old-style branch-based banking [and] in some ways of large voicebased customer contact centers was going to change as the opportunity for customers to interact with the bank digitally improved,” he says. At Spaceship, digital has been the only way to go. Its products and services are offered exclusively digitally,

The quote

...working on deals can be tremendously exhilarating but the challenges associated with leading a business, I think are a much more all embracing ones...

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Cover story

The quote

We are still building our brand.

and the company maintains a small office in Sydney's Chippendale. Moore is markedly different from other superannuation chief executives. He doesn’t mention “member interest” once in the hour-long conversation this profile resulted from, and is happy to chat about client acquisition channels – a taboo subject among industry fund executives. He is also not fussed about the government’s proposed [at the time of print] plans to staple members to existing funds, stop inflows to underperforming funds, and subject superannuation funds to a best interest financial duty. Most of these don’t apply to Spaceship, as its fund is classified as a choice product. On acquiring superannuation clients, Spaceship has shifted away from chasing superannuation leads to using its low-cost managed fund product as the first hook. “So it could be that it costs you $400 or $500 to acquire a superannuation customer through a digital direct consumer channel. Then in terms of the value of that customer over time, it will depend a lot on what the fee structure is, how long the client stays and there’s opportunity to recover that [acquisition] cost,” he says, adding Spaceship’s members being younger makes them more likely to stay for longer. “One thing that we're finding with the model that we've now built with Voyager, we acquire a customer at a much, much, much lower cost than what it costs to directly acquire a superannuation customer.” A Spaceship super customer comes into the business either via Spaceship Voyager, which is a more accessible entry point for them, or via organic marketing. The business keeps its marketing spend on super low. Spaceship Voyager’s three drawcards are that it waives fees for the first $5000 invested, charges index rate fees afterwards and is tilted towards tech stocks the market loves. Moore says the low free structure will stay for now but is constantly reviewed. “We are aware that there are competitors in the market that charge differently to the way that we do. You might call them a subscription-type fee. We don't have any current plan around our fee structure, [but it is] something that we're constantly monitoring,” he says. Voyager in itself, draws clients from three main channels: nearly half is organically generated via search engine optimisation, about a third comes from existing client referrals (they get $5 or $10 to bring in a friend or relative), and the remaining is via paid digital advertising through Google and Facebook. In the latter, Spaceship is no different from pureplay online retail businesses like Kogan, Temple & Webster and Adore Beauty. They spend about nine to 12% of their annual sales on paid marketing – a strategy that is slammed by many small cap investors as being too dependent on third parties and loved by others who see it as investing in the business.

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Moore says Spaceship’s ballpark marketing spend is higher than the 9-12% range, and there is room for it to go higher. “We are still building our brand…we don’t spend more money if we find that the incremental spend is giving us a diminishing return in terms of additional business,” he says. In terms of funds under management, Spaceship is inching towards $1 billion, but it doesn’t expect to break even on the cashflow until 2023 or five years in its life. Meanwhile, Moore, with his experience in mortgages and acquisitions, is open to growth opportunities. “I think the most logical of those products initially will be one, not so much on the banking or credit side of the balance sheet, but more on the investing or saving side,” he says. “In our customer surveys, we often get feedback, where people say ‘help me save for a home’; or ‘help me with investing products, where I can make some of those investing decisions myself [via] a broking platform’, rather than the managed funds we have,” he says, hinting a mortgage broking helpline may also be a future business unit. Spaceship is open to acquiring other superannuation funds, only if they don’t distract from the core offering. “Sometimes it can sound like a great idea to have smaller players as part of an aggregation play. But I think the concern for us is it may just distract from a more significant growth opportunity that we've got by continuing to build out on this business model that we've got with Voyager,” he says. On the way, Spaceship has also had a few brushes with the regulator. In 2018, Australian Securities and Investments Commission asked it to clean up its website of claims its GrowthX option “measures compnies” when 79% of the fund was tracking an index without any quantitative analysis. ASIC also handed it and trustee Tidswell fines of $12,600 each. The prudential regulator, APRA, rebuffed Spaceship’s appliction to get a RSE licence which Moore says it has since dopped considering until it cracks $1 billion. For the future, Spaceship has its eyes on building up to a million young Australians as its clients, which by Moore’s estimate, would put its total assets at $20 billion and could happen in less than a decade. “We want to create a Spaceship-first space,” he says. “What I mean is if someone were to ask someone, ‘Hey, Andrew, what do you [do] about investing?’ the response from that person would be, ‘Spaceship’. “That’s the type of branded relationship and connection that we're looking to build with all of our customers. So, we would like to feel that we're on our way towards having a million customers who feel that way about us and I think at that point, the level of funds under management across both of our products would be in excess of $20 billion.” fs

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Tables

Watching the charts Pooja Antil

research manager Rainmaker Information

The Rainmaker MySuper Index returned 19.9% for the 12 months ending March 2021, the highest one-year rolling return in 15 years. The last time default super enjoyed such massive 12-month performance was April 2006. Super funds’ 12-month returns surge was because it was in March 2020 when the market bottomed following the COVID plunge. Nevertheless, the MySuper index has climbed only half what the ASX has. Driving the near 20% returns were spectacular one-year performances from the Australian equities, international equities and property fund sector indexes of 38%, 24% and 29% respectively. Australia’s top performing single strategy MySuper products over the 12-month period were Hostplus, UniSuper, AMG Corporate Super, AustralianSuper and TWUSUPER. Overall, all single strategy products delivered double digit positive returns. In MySuper lifecycle space BT Lifetime Super outperformed its peers consistently over all age cohorts. Over the longer time periods, MySuper index returns were a more measured 7.3% p.a. over three years, 8.1% p.a. over five years and 7.7% p.a. over 10 years. fs

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Best super funds: Top 30 MySuper

PERIOD ENDING – 31 MARCH 2021

FUND & INVESTMENT OPTION NAME

Strategy Growth assets

1 year

Risk category

3 years

5 years

Rank

Virgin Money SED - LifeStage Tracker 1979-1983

90% High Growth

25.0%

9.3%

N/A

UniSuper - Balanced*

68% Balanced

22.6%

9.1%

9.2%

GuildSuper - MySuper Lifecycle Growing

100%

High Growth

28.0%

9.1%

8.8%

smartMonday PRIME - MySuper Age 40

86% High Growth

25.6%

9.0%

9.5%

Australian Ethical Super Employer - Balanced (accumulation)

70% Balanced

19.3%

8.9%

8.4%

AustralianSuper - Balanced

66% Balanced

21.7%

8.6%

9.5%

LGS Accumulation Scheme - High Growth

95% High Growth

24.6%

8.5%

9.8%

Mine Super - Aggressive

89% High Growth

28.5%

8.5%

8.9%

Lutheran Super - Balanced Growth - MySuper

75% Balanced

20.6%

8.2%

8.8%

Vision Super Saver - Balanced Growth

70% Balanced

20.7%

8.2%

8.8%

Telstra Super Corporate Plus - MySuper Growth*

89% High Growth

24.4%

8.1%

9.2%

Aware Super Employer - Growth

68% Balanced

18.4%

7.9%

9.0%

Cbus Industry Super - Growth (Cbus MySuper)

73% Balanced

20.8%

7.9%

9.0%

VicSuper FutureSaver - Growth (MySuper)

68% Balanced

17.8%

7.9%

8.8%

QSuper Accumulation - Lifetime Aspire 1

61% Balanced

15.7%

7.8%

8.2%

Mercer CS - Mercer SmartPath 1979-1983

89% High Growth

24.8%

7.8%

8.6%

HOSTPLUS - Balanced

81% Growth

23.2%

7.7%

9.6%

Media Super - Balanced

67% Balanced

17.3%

7.5%

8.6%

IOOF ESE - IOOF Balanced Investor Trust

53% Balanced

17.5%

7.5%

7.9%

Prime Super (Prime Division) - MySuper

65% Balanced

17.8%

7.4%

8.8%

HESTA - Balanced Growth

69% Balanced

20.3%

7.3%

8.4%

Equip MyFuture - Equip MySuper

60% Balanced

19.0%

7.2%

8.0%

Spirit Super - Balanced (MySuper)

67% Balanced

17.8%

7.1%

8.1%

StatewideSuper - MySuper

71% Balanced

19.7%

7.1%

8.6%

BUSS(Q) MySuper - Balanced Growth

74% Balanced

16.8%

7.1%

7.8%

NGS Super - Diversified (MySuper)

72% Balanced

17.9%

7.0%

8.3%

CareSuper - Balanced

77% Growth

18.4%

6.9%

8.4%

FirstChoice Employer - FirstChoice Lifestage (1980-1984)

90% High Growth

28.0%

6.9%

8.5%

legalsuper - MySuper Balanced

74% Balanced

20.5%

6.9%

8.0%

AvSuper Corporate - Growth (MySuper)

81% Growth

20.4%

6.8%

7.8%

Rainmaker MySuper/Default Option Index

19.9%

% p.a. Rank % p.a. Rank

7.3%

8.1%

* Limited public offer fund.

SelectingSuper Benchmark Indices - Workplace Super Index Names

1 year

3 years p.a.

5 years p.a.

Rainmaker MySuper/Default Option Index

20%

Rainmaker Growth Index

25%

Rainmaker Balanced Index

18%

Rainmaker Capital Stable Index

10%

Rainmaker Australian Equities Index

37%

Rainmaker International Equities Index

30%

10%

12%

Rainmaker Property Index

22%

Rainmaker Australian Fixed Interest Index

Rainmaker International Fixed Interest Index

Rainmaker Cash Index

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Investment:

24 Trading at London 4pm 30 and the illusory benefits From hurdler to hero

By Raewyn Williams, (formerly of) Parametric

By Stuart Simmons, QIC

Investment

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: With superannuation mergers becoming more common, it is important the consolidation process delivers investment wins cost-effectively. This paper describes a merger of two hypothetical funds by explaining three key steps to investment rationalisation. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

From hurdler to hero Using super fund mergers to deliver key investment wins

M Raewyn Williams

ass consolidation is a much-studied phenomenon of the corporate sector, riding the economic boom/bust cycle— but it is a first for Australia’s $3 trillion superannuation industry (see Australian Prudential Regulation Authority (APRA) Quarterly superannuation performance statistics highlights: September 2020). The merger, or ‘horizontal integration’, of APRA-regulated superannuation funds en masse will define the future for an industry approaching its 30th birthday. If this is done well, surviving funds will deliver investment solutions that better match the needs and preferences of fund members, at a lower cost; and fill the void banks have left in becoming a trusted financial wellbeing partner to members. But done poorly, ‘scale dividends’ will be meagre, members will face more limited, ill-fitting options that simply pass on market returns, and culture dilution and ‘mission drift’ will substitute superannuation funds as the neo-bank conglomerates of the future. Further, all this is subject to the federal government’s (government) overarching policy success measure. That is, whether the superannuation system will, in time, lower the bill for supporting Australians in retirement (versus a government-funded Age Pension). These are high stakes indeed.

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The ‘story within a story’ here is one of investment consolidation— how to deal with multiple, overlapping investment strategies as two superannuation funds become one. Not just consolidation, this will be a process of investment rationalisation as funds make crucial decisions about which strategies will ‘make the cut’. The classic transition management playbook would require merging funds to analyse their combined ‘legacy portfolio’ and define the ‘target (destination) portfolio’ in the merged entity, before implementing through careful transition management. But right from the start, most funds will face a crucial stumbling block. That is, a lack of transparency about what each fund’s aggregated holdings look like separately and combined, as they come together. How can merging funds rationalise investments wisely without transparency over their start or end points? This paper describes this challenge through the eyes of two hypothetical merging funds, walking through the three key investment rationalisation steps in a fund merger, and shows how the funds can solve this seemingly intractable problem for their equity holdings using a centralised portfolio management (CPM) equity portfolio structure. This set-up empowers the hypothetical funds to look beyond the risk aspects (hurdles) of investment rationalisation and adopt a more opportunity-attuned mindset. In this fictitious merger journey, the fund ‘heroes’ who emerge are able to identify clear merger-related investment wins and deliver them in a smoother, more agile and less costly fashion.

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Investment rationalisation in a fund merger—a high-stakes exercise To illustrate our ideas, we introduce two hypothetical superannuation funds, ‘Ice-cream Super’ and ‘Syrup Super’, each with four equity managers, which will be merging into a single fund, ‘Sundae Super’. The practical merger scenarios funds face may be different (for instance, a small fund being absorbed into a bigger fund; or separate front-end identities retained with a shared service back-end). Nonetheless, these ideas can be adapted to these different merger scenarios. We focus only on the listed equity holdings of these funds for the remainder of this paper. Moreover, we use a classic transition management framework and language, applied to a fund merger context. We depict the investment challenge that awaits the two merging superannuation funds—moving from a notional eight-manager legacy portfolio to a new rationalised target portfolio—in Figure 1. Before tackling the complexity of this challenge, it is important for both funds to appreciate just what is at stake; why it is so important for the funds to design the target portfolio cleverly, and execute the transition well. The key reasons are summarised in the following discussion. The funds’ investment portfolios are mission-critical

This is akin to the production assembly line in a large manufacturing plant. Investment returns are the figurative ‘widgets’ in the horizontal integration (merger) of our two funds here; the functional outputs which deposit retirement dollars into the accounts of Ice-cream Super and Syrup Super fund members. Delivering on investment objectives is inherently a demanding exercise, even without the shortterm organisational disruptions of the merger process. How the two funds’ investment portfolios come together may directly link to the objectives of the merger

In the short history of fund mergers to date, some funds have articulated investment objectives like reduced investment fees, increased diversification, and broader capabilities of the investment team. Investment teams must be made aware of the wider organisational goals

of the merger and understand how investment rationalisation outcomes can contribute to overall merger ‘success’. The quote Investment rationalisation can involve all the funds’ portfolios at once

The many moving parts and portfolio values involved make this scenario quite different from a typical investment transition from just one strategy or manager to another within an (unchanged) broader portfolio. The forced investment change environment is a ‘window of opportunity’ for Ice-cream Super and Syrup Super to enhance or even revolutionise the way the funds invest as the new entity, Sundae Super

Most funds’ investment teams can speak of good portfolio ideas intended to be delivered ‘one day’. For portfolios already being reshaped and transitioned, it may be easier (and cost less) to land a number of new ideas in the rationalised target portfolio. Dramatic industry developments are also forcing a rethink of how superannuation funds invest, such as: • mandatory comprehensive income products for retirement (CIPRs) retirement solutions (due July 2022) • The Australian Securities and Investment Commission’s Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97) • the rise of ‘responsible investing’ • the proposed APRA performance benchmarking rules. As the hypothetical funds, Ice-cream Super and Syrup Super, think about the strategic investment pivots they need to make to deal with such changes, it makes sense to weave these into the design of the Sundae Super rationalised investment portfolio. These observations underscore the need to bring a best-practice approach to the rationalisation of superannuation investment portfolios in a fund merger. Managing risks (the hurdles) is, of course, critical, but investment rationalism also provides the opportunity for heroics, if funds are prepared to be curious and eager to find ways to deliver investment wins through the merger process.

Figure 1. Fund mergers: The investment rationalisation challenge (multi-manager equities)

Source: Parametric, 2021. We leave the details of the transition portfolio unspecified as an array of structures, manager combinations, etc are possible.

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Delivering on investment objectives is inherently a demanding exercise, even without the shortterm organisational disruptions of the merger process.

Raewyn Williams, (formerly of) Parametric Williams was Parametric’s managing director, research, Australia. She was responsible for setting the agenda to research and develop new products for the local market.

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Defining the merged legacy portfolio The quote

We may never see more dramatic, sweeping investment portfolio changes than in the context of the fund mergers that will more than halve the number of APRA-regulated superannuation funds over the next decade.

As Figure 1 shows, the design of the Sundae Super's target equity portfolio and effective transition hinge on how well the merging funds understand the true starting point in their investment rationalisation journey. First, each fund needs a whole-of-portfolio view of their own equity holdings across the four managers. Our merging funds, Ice-cream Super and Syrup Super, face a challenge if they use a typical multi-manager structure which parses out the equities allocation among numerous independent managers with different style attributes—each fund must piece together the ‘jigsaw’ of manager sleeves to create a holistic view. The challenge, in fact, is twofold: to obtain the data from across these sources, and to find the resources and skills to synthesise and analyse the data to create a coherent, insightful whole-of-portfolio view. A further step, which adds to the degree of difficulty, is needed to reflect the merger context: to combine the whole-of-portfolio views of Ice-cream Super and Syrup Super into a single holistic view of the true legacy portfolio. This merged view of the true legacy portfolio spanning both funds will put the funds in a powerful position to not only manage the risks, but capitalise on the opportunities, of the investment rationalism workstream of the merger. However, combining the eight individual manager equity portfolios to achieve this will be a confronting, arduous task for the merging funds, and may be practically impossible in the traditional multi-manager equity structure described earlier. We solve this problem by imagining, instead, that the equity positions of Ice-cream Super and Syrup Super are implemented using a CPM structure as depicted in Figure 2. (For a short research note summarising the mechanics of CPM, see Williams & McKenzie, ‘Retirement investing, responsible investing: searching for scaleable implementation’, Parametric ResearchBite, January 2021.) Here, the first, crucial step in compiling the whole-ofportfolio view for each fund has already been achieved

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as the CPM manager naturally aggregates and optimises the positions of the underlying four managers for each fund, prior to implementation as a single live portfolio (Ice-cream CPM and Syrup CPM respectively). The true legacy portfolio view, then, for Ice-cream Super and Syrup Super together can be generated by the CPM manager creating a report showing the combined positions of these two CPM portfolios. Responding to the twofold challenge, we have now delivered two solutions in one to our merging funds: the CPM manager, with line-of-sight across all portfolios involved and specialist research and implementation skills, offers Ice-cream Super and Syrup Super both access to the data to provide a holistic starting point for the investment rationalisation project, and a trusted partner to perform the aggregation and analysis.

Designing the merged target portfolio Identifying a holistic investment rationalisation starting point for Ice-cream Super and Syrup Super is quite a breakthrough, though purely analytical—a matter of solving the data challenge and finding a party to capture the key investment attributes of the shared legacy portfolio. Defining the end point in the rationalisation process—the Sundae Super target portfolio—is different, drawing on strategic thinking, decision-making and exercise of judgment. The hypothetical funds have crucial decisions to make about which equity strategies will ‘make the cut’ and, further, which new portfolio ideas should be delivered as part of the new Sundae Super portfolio. A report which captures the combined legacy portfolio can help our hypothetical merging funds answer these vital questions. It is key to elevating the roles of decisionmakers in the investment rationalisation process from (mere) hurdlers to potential heroes. Continuing with our proposed CPM structure (solution), Ice-cream Super and Syrup Super could ask their CPM manager to provide the following kinds of insights in the way they summarise the legacy portfolio (see Table 1 on the next page).

Figure 2. Transparency over the merging funds’ legacy portfolio using CPM

Source: Parametric, 2021

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Table 1. Data and analysis for target portfolio decision-making

Legacy portfolio insight

Helps funds to identify …

Strategy pairing (strategies with similar risk characteristics)

Which strategies will be direct ‘double-ups’ in Sundae Super

Potential decision for target portfolio

Absorb assets of redundant strategies based on Sundae Super’s preferred decision criteria (e.g. better performance, better risk-adjusted performance, lower fees, better transparency)

Strategies driven by systematic versus idiosyncratic risks

Which strategies could be absorbed into or replaced by lower-cost rules-based strategies

Absorb strategies high in systematic risk (e.g. ‘factorhuggers’) into new low-cost smart beta sleeves

Total portfolio tracking error to market capitlisation benchmark

How different the combined Ice-cream Super plus Syrup Super portfolio is from a simple index portfolio

Redesign Sundae Super target portfolio around a core, low-cost index holding and convert active sleeves into higher-tracking error complements

Strategy rankings by fee, or fee per unit of return

Higher cost (vs value) strategies

Absorb higher-fee strategy assets into lower-fee strategies to hit Sundae Super’s fee target

Total portfolio redundancy

How many of a manager’s positions overlap with other managers’ positions

Redesign Sundae Super target portfolio around a core, low-cost holding of high-overlap stocks and convert active sleeves into ex-core active complements

Embedded capital gains, by strategy

Which strategies can be changed or divested without triggering a large tax bill

Absorb assets of low-embedded tax strategies into higherembedded tax strategies and/or specify after-tax return focus of target portfolio

Carbon (or other environmental, social and governance (ESG)) characteristics of total portfolio

How the combined Ice-cream Super plus Syrup Super portfolio compares to a carbon/ ESG benchmark or specific fund ESG target

Absorb assets of ESG-naïve strategies into ESG strategies or add a whole-of-portfolio carbon/ ESG screen or overlay to Sundae Super target portfolio

Strategy rankings by RG 97 costs

Which strategies may reduce competitiveness of Sundae Super in product disclosure documents and web comparison tools

Absorb higher RG 97 cost strategy assets into lower cost strategies to hit Sundae Super’s competitive positioning target

Strategy rankings by concentration/diversification

Which strategies can be changed or divested quickly, with lower transition costs

Accelerate transition planning for concentrated portfolios and/or specify trading and implementation efficiency focus of target portfolio

Source: Parametric, 2021

See how this transparency empowers the hypothetical merging funds. They are now well positioned to think about how portfolio inefficiencies can be addressed in the course of investment rationalisation, and what can be delivered as a merger ‘win’ in the way the target portfolio is designed. The beneficiaries of these wins are fund members; but there is also, arguably, a more commercial win—a competitive advantage these funds will enjoy as the merger is executed over other funds who do not use a CPM equity structure. We envisage Ice-cream Super and Syrup Super engaging collaboratively with the CPM manager to gradually refine their target portfolio ideas, until they settle on the final design of the Sundae Super target portfolio. The funds can now move to the implementation phase of the investment rationalisation project with a detailed

FS Super

understanding of the expected portfolio holdings, risks, fees, tax positions, ESG and other sensitive attributes of the newly designed, rationalised Sundae Super portfolio.

Managing the investment rationalisation transitions A third area of investment rationalisation can elevate the roles of Icecream Super and Syrup Super from hurdlers to heroes: the actual transition path they will forge in moving from their shared legacy positions to the Sundae Super target portfolio. What does best practice look like in this high-stakes exercise? We believe it is a matter of optimising between three objectives, held in tension, depicted in Figure 3. Figure 3. Transition management objectives for a superannuation fund

Source: Parametric, 2020—reproduced from prior published research.* Transaction costs include explicit costs like brokerage, fees and transaction taxes and implicit costs like bid-ask spreads and price-impact (‘market move’) costs. *See Williams & McKenzie, ‘The sting in the transition tail’, Parametric Research, May 2020. In this paper, we analysed a hypothetical superannuation fund equity transition scenario and identified tax costs (typically ignored) which were more than six times larger than transaction costs.

This three-way lens is at odds with the usual framing of superannuation investment transition management as a two-way speed versus transaction cost trade-off. This ignores the taxable nature of superannuation fund investing. The merger context is, surely, the worst time for our funds, Ice-cream Super and Syrup Super, to adopt ‘tax blinkers’ in relation to the investment rationalisation task, given the intuitive rule of thumb that the larger the transition, the larger the potential tax bill. (This should not be confused with the tax rollover relief provided to merging superannuation funds in Subdivision 310 of Part 3-30 of the Income Tax Assessment Act 1997. This shields funds from tax liabilities (or loss of accrued tax loss shelters) which can otherwise arise through the change of legal ownership of investments in fund mergers. The tax relief does not extend to the investment rationalisation that, inevitably, needs to occur during the process of consolidating the assets within the merged fund.) Again, we note the difficulties a typical equity structure (see Figure 1) would present to the hypothetical superannuation funds to balance the competing pressures of time, transaction costs and tax costs across the eight transitioning manager portfolios and, indeed, find a transition manager skilled at optimising between these three. And, again, we see how the qualities of our proposed solution cut to the heart of this challenge: in the reimagined hypothetical, Ice-cream Super and Syrup Super use a CPM structure with both in-built transition management and a specific focus on managing ‘real-life’ portfolio implementation frictions, including taxes and transaction costs.

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With the final design of the Sundae Super target portfolio settled, we envisage Ice-cream Super and Syrup Super commissioning from the CPM manager a pre-transition report covering estimates of time, transaction costs and tax costs to move from the merged legacy to target portfolio. Subject to a clear, prevailing preference (such as ‘move as fast as possible’), the report can cover multiple scenarios to give the funds a feel for the different options and trade-offs involved, before agreeing and implementing the transition plan. This is the embodiment of the three-way framework set out in Figure 3 and, in our view, brings best-practice implementation to the investment rationalisation workstream of the fund merger.

Conclusion The hypothetical funds, in the course of effecting a broader fund merger, have now navigated a challenging, high-stakes investment rationalisation process and delivered a new, cleverly designed Sundae Super equity portfolio. Using a specialist change management and implementation structure (CPM) has made possible what might be impossible (at best, unwieldy) in a traditional equity structure. In fact, it has brought surprising ease and agility to this critical process. Ice-cream Super and Syrup Super can confidently communicate to

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stakeholders that they have made the best of their opportunity to deliver a new set of equity holdings which have: • been stripped of redundancy, uncompensated risk and other inefficiencies that would otherwise have resulted from the merger • been pivoted to meet key strategic objectives (e.g. to reflect lower fees, better ESG characteristics or a lower (or higher) risk appetite) • preserved portfolio value through the investment rationalisation process, through intentional management of taxes and transaction costs • implemented the investment-related deliverables of the fund merger in a timely fashion, consistent with the broader fund merger timetable • been able to target the investment-related ‘wins’ from the merger as a contribution to the merger’s broader success. The key takeaway for the real-life peers of Ice-cream Super and Syrup Super is this: the greater the potential investment changes, the more the value of a CPM structure and best-of-breed implementation come to the fore. We may never see more dramatic, sweeping investment portfolio changes than in the context of the fund mergers that will more than halve the number of APRA-regulated superannuation funds over the next decade (prediction published in KPMG’s Super Insights Report 2018). Funds can—must—position themselves far in advance to execute

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well on merger activity when it happens. This becomes compelling for larger funds who expect to be a party to fund mergers over and over again. Part of this preparatory work is to think ahead about the critical process of designing and delivering the production centre of investment ‘widgets’ (retirement dollars) into a new merged ‘factory’ setting. Funds that take the lead from the fictitious funds in this paper will be excited by the opportunity their merger plans present. That is, to tackle the investment rationalisation required with a heroism that delivers key investment wins to the newly merged entity and its members, and helps to underscore the merger’s success. fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. What does the author consider to be the primary stumbling block to the process of merging two superannuation funds? a) Lack of transparency over each fund’s investment holdings b) Deliberate resistance by one or both sets of fund trustees c) Conflicting approaches to investment management d) Inability to agree over a target or destination portfolio 2. The paper proposes an ordered three-step investment rationalisation process for a successful fund merger, for which the second step entails: a) Defining the merged legacy portfolio b) Managing the investment rationalisation transitions c) Designing the merged target portfolio d) Minimising taxation liabilities arising from the change of legal ownership of assets 3. Using CPM to identify legacy portfolio strategies driven by systematic risk, fund decision-makers can address inefficiencies in the target portfolio via: a) Divesting assets with higher embedded capital gains tax liability b) Replacing strategies high in systematic risk with low-cost smart beta alternatives c) Absorbing assets of ESG-naïve strategies into more ESGaware strategies d) Adopting an increased level of investment diversification 4. Two current industry developments prompting superannuation funds to rethink how they invest are: a) Goals of enhanced diversification and reduced investment fees b) Merger-related investment wins and ASIC’s RG97 c) The compulsory introduction of CIPRs and lower investment performance fees d) The rise of responsible investing and APRA’s proposed performance benchmarking 5. Superannuation funds can improve the execution of any merger activity through forward thinking about the investment rationalisation process. a) True b) False 6. According to APRA, Australia’s superannuation industry was over $4 trillion in size by September 2020. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper explains why the London 4pm benchmark Fix is a poor option for investors who are exposed to significant but wholly avoidable market impact costs. A ‘best execution’ outcome will more likely be achieved when currency management is aligned to timing of underlying FX exposures. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Trading at London 4pm The illusory benefits of maximum liquidity

T Stuart Simmons

his paper explores why trading at the London 4pm WM/Refinitiv benchmark fix (Fix) brings Australian institutional investors only the illusory benefits of maximum liquidity. The conclusion is that investors need to challenge the use of the Fix for execution purposes, and instead pursue strategies that meet with their objectives. It will require more rigour, but the reward is the conversion of very material and unobserved execution costs evolving into visible implementation ‘profits’ relative to the industry benchmark fix.

Background to the London 4pm benchmark Those unfamiliar with benchmark fixing and its uses should start with the basic fact that the institutional foreign exchange market operates uninterrupted for over five days of the week; from the New Zealand open on Monday to the New York close on Friday. To delineate one trading day from another, ‘fixing’ rates are published to represent a daily closing price. Market convention records this timing as London 4pm, with WM/Refinitiv’s benchmarking service the most popular singular standard for the pricing of international asset portfolios and global benchmarks. The mechanics of Refinitiv’s fixing methodology utilise median market rates in a five-minute window around the time of the Fix—two-and-

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a-half minutes before and after 4pm for benchmark daily closing rates. But these benchmark rates are not just used to revalue international assets, benchmarks, and derivative positions. Market participants are also drawn to executing trades at the Fix, and for investors seeking to guarantee the fixing rate, they will typically submit an order to a counterparty bank in advance of the Fix. This then leaves the bank to manage the risk around that and other fixing orders before delivering on the fixing price alongside a preagreed spread. There is no doubting what attracts a number of investors to execute at the Fix: • Some seek the additional liquidity (trading volumes/ market depth) and narrow bid-ask spreads which accompany elevated trading volumes. • Others are drawn to the potential benefit through netting some of their trading interest at a fixed time. • There are those who seek to simply minimise the level of tracking error to their respective benchmarks. • Some are drawn in by the transparency that the Fix offers. • Others trade at the Fix to generate scale in their currency management practices. It all sounds rather compelling except for the very significant, largely unrecognised, and wholly avoidable market impact costs accompanying rebalancing at the Fix.

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By not considering how unbalanced order flows distort exchange rates, investors are skirting ‘best execution’ obligations and incurring unobserved costs which elicits a material dollar cost to the end investor. In the next section, we explain how market impact costs from herd behaviour completely overwhelm any benefits that accrue from the surge in trading volumes.

Herd behaviour: Triggering an adverse market reaction Individual investors follow their own self-interest. Leaving an order to be filled at the London 4pm fix would generally anticipate a minimum of market impact given the elevated trading volumes and deep liquidity. However, it is the collective of these individual decisions that generates herd behaviour which itself triggers an adverse market reaction. As per the Financial Stability Board’s Foreign Exchange Benchmarks Final Report: “Price movements will always occur in the fixing window to reflect the net balance of supply and demand in the market.” Consider market moves around mid-March at the height of the COVID-19 crisis: global stocks suffered badly on March 12, 2020 with the MSCI World exAustralia (AUD) Index falling 6.6%. As investors assessed the damage to their portfolios the following day, one response was an urgent need to rebalance hedging programs. The natural reaction for an Australian investor in that situation was to sell Australian dollars and buy foreign currencies to realign the hedges and reflect the lower portfolio valuation. Here, timing matters—a lot. An investor waiting until the Fix will see their orders combined with those of other investors pursuing a simi-

Figure 1. AUD/USD London 4pm fixing on 13 March 2020

Source: QIC, Bloomberg

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lar objective. The sheer weight of orders going in the one direction creates a massive imbalance for the market— one which is resolved by the Australian dollar cascading lower in the hour ahead of the 4pm fix. The galling result as shown in Figure 1 is that the investor rebalancing (selling) at the Fix will be doing so at a level that is 2% lower than where the dollar was trading just an hour earlier. This result is not an accident or chance event. It is the natural outcome from a herd of investors rebalancing in the same direction and concentrating their flows at the same time. Nor is it an isolated incident, as the COVID crisis provided a host of examples where the concentration of investor flows saw a very material and detrimental movement into the London 4pm Fix in both directions. This is demonstrated in Figure 2, with that March 13 move as the centrepiece. It is clear that herd behaviour generated a series of significant market moves into the Fix with investors often getting filled at levels at or near the extremes of that representative trading range.

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Investors need to challenge the use of the Fix for execution purposes, and instead pursue execution strategies which meet with their objectives.

Market impact: A systematic bias towards trading range extremes It is also important to recognise that this herd behaviour phenomenon is not isolated to crisis conditions. There exists a systematic market bias to the fixing rate being set towards the extremes of the trading range. Our earlier research has found there is a persistent tendency for the AUD to peak or trough at the Fix. We can represent this by looking at the distribution of the AUD fix compared to the prevailing trading range around the Fix. Figure 3 shows the distribution of the AUD fix compared to its price range just ahead of the

Stuart Simmons, QIC Simmons is QIC’s director and head of currency. He is responsible for QIC’s currency overlay mandates as well as ongoing thought leadership and research on currency markets. He is a member of the Reserve Banks of Asutralia's Australian Foreign Exchange Committee and is Australia's private sector representative to the Global Foreign Exchange Committee. Prior to joining QIC, he was director, ANZ (Europe); managing director, Principal Global Investors (Europe); and vice president, BT Funds Management.

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Figure 2. Significant market moves around AUD/USD London 4pm fixing on various dates

Source: QIC, Bloomberg

Figure 3. London 4pm bias distribution(s)

Source: QIC, Bloomberg

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Fix (3:46pm–4:03pm) with observations across each trading day from July 2017 to September 2020. Note: The WM/R London 4pm fix is technically calculated over a window covering 2.5 minutes either side of 4pm. Calibrating our sample to 4:03pm covers the entire fixing window. On regular trading days outside of month-ends, there is a general bias towards fixing in the first and fourth quartiles of the trading range around the Fix. This only gets more exacerbated when taking in the observations at month-end and quarter-end dates. It is also intuitive as a greater concentration of investors rebalance at the end of month/ quarter, with these flows also tending to be more significant commensurate with the accumulated monthly move in underlying assets as less frequent rebalancing allows the exposure ‘drift’ to widen. Knowing there is a tendency for the AUD fix to occur at a price extreme means that at best, trading outcomes will tend to be binary and volatile. Further, this outcome will cause investors to either benefit or suffer depending on whether an individual investor’s flow is trading in the same direction as other market participants during a fixing window. One may claim that given we typically have no foresight to what the balance of investor volume is on any given day, this volatility will reflect random noise that is not expected to cost over time. However, for investors wishing to hedge their international investment portfolios, this claim is not quite true. Australian superannuation funds typically allocate a significant proportion of their investment portfolio in international equity markets, which generate currency hedging needs. As equities rise or fall, the foreign currency exposure from international equities will move out of alignment with their currency hedge, leading to a need to rebalance the hedge. The requirement for rebalancing is typically elevated either after significant equity-market moves, or at popular rebalancing points such as monthends, leading to a certain amount of predictability in some investor flows. Indeed, Figure 4 shows the cumulative difference between the AUD 4pm fix relative to its time-weighted average price (TWAP) between 3:46–4:03pm over time— a measure of the cumulative market impact into the Fix— relative to the MSCI World Index. There is a clear co-movement between the 4pm market impact to equity prices highlighting the significant influence exerted by portfolio hedging flows on the Fix, particularly following periods of heightened market volatility. In fact, this effect is so prominent that during the period of extreme market volatility during the COVIDcrisis, prior equity returns became a clear predictor of the daily trading patterns into the AUD 4pm fix. This was because the significant swings in equity prices meant trading volumes from investor rebalancing also surged. As Figure 5 shows, the combination of elevated rebalancing episodes during this period, coupled with a larger

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than average market impact into the 4pm fix, meant investors dealing at the Fix incurred a massive, and largely unrecognised, trading cost.

Industry warnings The heightened volatility from concentrated flows was so prominent the Global Foreign Exchange Committee took the extraordinary step of issuing a warning to institutional investors on 26 March 2020. In a press release titled 'GFXC Issues Statement on FX Market Conditions', the GFXC advised institutional investors to reconsider trading behaviour around the March month/ quarter end, warning of significant volatility associated with hedge rebalancing. “Given the intense volatility seen in global financial markets this month, it is possible that FX market participants may execute larger than usual FX volumes during end-ofmonth benchmark fixings...In light of these possible develop-

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Knowing there is a tendency for the AUD fix to occur at a price extreme means that at best, trading outcomes will tend to be binary and volatile.

Figure 4. London 4pm fix versus TWAP & MSCI World (local)

Source: QIC, Bloomberg

Figure 5. AUD trading bias into 4pm fix versus prior week equity return

Source: QIC, Bloomberg

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Figure 6. Net P&L difference versus rebalancing at London 4pm fix (March 2020)

Source: QIC, Bloomberg

ments, significant volatility and price movements may be observed during FX fixings in the coming days.” This certainly helped to avert a major event at the end of March, with investors introducing more flexibility into their processes. However, routinely executing at the Fix continues to prompt industry leaders to question whether this practice represents the most appropriate method of execution. More recently, this sentiment was reiterated by GFXC chair and RBA deputy governor Guy Debelle in a ‘The Global Foreign Exchange Committee and the FX Global Code speech of October 2020: “In periods of volatility, it is inevitable that there will be a greater focus on benchmark fixes. Large changes in asset prices and currencies generally mean that investors have greater-than-normal rebalancing flows when managing their portfolios. This was certainly the case at the height of market volatility in March. Ordinarily, a lot of these rebalancing flows will go through the market at times that match benchmark fixings…At the same time, it remains as important as ever for users of the 4pm fix and other benchmarks to regularly assess whether executing at those times suits their requirements.” Investors cannot claim they have not been warned. While London 4pm may indeed see a surge in market trading volumes, this only becomes a liquidity benefit for investors if that trading volume is balanced. Australian investors in particular will often find herd behaviour systematically skews the market as their trading needs often coincide with other investors, leading to significant unrecognised market impact costs when dealing at the Fix. This is why leading industry committees are pointedly reminding investors that they often have a duty to seek best-execution outcomes—and this is not represented by systematically rebalancing at the Fix. As per the Financial Stability Board’s Foreign Exchange Benchmarks Final Report: “It is important to stress that trading at the Fix price, even at the midrate, is not necessarily going to give best execution for a customer in the sense of the best possible price. In fact, trading at the Fix leaves the client exposed to the price movements arising from the net order flow taking place at that point in time.”

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Implementation shortfall: Giving consideration to market impact Clearly, there is a need for investors to do more than celebrate a narrow bid-ask spread. This is where a measurement of implementation shortfall comes in—ensuring that investors give consideration to the trading costs inclusive of market impact. The example of 13 March 2020 provides a relatively simple illustration. With global developed market equities (in Australian terms) falling 6.6% on 12 March 2020, the rebalancing response from an investor who maintains a 50% hedge is to sell approximately 3.3% AUD forward. Considering only the US component of the equity benchmark which represents approximately two thirds of the MSCI World (ex-Australia) index, the cost of waiting that extra hour for the Fix is over four basis points at fund level. On a global equity allocation of $1 billion, this represents an avoidable market impact cost of $435,000 for just one trade. This does not even include the disclosed spread a counterparty will apply to the trade. We know that 13 March 2020 was not an isolated move and can expand this analysis by simulating the implementation shortfall of an Australian global equity investor who rebalances a 50% hedge throughout March. Capturing the daily range where exchange rates are more liquid, as Figure 6 demonstrates, executing at London 4pm is the single most costly time to be executing. Every other half hourly increment generates a better result for the investor. By executing one hour ahead of the Fix, that hypothetical investor can save 0.14%, or $1.4 million at the fund level. This goes up to $1.6 million if the investor had executed just 90 minutes ahead of the 4pm fix. The investor’s effort to minimise trading costs perversely ends up with an overwhelming implementation shortfall that clearly dominates any modest narrowing of the ‘visible’ spread cost. For a $10 billion portfolio, this impact goes up to $16 million. Another reason this market impact cost appears to be hidden from investors is the alignment between the execution time and the benchmark market convention. Any investor executing at the London 4pm fix is almost certainly capturing the same rate as their

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benchmark (excluding the commission), and an associated attribution of performance will not identify the opportunity available through avoiding that benchmark rate. The same market impact costs being incurred by the fund are also being absorbed by the benchmark performance. Only an investor who is actively avoiding that fixing/benchmark rate will be able to identify the very material gains accruing to those willing to put more rigour into their execution process.

Conflicts of interest, agency issues and alignment We have identified the systematic behaviour of exchange rates around the fixing window and the associated investor flows that contribute to that market impact. Now it is important to explore how the lack of alignment across different market participants is directly linked to that market impact and skewed fixing outcomes. Simply put, leaving an order with a counterparty at the London 4pm fix naturally introduces a mismatch in alignment. When orders are left with a bank counterparty, the currency risk is transferred from the customer to the bank, as the bank is exposed to exchange rate movements at the Fix.

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Dealers accept these orders and act as principal bearing the consequent price risk, rather than executing orders on an agency basis where the risk remains with the investor. Another way of expressing it is that the dealer agrees to execute those orders at an unknown price which is subsequently established during the fixing window. At a minimum, the investor’s goals are not aligned with the bank whose primary objective is profitability, while the investor may be pursuing transparency or minimising the ‘visible’ cost. The bank will profit if the average rate at which it buys is lower than the fix rate which it ‘sells’ to the client, or the average rate at which it sells is higher than the fix rate which it ‘buys’ from the client. The foundation of this misalignment is that both parties want the price to move in different directions into the Fix. No doubt the trading environment has improved from the heavily publicised market manipulation that existed prior to 2013, which led to massive fines against banks and wider industry scrutiny that also resulted in penalties levied against buy-side firms. Benchmark reform and the introduction of the FX Global Code have seen a seismic shift in behaviours, but investors remain systematically worseoff. That issue of misalignment ensures that there are inherent issues irrespective of conduct.

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The systematic price trends that extend from an hour ahead of the Fix indicate fixing-related activity commences well before the Refinitiv London 4pm fixing window which ‘opens’ two-and-a-half minutes before the hour. This could be the result of three factors: 1. Banking activity front-loading their risk management which advertently or inadvertently improves their average against the Fix. 2. The actions of speculators who are capitalising on the predictable market imbalance for their own gain, and/or 3. The less-common usage of the Bloomberg BFIX fixing methodology which has a heavy skew towards activity ahead of (and precisely at) 4pm. This is a natural consequence of loss-aversion from banks which want to prevent being caught offside by the fixing rate—and an inclination to front-load any trading to harness levels that are prevailing before too much market impact has occurred. Similarly, speculative trend following will also occur ahead of and

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around the Fix—even in the case of market participants which have no natural fixing flows. We have already seen how there is a predictability to exchange rate movements around the Fix for the Australian dollar, with a clear relationship to equity market movements. Even without that information, our research has identified systematic patterns which can be exploited from observing momentum leading in to 4pm, and mean reversion of exchange rates after 4pm. We are not alone in identifying these patterns, with researchers Carl Husselmann and Kristjan Kasikov also observing similar trends in their ‘Trend-following market behaviour at the 4pm London time BFIX and WMR fixing windows’ paper of August 2019: “Excess concentration of large one-way orders and potentially some speculative trading around fixing times has also given rise to certain distortions in FX markets.” This combination of bank and speculator activity exacerbates exchange rate movements into the Fix. It is fertile ground where an

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investor’s implementation shortfall may end up as bookable profits for other market participants. It is also critical for an investor to understand the misalignment is not limited to the relationship between an investor and the counterparty bank. There is often also a fundamental misalignment between the investor and their own investment manager. Some currency managers operate with huge scale with associated standardised, inflexible processes which accommodate that scale. These processes may include standardisation of execution practices, standardisation in tenor selection, standardisation in rebalancing and standardisation of reporting. Executing at London 4pm generates the type of efficiency which enables such scale, and there is simply no incentive to deviate from extremely scalable practices to head-off a sub-par outcome for the investor.

The FX Global Code Before an investor considers themselves a victim of misconduct, it is important to walk through what is acceptable under the FX Global Code—the global principles of good practice developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. Principle 10 encapsulates acceptable conduct around handling orders relating to the Fix, requiring market participants to handle orders fairly, with transparency, and “in a manner consistent with the specific considerations relevant to different order types”. More specifically, trading activity which intentionally influences the benchmark fixing rate to benefit from the fixing is classed as misconduct: “Market Participants handling a Client’s order to transact at a particular fixing rate (Fixing Order): should not intentionally influence the benchmark fixing rate to benefit from the fixing, whether directly or in respect of any Client-related flows at the underlying fixing.” What is captured as acceptable conduct includes trading before the fixing window opens: “Indicative Examples of Acceptable Practices: transacting an order over time before, during, or after its fixing calculation window, so long as not to intentionally negatively impact the market price and outcome to the Client.” Consider the example of 13 March 2020, where investor orders would have been significantly skewed in one direction—to sell Australian dollars in a very material size. The FX Global Code enables a bank to execute ahead of the five-minute window if it is judged that this will mitigate market impact. Excess volatility can occur irrespective of the conduct of banks participating in the Fix. It is the imbalance of market orders which drives that volatility and invariably works against the investor.

What is the alternative? Avoiding the Fix is easy, whereby landing on the optimal alternative trading process requires a lot more rigour. It necessitates a more considered approach to achieve ‘best execution’, and one which considers the market environment rather than methodically and naïvely trading at the Fix. As per the Financial Stability Board’s Foreign Exchange Benchmarks Final Report: “The most sophisticated asset managers (especially those with a centralised FX desk) more generally execute their trades throughout the day, possibly using a range of facilities.” There is no ‘silver bullet’, but a good place to start is to recognise the

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purpose of the trade. If an investor needs to rebalance their hedging program because it is out of structure, there is no need to wait until the close of the following day. This is accepting an unwanted and uncompensated risk for longer than necessary. Consider again that example of March 13, 2020 where investors were responding to the equity correction that occurred over prior days. Investors leaving orders at the 4pm fix were doing so in an environment where stocks were already undergoing a fierce rebound, eventually posting an 8.2% gain (MSCI World ex-Australia net total return (AUD)) on the 13th. This more closely aligned the timing of the hedging unwind with the theoretical timing of when investors should have been reinstating positions—an implementation and risk management failure. To effectively mitigate unwanted market risk from their hedging program, investors need to more closely align the rebalancing timing with the change in underlying assets and any cashflows. Also consider the not-uncommon scenario of an investor outsourcing their currency program to a manager with real or perceived conflicts of interest—this is where the lines between the manager acting as principal or agent are blurred because of related-party dealing. In these circumstances, executing at the London 4pm fix often represents a compromise that brings much-needed transparency to the investment process. But this is also one area where the cure—implementation shortfall—may be even worse than the disease—related-party dealing. The simple solution to this is to employ a manager with full alignment to the investor. To be clear, we are also not advocating for a complete withdrawal from executing at the London 4pm fix. There are circumstances such as a transition between accounts or managers, where it is necessary to find a clearing price that matches off against an opposing flow. There are also occasions where the timings of currency trades are linked to investor cashflows and achieving a rate close to the 4pm fix is necessary to minimise market risk. In these circumstances, investors can consider other trading strategies that enable them to capture the rate close to the Fix but where any ‘gains’ relative to the published fixing rate from their own market impact also accrue to themselves.

Conclusion Systematically executing FX hedge rebalancing trades at the benchmark closing rate of London 4pm does not represent ‘best execution’. Despite several attributes that at face value, appear very attractive, evidence through the COVID crisis and beyond indicates that it is the antithesis for an investor concerned about execution costs. Through the relatively liquid phase of a trading day there was no worse time to have executed, with a concentration of orders in the same direction leading to severe order imbalances and commensurate market impact. The end-investor gets lumbered with a trade fill established at the end of a predictable market surge corresponding to movements in underlying assets. This is not an innocuous, unbiased auction process to determine a clearing rate for participants into the close. There is a highly predictable element of the direction of flows which appears to be capitalised on by speculators and may also be exacerbated by banks which can act in advance of the Fix. It is not isolated to crisis periods either, with systematic patterns observable through ‘normal’ market periods, and especially at month and quarter ends where rebalancing volumes tend to be elevated.

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CPD Questions

Investors need to challenge the use of the Fix for execution purposes and instead pursue execution strategies which meet their objectives. It will require more rigour, but the reward is the conversion of very material and unobserved execution costs evolving into visible implementation ‘profits’ relative to the industry benchmark fix. fs

Earn CPD hours by completing this quiz via FS Aspire CPD 1. What does the author identify as a significant disadvantage for investors from rebalancing at the Fix? a) The narrow bid-ask spreads b) The netting of trading positions at a fixed time c) The transparency of the Fix d) The largely unrecognised market impact costs 2. The market impact cost of the Fix is typically hidden to many investors because: a) Trading at the Fix generates scale in their currency management practices b) Their currency orders are often left with bank counterparties whose primary objective is profit c) The costs are absorbed by the benchmark performance d) The actions of speculators who aim to capitalise on market imbalances 3. Why do many Australian superannuation funds have ongoing requirements for currency hedging? a) They have significant allocations to international equities b) They hold large allocations to international fixed interest assets c) Active foreign currency trading is employed to boost member returns d) It is a natural outcome of ‘herd behaviour’ often displayed by superannuation funds 4. To remove unwanted market risk from their hedging program, the author recommends investors: a) Systematically align the timing of their rebalancing with the London 4pm Fix b) Align the timing of rebalancing with changes in underlying assets and cashflows c) Suspend rebalancing activities on days of extreme price volatility such as 13 March 2020 d) Avoid scheduling any rebalancing activities on month-end days 5. Research has shown that the AUD/USD persistently peaks or troughs at the Fix. a) True b) False 6. The author claims that ‘best execution’ is achieved via systematic execution of FX hedge rebalancing trades at the Fix. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Insurance:

Life insurance in superannuation

By APRA

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: APRA has expressed concerns over recent trends and practices it considers to have led to poor profitability and increased premium volatility by insurers. This paper provides guidance to fund trustees and life insurers on ‘best practice’ for conducting tenders on insurance offerings for members. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Life insurance in superannuation Improving outcomes for members

L APRA

ife and disability insurance are important benefits offered by superannuation funds to Australians. Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), all members in MySuper (default) products must have death and permanent incapacity benefits provided through their superannuation fund (subject to certain limited exceptions). Consequently, almost 70% of Australians who have life insurance hold it through their superannuation fund and in 2020, over $5 billion was paid in insurance claims to superannuation members. In monitoring industry trends and practices across the insurance and superannuation sectors, APRA has seen a re-emergence of some concerning developments in relation to premium volatility, the availability and provision of data, and tender practices. APRA’s view is that these developments, if left unaddressed, are likely to result in poor outcomes for those Australians with life insurance held through their superannuation fund and could ultimately adversely impact the availability and sustainability of life insurance through superannuation in the future.

Insurance experience Following a period of intense competition among life insurers contesting for superannuation business, where material premium reductions

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and benefit increases were offered, many life insurers experienced significant financial losses between 2012 and 2014. As a result, between 2014 and 2016, many superannuation funds and their members experienced large increases in their premiums for life insurance. More restrictive cover terms were also introduced as the life insurance industry sought to restore the sustainability of their business. In addition, a number of superannuation trustees had difficulty obtaining quotes for cover for their members, as insurers and reinsurers declined to participate in many tenders because of their recent poor experience. The significant volatility in premiums, as a result of premium reductions followed relatively quickly by large increases, was a poor outcome for superannuation members. In particular, it makes it difficult for members (and trustees) to ascertain the value being provided by their insurance arrangements. The trends and practices which APRA has recently observed appear similar to the cycle seen in 2012-2016 and have similarly been accompanied by a deterioration in group life insurance claims experience (for example, through increasing mental health claims) and a significant impact on life insurer profitability, as illustrated in Figure 1. Figure 1 shows the net profit after tax for group disability income insurance and lump sum insurance, for the years 2011 to 2020 (inclusive). Both insurances made net losses in 2013, 2019 and 2020. APRA is concerned that, should these cyclical trends remain un-

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Figure 1: Net profit after tax – Year to 31 December

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Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), all members in MySuper (default) products must have death and permanent incapacity benefits provided through their superannuation fund.

Source: APRA

addressed, superannuation fund members are again likely to be adversely impacted through further substantial increases in insurance premiums and/or a reduction in the value and quality of life insurance in superannuation. Indeed, the ongoing viability and availability of life insurance through superannuation may be jeopardised, adversely impacting access to life insurance cover for a large part of the Australian community. External forces and evolving market conditions have also affected the provision of life insurance in superannuation, including the impacts of COVID-19 and changes introduced by the Protecting Your Super and Putting Members Interests First legislative reforms. APRA wants the life insurance and superannuation industries to take appropriate and timely steps to address these trends and impacts, with a focus on measures to deliver high quality and sustainable insurance outcomes for Australians.

Premium volatility Unsurprisingly, with the deterioration in life insurance claims experience within superannuation, and consequent substantial losses for insurers, recent APRA data illustrates that insurance premiums per insured member have been escalating during 2020. APRA has also observed that material premium increases by insurers have contributed to superannuation trustees tendering insurance arrangements more frequently. APRA is concerned that, in some cases, the pricing on which tenders are being won by insurers, while initially attractive to trustees, may prove to be unsustainable, and therefore likely to lead to significant increases in premiums at the end of premium guarantee or contractual periods. Ultimately, members are not best served by such un-

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predictability and volatility in insurance premiums, with members inevitably paying more in future for insurance because of unsustainable prices being offered to win tenders in a prior period. This volatility makes it more difficult for members to assess insurance costs and the value of the insurance. As a result, it is increasingly difficult for superannuation members to make decisions about the true cost and benefits of their insurance benefits. Many participants play an important role in the provision of life insurance to superannuation fund members and their dependants, including life insurers, reinsurers, superannuation trustees, administrators, tender managers and advisers. Accordingly, all these stakeholders have a role to play to ensure that the design and pricing of insurance arrangements have a greater emphasis on the sustainability of premiums and the value for money for consumers, and in reducing volatility in premiums for superannuation members.

Availability and provision of data Understanding the risk within an insured portfolio is critical to being able to correctly price insurance cover. Life insurers, however, are continuing to face challenges in accessing high quality and timely superannuation fund and membership data relevant to designing and pricing their insurance offer. This is due to the varying quality and type of data captured by superannuation trustees on members, as well as varying approaches to providing such data to insurers. The lack of sufficiently granular, quality data impacts the ability of superannuation trustees and life insurers to design and price appropriate insurance arrangements, often contributing to losses for insurers when experience does not align with expectations based on the data provided.

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For the ultimate long-term benefit of their members, superannuation trustees should maintain, and make available to insurers, high-quality and sufficiently granular data to support a thorough understanding of fund membership and sound insurance benefit design, consistent with Prudential Standard SPS 250 Insurance in Superannuation (SPS 250). ASIC Report 675 ‘Default insurance in superannuation: Member value for money’ also contains key observations about the data superannuation trustees have, that can give insights into improving the quality of membership and insurance records.

Tender practices Superannuation trustees must act in the best interests of members at all times and must ensure that the superannuation fund is providing sound outcomes for members. This includes annually assessing the insurance they provide and insurance outcomes for members. The annual outcomes assessment must include consid-

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eration of a range of factors including: • appropriateness of the fund’s insurance strategy, and • impact of fees and costs associated with the insurance provided, including whether those costs inappropriately erode the retirement income of members. An important part of ensuring sound insurance outcomes is the tender process for providing insurance in superannuation funds. Superannuation trustees often contract third-party tender managers to conduct tenders, with life insurers submitting their proposals, which are then assessed by the superannuation trustees. This process allows superannuation trustees to evaluate benefit features and member services in a competitive environment. But it is important that tender managers conduct the process in a way that helps optimise member outcomes in both the immediate and the longer term. APRA has recently observed the following examples of undesirable tender practices that are contributing to many of the unwel-

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The quote

Tenders should be conducted in such a way that insurers are given adequate time to consult on scheme designs and appropriately price the risks and benefits.

come developments outlined in this article: • abbreviated timeframes for the tender process, or to respond to revisions in insurance design or other parameters as part of that process, being imposed, • life insurers being unduly restricted by superannuation trustees seeking to have a major role in determining the reinsurers that must be used, and • the data provided being inadequate, out of date and/ or not made available to all tender participants. Tender practices should support sustainable insurance benefit design and pricing. Tenders should be conducted in such a way that insurers are given adequate time to consult on scheme designs and appropriately price the risks and benefits. New data that becomes available during the tender process should be provided to all participants, with sufficient time for the impact of any changes to be assessed.

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Looking ahead APRA’s focus is on ensuring superannuation trustees and life insurers take steps that will support the provision of high-quality and sustainable insurance outcomes for both current and future superannuation members and reduce the unpredictability and volatility in insurance outcomes that makes an assessment of the value of insurance very difficult. In doing so, APRA expects that superannuation trustees and life insurers will take steps to ensure that insurance offerings and benefits are sustainably designed and priced, provide good value for members, and adequately reflect the underlying risk and expected experience. fs Reference: www.apra.gov.au/life-insurance-superannuationimproving-outcomes-for-members

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. In how many years between 2011-2020 did combined industry group disability income insurance record a net loss after tax? a) Three b) Five c) Six d) Seven 2. How have superannuation trustees responded to the significant increases in premiums charged by life insurers? a) More frequent tendering for new or updated insurance arrangements b) Improving the quality and timeliness of member data provided to life insurers c) Imposing more restrictive terms on life cover offered to their members d) Reducing the number of life insurers they work with in an effort to gain premium discounts 3. A PRA claims that for a majority of Australians, access to life insurance has or is being jeopardised by: a) ongoing increases in insurance premiums b) the impact of COVID-19 c) incoming legislative reforms d) All of the above

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4. A n ‘undesirable’ practice that APRA sees as inhibiting the life insurance tender processes conducted by some superannuation trustees is: a) Extending timeframes for conducting the tender process b) Providing outdated or poor-quality data to tender participants c) Contracting third-party tender managers to conduct their tenders d) Removing contractual premium guarantees 5. A pproximately 70% of Australians with life insurance elect to hold it through their superannuation fund. a) True

b) False

6. Death and TPD benefits are offered as an optional extra for all members in MySuper products. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Technology:

Striking the balance By Daniel McKean, Chandler

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Australian superannuation funds experienced an increase in cyber-related identity crime in 2020 like fraudulent withdrawal claims linked to government’s COVID stimulus package. The paper provides practical ways for funds to mitigate the risks cybercrime poses to the organisation and to members. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Striking the balance Countering cyberthreats while meeting customer expectations

A Daniel McKean

s confirmed by the Australian Institute of Criminology (AIC), we now live in a world where cyber-related identity crime is “more common than robbery, motor vehicle theft, household break-in, or assault”.1 This paper delves deeper into this topic and examines the cyber-risks associated with customer experience, and the challenges associated with limiting the risk while maintaining a good customer experience, thus striking the balance.

Vulnerabilities and accelerated technologies In 2020, much of the focus for organisations was on business continuity, adjusting business models, and empowering employees to work remotely. The primary focus became reinventing product and service delivery to customers, as regular methods were disrupted. This, compounded by COVID-19, forced many to operate largely through digital platforms and channels. Amid this sudden seismic shift toward a comprehensive adoption of new technology platforms and services, we witnessed notable developments in several areas, including: • identity verification at key points in customer lifecycles, and know your customer (KYC)

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• rapid technological advancement to facilitate new digital business models • uplifts in ransomware attacks, data breaches and identity theft. For digital services’ providers, the pace of change and increased adoption is encouraging. While this evolution of digital capability has provided many highly functional innovations and tools, it has also come with its risks and exposed vulnerabilities. The various threats can evolve quickly and are often equal to or ahead of the measures put in place to protect against attacks.

The reality of cyberthreats Even with all the new technology available, an organisation’s speed and flexibility can determine how well it is set up to defend itself and its customers against cyber-related identity crime. One thing for certain is it is an ever-evolving space, and people and organisations cannot continue to do what they have done in the past. The Sydney Morning Herald recently reported a suspected 90% of Australian universities are not set up to block fraudulent emails.2 This is despite that in 2019, the most common method for scamming as reported by the Australian Competition and Consumer Commission (ACCC) was email phishing.3 In 2021, this is concerning. Several notable examples further highlight the threats: • In 2017, Flight Centre inadvertently leaked the details of credit cards and passports for over 6,000 Australians due to poor information

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The quote

Differentiating between viewing and transacting allows you to increase the user’s effort in line with their interest and motivation.

and data management. It also breached several Australian Privacy Principles in its use of customer data. • In 2018, the Marriott Hotel chain announced 500 million of its customer records were compromised. • In 2020, several high-profile attacks took place. About 500,000 compromised Zoom accounts were sold on the dark web in a hacker forum. • Melbourne TAFE’s data breach exposed 55,000 student and staff files, including sensitive health and financial data. • RedDoorz, a Singaporean hotel-booking platform, experienced a data breach that lost 5.8 million user records. The records were also sold on a dark web hacker forum. All industries at risk

The superannuation industry is not immune, as funds became an immediate target as a result of the COVID stimulus package. Member accounts across most funds were subject to fraudulent withdrawals. These changes were thrust upon the sector with little notice, significantly changing the risk profile for this industry (which was previously protected by the limited access to withdraw funds). As a direct impact of the increased attacks, the

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Australian Taxation Office imposed changes to member authentication requirements relating to consolidation methods. These attacks pose an increased risk for all organisations, not just those that were attacked. Customers will reuse an email address and password across multiple service providers. As such, it is common that a customer’s login for their bank or their superannuation account is the same one for, say, their Marriott account, or Zoom account, or any number of other breached organisations. Increased avenues for exponential damage

If an attacker has a compromised account from another breached site, they can attempt to log in to a bank or superannuation account with those same credentials. This attack is known as credential stuffing. While the hit rate may be low, if they have purchased 500,000 compromised records from the dark web, they only need a small hit rate to be successful. For example, a 1% success rate translates to 5,000 compromised bank or superannuation accounts. The attack surface continues to grow exponentially with the increase in remote working, internet of things (IoT) devices and multi-cloud environments. Remote

Daniel McKean, Chandler McKean is chief executive and co-founder of Chandler and is responsible for the overall performance and growth of the business. Previously, he held several senior management roles in the United Kingdom and Australia. Chandler has been in business for 12 years.

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endpoints require the same, if not higher, levels of security than assets that sit within corporate firewalls, and it will become very clear to organisations that endpoints are the most vulnerable. Remote workers may be using non-secure home Wi-Fi connections and unpatched virtual private networks, and are increasingly vulnerable to phishing attacks. IoT device passwords are often so weak that brute-force attackers can enter networks in milliseconds. It is estimated that the annual cost of identity-related cybercrime in Australia totals an approximate $3.1 billion, as per the AIC’s findings.4 Anyone who works in financial services knows of the risks, but the above points should help quantify the threats in a little more detail.

Ways to mitigate cyberthreats So, how should an organisation face this threat? It can lock everything down and require a blood sample, fingerprints, and a retina scan to authenticate customers. However, this will result in customers fleeing in droves to a rival organisation due to the additional impost. The threats and risks are identified and acknowledged, but how do you strike the balance between security and a good user experience? Links and logins

Across the many industries servicing Australians, there is a need to strive to get all aspects of the customer experience (CX) right. As a subject matter expert in this space, we see firsthand CX strategies that can unintentionally put their customers at risk. For example, the practice of using links to direct customers to public-facing online portals, while not intentional, is a perfect setup for a bad threat actor to conduct a phishing campaign. This involves sending a fake email to customers with corporate branding/logos, building an imitation of the online portal login screen and then scraping the usernames and passwords of customers that click on the fake link. The challenge is that links are convenient for the user, whereas self-navigation is more of an effort. Wherever there is more user effort required, users will begin to drop off and not complete the desired action. One option to provide additional security while maintaining a good user experience can be using a different login method for lowrisk actions. This login method would not be the same as the publicfacing online portal. Security tokens

Our recommended approach is to issue a one-time security token embedded in the link sent to the customer. This uniquely identifies the member and email, and is not reused across other login processes. By using this method, it means a potential scammer cannot skim the normal login details to get access to the customer’s account via the generic public-facing login page. These initial interactions via a security token can be a great user experience for viewing content (for instance, correspondence or notifications). This security can then be boosted if a higher-risk action is taken, such as a transaction or account update. The additional security could be a two-factor authentication (for instance, SMS) and/ or an ID verification service (for instance, driver licence, Medicare card, passport etc).

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This also mitigates the risk of a customer’s account being compromised by leaked usernames/passwords from a data breach of another organisation (credential stuffing). As a customer starts a transaction, they should be prompted for two-factor authentication and/or ID verification. This ensures a leaked email address/password by itself cannot be used to compromise an account. The challenge often faced is the average customer has a short attention span with many distractions and a low tolerance for anything considered too much effort. The tolerable effort is directly relative to an individual’s interest and motivation. Based on statistics, we see a significant improvement in customer engagement with a layered approach to security. Based on its analysis across product solutions and targeted campaigns, Chandler found that security tokens achieve four-times higher engagement compared with password-protected generic login portals. Differentiating between viewing and transacting allows you to increase the user’s effort in line with their interest and motivation. This can often yield a more rigorous and secure confirmation of the user’s identity along with a significantly better user experience. Authentication and verifications tools

Another tip toward striking the balance is using authentication/ verification tools that can be tailored to specific scenarios—often referred to as a policy framework (Figure 1). This can tailor the authentication requirements commensurate with: • whether it is a new or known device • the previous authentication steps already completed • the risk level of the activity/transaction underway • the current individual account risk rating (device, previous login attempts/account status/other activity). Having intelligence applied to authentication not only improves security, it can make a significant difference in user experience. Figure 1. Authentication and customer experience in harmony

Transaction based requirements

Threat indicators

Previously collected information

The right customer experience

Source: Chandler

Cybersecurity vendors are increasingly offering solutions that leverage artificial intelligence (AI) to identify and stop cyberattacks with less human intervention than is typically expected or needed with traditional security approaches. AI can enhance cybersecurity by better predicting attacks and enabling more proactive countermeasures, shortening response times, and potentially saving cybersecurity investment costs. Improved risk-monitoring systems can also be a good measure to identify threats and act swiftly to limit any issues and impacts. This would include automated lockout, proactive alerts and escalation of identified threats or issues.

Conclusion Threats are always going to evolve, the minimum compliance and regulatory requirements will continue to evolve, and the victim of this can be the user experience. Striking the balance is key to growth and customer retention in this rapidly changing environment.

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Technology

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. COVID-19 stimulus measures led to superannuation funds becoming the target of cybercrime because: a) members’ personal information was inadvertently leaked b) the early release program provided unprecedented access to withdrawals c) n inety percent were not adequately set up to block fraudulent emails d) several high-profile funds reported breaches due to poor data management 2. The practice of using stolen login credentials from a breached site to gain unauthorised access to a user’s accounts with other organisations is known as: a) Phishing b) Brute-force attack c) Credential stuffing d) Malware attack

The upside is that further adoption of digital technologies from both organisations and customers will deliver cost savings and business efficiencies. The measure of success is always linked to the strategy and deployment of these digital solutions. The final tip is to leverage the expertise in the local market (with an emphasis on local, as jurisdictional factors come into play). Further, it is worthwhile seeking assistance with analysis of current practices along with suggestions on improvements that maintain the security of the process while improving the customer experience. One organisation’s challenge is another’s opportunity. The difference is often in their approach. fs Notes 1. AIC, ‘Identity crime in Australia’, n.d. 2. Galloway A, ‘“Common target”: Only 10 per cent of Australian universities automatically blocking fraudulent emails’ The Sydney Morning Herald, 20 January 2021. 3. ACCC, Targeting scams 2019: a review of scam activity since 2009, June 2020. 4. AIC, ‘Identity crime in Australia, n.d.

3. The author found that a major difficulty which organisations face in striking the right balance between cybersecurity and customer experience is: a) the average customer has a short attention span and low tolerance for anything they consider too much effort b) many customers have poor skills and computer literacy c) the average customer is unwilling to install antivirus software and keep it updated d) many customers fail to remove unnecessary programs form their systems 4. Remote work locations can increase the threat of cyberattack if: a) w orkers are using non-secure home Wi-Fi connections b) remote devices have weak passwords that may make them vulnerable to brute-force attack c) workers are using unpatched virtual private networks (VPNs) d) All of the above 5. According to research cited, cyber-related identity crime is more common than robbery, motor vehicle theft, household break-in, or assault. a) True b) False 6. The use of two-factor authentication ensures that a stolen email and password cannot be used alone to compromise an account. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Retirement:

A new contribution cap for 2021/22: What are the implications?

By Meg Heffron, Heffron SMSF Solutions

Revisiting grandfathered account-based pensions

By Mansi Desai, Challenger

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: With the first indexation increase to superannuation contribution caps since 2016/17 coming into effect on July 1, this paper explores the implications for several common strategies in terms of the timing and maximum permitted contribution amounts that may be added to an individual’s super balance. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

A new contribution cap for 2021/22 What are the implications?

O Meg Heffron

ne of the final pieces of the 2021/22 planning jigsaw has dropped into place. The release of the November 2020 Average Weekly Earnings data means we now know for sure that the concessional contributions cap will increase from $25,000 to $27,500 from 1 July 2021. If it feels like a long time between drinks, that is because it is. The last time the contribution cap for concessional contributions was above $25,000 was back in 2016/17.

So, what does this mean for planning right now? For a start, indexation of the concessional contributions cap automatically flows through to an increased non-concessional cap ($100,000 will become $110,000 from 1 July 2021). We can also now populate the (slightly complex) table (Table 1) of bring-forward thresholds and amounts for 2021/22. It is complex because it depends on both the general transfer balance cap (increasing to $1.7 million from 1 July 2021) and the non-concessional contributions cap (as we now know, this is also increasing).

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Table 1. Bring-forward thresholds and amounts for 2021/22 Total superannuation balance at 30 June 2021

Non-concessional contribution cap / bring-forward rules

$1.7 million or more $0, no bring-forward $1.59 million or more but less than $1.7 million $110,000, no bring-forward $1.48 million or more but less than $1.59 million $220,000, two-year bring-forward period Less than $1.48 million $330,000, three-year bring-forward period

The $1.59 million threshold above is: The general transfer balance cap ($1.7 million) Less 1 x the annual non-concessional contributions cap ($110,000)

Importantly, the same table applies to everyone. While the personal transfer balance cap will be different for different individuals from 1 July 2021, this table of contribution thresholds depends on the general transfer balance cap ($1.7 million) regardless of the individual’s personal cap. There are a number of important flow-on impacts for clients.

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Retirement

Meg Heffron, Heffron SMSF Solutions

Timing of large non-concessional contributions Those considering large non-concessional contributions will need to think carefully about whether they do this in 2020/21 or 2021/22. Consider a 60-year-old client with a $ 1million total superannuation balance at 30 June 2020 who has not previously used the bring-forward rules but is about to do so. Contributing $300,000 now locks in the 2020/21 non-concessional cap of $100,000 for all three years (2020/21, 2021/22 and 2022/23), even though the cap will actually increase next year. All other things being equal, it may be preferrable to contribute $100,000 now and $330,000 in July 2021. What about those with slightly more superannuation—say, hovering around the $1.4 million mark? They have a delicate balance between: • contributing the full $300,000 now while they are still below the key threshold for this year ($1.4 million at 30 June 2020), versus • contributing only $100,000 now, increasing the total superannuation balance and possibly impacting their

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ability to maximise their bring-forward in 2021/22. For example, if this client’s total superannuation balance was instead $1.35 million at 30 June 2020, a $300,000 contribution would clearly be possible in 2020/21. Contributing $100,000 in 2020/21 instead, however, might mean their balance at 30 June 2021 scrapes over one of the new thresholds ($1.48 million). Their nonconcessional contributions would be limited to only $220,000 in 2021/22 (a bring-forward period of two years rather than three). All that said, even this outcome is not such a bad thing. While it might not be as much as they had hoped ($100,000 in 2020/21 and $330,000 in 2021/22), the total contributed for the three years up to 30 June 2023 would be $320,000 ($100,000 in 2020/21 plus $220,000 in 2021/22). That is still better than putting the full $300,000 in now.

Watching unexpected impacts on the bring-forward rules We all like to think that bring-forward periods are care-

Heffron is one of the few actuaries to work in all areas of SMSF practice. Her passion is turning technical knowledge into practical solutions for accountants and advisers to use to assist their clients. A soughtafter speaker and a regular contributor to the Australian Financial Review, The Australian and SMSF trade publications, She is a trusted source in the development and implementation of superannuation policy via government and regulators.

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD 1. The annual concessional contributions cap for 2021/22 will rise to: a) $110,000 b) $27,500 c) $137,500 d) $25,000 2. Which event or events may lead to an individual unintentionally triggering the bring forward rules and thus impacting their future non-concessional contribution caps? a) Spouse contributions credited to their super balance b) Non-refunded concessional contributions in excess of the annual contributions cap c) Personal funding of expenses incurred by their SMSF d) All three events 3. If Sienna builds a total superannuation balance of $1.5 million by 30 June 2020 her non-concessional contributions cap for 2021/22 under the bring forward rules will be: a) $330,000 b) $200,000 c) $220,000 d) $110,000 4. For what purpose do individuals often employ a double deduction strategy? a) To double their superannuation account balance by financial year end b) To claim two years’ personal tax deductions in the first contribution year c) To match employer super contributions ‘one-for-one’ with personal contributions d) To catch-up on any unused portion of prior year contributions caps 5. The non-concessional contributions cap automatically rises in line with indexation to the concessional contributions cap. a) True b) False

fully considered and happen exactly when the client meant to use these rules to maximise their non-concessional contributions. In fact, remember that they are triggered automatically whenever the annual non-concessional cap is exceeded. The contributor has no choice about the period of the bring-forward. If someone with a total superannuation balance of $1 million at 30 June 2020 has even one cent more than $100,000 counted for their non-concessional contribution cap in 2020/21, they will automatically lock in a threeyear period up until 30 June 2023, and their non-concessional contributions over that time will be limited to $300,000. Traps for the unwary are small contribution amounts that have been forgotten about which cause the person to exceed the cap, even though they thought they had only contributed $100,000. For example: • personal contributions to an industry fund to maintain insurance cover • personal contributions for which a tax deduction has been denied • spouse contributions • self-managed superannuation fund (SMSF) expenses paid personally that were not reimbursed • excess concessional contributions where no action was taken on the excess notice, and so the contributions remained in the fund (remember these only count towards the non-concessional contributions cap if they are not refunded).

Double-deduction strategies A strategy sometimes employed by those who need a large tax deduction in one year but not the next is the ‘double-deduction’ strategy. A common example for someone who is (say) no longer receiving employer contributions is: • contributions up to the concessional contributions cap are made any time during the year (say 2020/21) • an additional contribution is made in June 2021 but not allocated to the member until July 2021 • a personal tax deduction is claimed for two years’ worth of contributions in a single year (because both contributions were made in the same year), but the contributions count towards the relevant cap in different years, avoiding any nasty excesses. So, what is different now? If that strategy is being adopted for 2020/21, do not forget that the second contribution in June 2021 can be $27,500. This is because it is being tested against the 2021/22 concessional contributions cap—and by then, the cap will be $27,500. An increase in the contribution caps can only be a good thing for SMSF clients. fs

6. The personal transfer balance cap rises with indexation to $1.7 million for all individuals on 1 July 2021. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Ultimately an appropriate amount for a client to invest in a lifetime income stream will depend on a client’s situation and the strategy implemented to achieve their goals. This paper addresses some of the key considerations and strategies relating to how much a client should invest in a lifetime income stream. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Revisiting grandfathered account-based pensions

F Mansi Desai

Recap of grandfathering rules for ABPs

rom 1 January 2015, the income test assessment (the assets test assessment remained unchanged) for account-based pensions (ABPs) changed to be treated under the deeming provisions for entitlements such as the Age Pension and Commonwealth Seniors Health Card (CSHC). When the rules changed, existing ABPs were grandfathered and retained their existing assessment if certain rules were met. The rules to retain grandfathering meant that certain strategies could not be considered for grandfathered ABPs after 1 January 2015. Strategies such as switching providers to save on fees, a recontribution strategy and adding a reversionary beneficiary were largely not possible without losing the grandfathering status. While the income test assessment for ABPs purchased prior to 1 January 2015 can be more favourable compared to deeming, it might be worth revisiting whether this still holds true for clients in light of recent changes, like: • reduced deeming rates • reduced minimum drawdown rates for 2020/21 • a reduction in balances due to the impact of COVID-19.

ABPs that commenced prior to 1 January 2015 are grandfathered and assessed using the deduction method if certain rules are met. It should be noted that the grandfathering rules for income support payments are different to the grandfathering rules for the CSHC. For instance, if an ABP is grandfathered for Age Pension purposes, it does not mean that it is automatically grandfathered for the CSHC and vice versa.

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Grandfathering rules for income support payments The income test assessment for ABPs that are grandfathered for income support payment purposes are based on the deduction rules. Income from these ABPs is assessed as follows: Annual payment less deduction amount Where deduction amount = (purchase price less commutations) / relevant number.* * Life expectancy of the person at commencement of the ABP. Where a reversionary beneficiary exists, the longer of the two life expectancies is used.

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be included in the CSHC’s income test from that day, and grandfathered status cannot be reobtained.

Figure 1. Strategy zones Single homeowner

$252,801

Single non-homeowner

$252,801

Couple homeowner

$270,750

$583,000

$521,250

$402,000

Couple non-homeowner

What has changed?

$797,500

The COVID-19 pandemic has resulted in significant market fluctuations as well as the introduction of many stimulus measures.

$876,500

$443,378

$645,500

$1,091,000

Deeming rates reduced Couple (illness separated) homeowner

$402,000

Couple (illness separated) non-homeowner $-

$200,000

Maximum Age Pension

$1,031,500

$443,378

$645,500

$400,000

$600,000

$1,246,000

$800,000

Income test provides lowest entitlement

$1,000,000

$1,200,000

$1,400,000

Asset test provides lowest entitlement

Source: Challenger

Mansi Desai, Challenger Desai is a technical services analyst at Challenger. She has over 15 years’ financial services industry experience including sales, compliance, and technical roles. Previously, she was a technical consultant at MLC. She contributes to various industry publications and has extensive experience supporting advisers by interpreting legislation and helping them deliver financial planning strategies.

To be grandfathered (and to retain the grandfathered status): • the ABP had to be commenced before 1 January 2015, and • the client was in receipt of an income support payment before 1 January 2015 and continuously thereafter. If the grandfathered status is lost, then the ABP is assessed under the deeming provisions from that day and grandfathering cannot be reobtained. Generally, clients can lose the grandfathering status in two common scenarios: • An ABP is commuted and restarted (e.g. where the client changes the fund or a product, restarts a pension after a recontribution strategy or adding a reversionary, merges two or more pensions and starts a new income stream). • The client has lost their income support payment entitlement (even for a day) and is not in continuous receipt of any other income support payment (e.g. loss of Age Pension entitlement during 1 January 2017 assets test changes).

Grandfathering rules for the CSHC The CSHC’s income test prior to 1 January 2015 was based on adjusted taxable income.* * I ncludes taxable income (excluding assessable First Home Super Saver Scheme released amount), fringe benefits, target foreign income, total net investment loss and reportable superannuation contributions.

This changed on 1 January 2015 to include deemed income from ABPs (unless the ABP was grandfathered). An ABP is grandfathered for the purposes of the CSHC income test if: • the ABP was commenced prior to 1 January 2015, and • the client held a CSHC before 1 January 2015 and continuously held the card thereafter. Similar to the grandfathering rules of ABPs for the purposes of income support payments, if the grandfathered status is lost, deemed income from the ABP will

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On 1 May 2020, the deeming rates reduced to a historic low of 0.25% and 2.25% (see Table 1 in the Appendix for deeming rates and thresholds). Those who may have retained the grandfathering status as a result of getting a more favourable income test assessment may want to reassess the situation, given the significant reduction to the deeming rates since 1 January 2015. The review can be worthwhile for clients who have made large commutations in previous years and as a result have had their deduction amount recalculated and reduced over time. For these clients, deemed income from their ABP may produce lower assessable income compared to the deduction rules, particularly if their income drawdowns exceed their reduced deduction amount. As a guide, Figure 1 shows the new income and asset test strategy zones using Centrelink rates and thresholds as at 1 January 2021. These zones highlight which test a client might be assessed under if we use the assumption that the client only has deemed financial assets. For instance, couple non-homeowners are full pensioners up to $443,378, at which point they become income tested and remain so up to $645,500, then they are asset tested up to $1,091,000, where they lose Age Pension entitlements. Note that the non-homeowner asset cut-out may be higher if eligible for rent assistance. Figure 1 shows that there is now no income zone for couple homeowners and a much-reduced income zone for single homeowners. For these clients, having an ABP that is subject to deeming will have little or no impact on their entitlement compared to an ABP assessed under the deduction method. In some cases, particularly where clients are drawing a level of income that is significantly higher than their deduction amount, the deeming rules can provide a better Age Pension outcome. However, this assumes that deeming rates stay constant. Increases in deeming rates in the future can change this outcome. Example 1. Grandfathering for the Age Pension

Katherine, a 77-year-old single homeowner, has a grandfathered ABP with a current balance of $300,000 and a deduction amount of $15,000. Her home and contents are worth $10,000. She needs to draw $30,000 annually from the ABP to fund her retirement. Under the grandfathered rules, the total assessable income from the ABP would be $15,000, and her Age Pension would be $19,366 p.a. If her ABP was subject to deeming, her total assessable income would be $5,690, and her Age Pension would increase to $21,276 p.a.

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Minimum pension drawdown rates halved

The minimum pension drawdown rates have been halved for 2020/21. This means clients can get their pension payments reduced (based on the cashflow requirement) to the new minimums. Although this can help income-tested pensioners with grandfathered ABPs to achieve a higher rate of pension due to reduced assessable income, it is important to note that this change is temporary. The minimums are expected to revert to the original rates from July 2021. However, in some cases, clients may need to maintain a high-income drawdown to fund their retirement. As a result, these clients may continue to be impacted from an income test perspective, unless lump sum withdrawals are used as a strategy. In these cases, it is important to note that future deduction amounts will be recalculated to a reduced amount. Reduction in balances

Account balance reductions due to market fluctuations triggered by COVID-19 is also another consideration. The minimum drawdowns are based on balances on 1 July of the relevant financial year, with the deduction amount based on the purchase price (less any commutations) and the relevant number at commencement. Although the reduced superannuation minimums can assist with reducing assessable income, the lower balances have the effect of reduced deemed income, particularly when coupled with lower deeming rates.

Advice considerations With lower deeming rates and likely lower balances due to market volatility, some clients may achieve a higher rate of Age Pension if their ABP is assessed under the deeming provisions instead of being grandfathered under the deduction method. Clients whose Age Pension is unaffected under the deeming rules or the deduction method can consider strategies that they were not able to implement previously due to unfavourable Age Pension outcomes under the deeming rules. These can include: • moving funds to save on fees • moving funds to access more appropriate investment options or specialist options in line with the client’s investment goals • refreshing the pension to include accumulation monies from contributions such as downsizer contributions • implementing re-contribution strategies • consolidating multiple ABP accounts • adding a reversionary beneficiary where a product provider requires the restarting of an existing pension to add the beneficiary, or • where the client wants the convenience of maintaining a high-income payment to fund their retirement without regularly taking lump sum withdrawals. However, it is important to note that once grandfathering is lost, it cannot be regained. Immediate benefits with having a deemed ABP instead of retaining grandfathering (including the ability to implement strategies previously mentioned) should be weighed against any future impacts in the longer term, such as the potential for higher deeming rates. Consideration for the loss of grandfathering not only includes comparing which income test assessment provides a better entitlement, but also the overall impact of the strategy. For instance, if any gain in the savings of fees or tax outweighs any loss in an existing entitlement. The impact of losing the grandfathering may not only be limited to

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income-tested clients. Asset-tested clients, especially non-homeowners, may need to consider the impact of the loss of grandfathering. For instance, they could become income tested on the loss of grandfathering and may be adversely impacted. In the case of the CSHC, losing the grandfathered status could mean losing the card if the client’s adjusted taxable income plus the deemed income from ABPs is above the income test threshold. However, in many cases, deeming may not even impact their CSHC entitlement as the income cut-off is quite high. A client can have an ABP balance (assuming adjusted taxable income of nil) of up to $2,527,467 (singles) or $4,046,667(couple combined) before they exceed the income test threshold and lose their CSHC (see Table 2 for the CSHC income test thresholds in the Appendix).

Example 2. Grandfathering for the CSHC Caroline is a single homeowner and holds an ABP valued at $650,000 and grandfathered for the purposes of her CSHC. She also has accumulation money of $200,000 which includes a downsizer contribution she made recently. Caroline currently works part-time and earns a taxable income of $30,000 a year. Her adviser wishes to implement a pension refresh and combine her accumulation money with her existing funds in pension phase for tax efficiency. They also want to explore a different product provider that offers more appropriate investment options and lower ongoing costs. If Caroline loses the grandfathering on her ABP, she would still continue to be eligible for the CSHC. This is because deeming on her ABP balance of $850,000 ($18,065) plus her employment income ($35,000) is still under the CSHC income test threshold of $55,808. As a result, Caroline is able to access a cheaper and a more appropriate ABP product, increase the amount she has in pension phase without having multiple pension accounts, and can retain her CSHC. Although there can be potential future increases in the deeming rates, the client may still be able to retain the card due to reducing account balances and indexation of the CSHC income test threshold. fs

Appendix Table 1. Deeming rates Threshold for singles Up to $53,000 Amount above $53,000

Threshold for couples Applicable deeming rate Up to $88,000

0.25%

Amount above $88,000

2.25%

Source: Challenger Table 2. Income test thresholds for the CSHC Relationship status

Annual income limit

Single $55,808 Couples $89,290 Illness-separated couples

$111,616

Source: Challenger

The information in this update is current as at 1 January 2021 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger, our, we, us), the issuer of the Challenger annuities. The information in this update is general information only about our financial products. It is not intended to constitute financial product advice.

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Retirement

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. In which of the following circumstances would an individual lose the grandfathered status of their pre-1 January 2015 ABP(s)? a) They temporarily lose entitlement to income support payments b) They become entitled to the CSHC c) Their deemed income rises above $53,000 per annum d) Centrelink updates their status from non-homeowner to homeowner 2. The CSHC income test was amended from 1 January 2015 to include: a) 60% of all deemed income from ABPs b) 100% of all deemed income from ABPs c) all taxable income earned by an individual d) all reportable super contributions for an individual 3. W hy may some individuals find they would now be better off giving up their grandfathered ABPs? a) They have recently gained entitlement to the full Age Pension b) The inclusion of deemed income in the income test for their CSHC c) The large reductions to deeming rates since 1 January 2015 d) The halving of minimum pension drawdown rates during 2020/21

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4. W hich of the following strategies would be have a more favourable outcome when implemented by Age Pension clients whose ABPs are deemed rather than grandfathered? a) Withdrawing and recontributing funds into superannuation b) Consolidating multiple ABPs c) Adding a reversionary beneficiary to one or more ABPs d) All three strategies 5. C urrently, Centrelink applies the deeming rate of 2.25% to singles with total investments over $53,000. a) True

b) False

6. An ABP grandfathered for purposes of the Age Pension will always be grandfathered for the CSHC. a) True

b) False

Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Administration & Management:

Do you have to pay super to contractors?

By Angus Morrison, Morrison ABS

Administration & Management

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: This paper explains the ATOs’ key principles for determining when super is payable to contractors and the penalties faced by employers failing their contractual obligations. It highlights three important steps to help employers meet their obligations to pay super to contractors. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Do you have to pay superannuation to contractors?

W Angus Morrison

ant to know whether superannuation should be paid to contractors? If you engage contractors, the cost of getting this wrong can be extremely high. Government legislation is complex. The facts of each individual case are taken into account when determining your obligations, the nature of your contracting arrangement can change over time and the cost of legal advice is high. Therefore, it is important to consider the key principles the Australian Taxation Office (ATO) uses to determine whether superannuation is payable to contractors so that you know which areas you need to review. This paper outlines these principles and suggests three key steps to review your own arrangements.

The ATO’s focus—‘wholly or principally for the labour of the person’ For superannuation, the ATO looks beyond an ordinary employment agreement and considers what work the contractor performs, what rights are available to the contractor and whether the contractor is paid to produce a result. The key term the ATO considers is whether the contractor “works under a contract that is wholly or principally for the labour of the per-

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son”. If it is, superannuation may well be payable to the contractor. When the ATO says “wholly or principally”, it means that if a contract is partly for labour and partly for something else (for instance, the supply of goods, materials, or hire of plant or machinery), it will qualify only if it is “principally” for labour.

When is a contract wholly or principally for the labour of the person A contract is considered wholly or principally for labour if the contract and the conduct contain the three characteristics covered in the following discussion. The individual is remunerated (either wholly or principally) for their personal labour and skills

This aspect looks at whether the contractor provides their own tools or materials and the amount that is provided relative to the work performed. If more than 50% of the work relates to materials provided, it is unlikely to be a contract principally for personal labour and skills, and superannuation will not apply. The individual must perform the work personally (there is no right of delegation)

If the contractor can delegate work, then the contract is not necessarily just for their own labour and skills. Thus, superannuation will not apply.

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Administration & Management

The quote

Do not take the fact that a contractor is using a company or trust as a hard and fast rule that you do not have to pay superannuation.

The ATO may argue that the right to delegate must not have any strings attached, whereas in the contract, there may be requirements for specific qualifications or experience for anyone to whom the work is delegated. The ATO’s position may not hold up in court based on past cases, but it may argue this nonetheless. The individual is not paid to achieve a result

The ATO will consider whether the contractor is paid in general for their time or more specifically for actual results. If for their time, then it indicates the relationship is more like an employer/employee relationship, and superannuation may be payable.

Contracting with companies, trusts and partnerships (corporate entity) The ATO states that if a contractor is a corporate entity, the contract is not, “for the labour of an individual” and, therefore, superannuation will not be payable. However, if a corporate entity is shielding what would otherwise be a standard employer/employee relationship, the ATO can disregard the fact that a corporate entity exists and deem superannuation to be payable. Do not take the fact that a contractor is using a company or trust as a hard and fast rule that you do not have to pay superannuation.

Penalties for not paying superannuation when it should have been paid As well as having to pay the unpaid superannuation, penalties include a monthly ATO administration fee per employee, and interest. Penalties can apply regardless of whether you made an

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inadvertent mistake or had a complex situation that may have indicated you did not need to pay superannuation.

Three steps to minimise the chances of getting it wrong To ensure you minimise your chances of getting this complex area wrong and possibly suffer large, backdated claims and/or penalties, follow these three key steps. Ensure you have written agreements in place with all contractors

Agreements need to document the nature of the arrangement, including the contractor’s right of delegation and whether payment is for a result or for general labour. Further, they need to be updated if and when the working relationship with the contractor changes. Use the ATO assessment tool

The ATO has an assessment tool (https://www.ato.gov. au/calculators-and-tools/employee-or-contractor/) to help employers ascertain if their “worker is an employee or contractor for tax and super purposes”. The tool: • entails answering some questions about the working arrangement with your contractors • draws on outcomes of court cases that considered various indicators to establish whether a contractor should be paid superannuation • provides a report that outlines whether your worker is an employee or contractor for superannuation purposes. The ATO states that the tool is “designed to guide your decision”. Further, it states that:

Angus Morrison, Morrison ABS Morrison is a chartered accountant and principal of Morrison ABS. He has been working fulltime in tax and business advice for nearly 10 years and has dealt with complex tax issues for clients.

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Administration & Management

Provided your responses accurately reflect the working arrangement, you can rely on the result provided by the tool for tax and super purposes. It is a record of your genuine attempt to understand your obligations for your worker and would be considered if we review your working arrangement in the future. Given the fact that there is a long history of court cases in this area and its associated complexity, it may be far safer to treat the assessment result as a guide rather something that can be absolutely relied upon. Seek legal advice

Legal advice will help clarify your situation and ensure you have all the necessary documents and procedures in place. There are several monthly subscription-based employment services for employers that are proving popular, such as Employsure and HR Central. These may be able to assist before problems arise, and costly legal assistance is needed.

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Conclusion Many businesses are at risk of getting the question of whether they are obligated to pay superannuation to contractors wrong and suffering disputes with contractors, incurring superannuation backpayments and being subject to ATO penalties. This is a complex area that you need to examine in relation to your own circumstances. Understanding the ATO principles, having written agreements, reviewing your own contractor relationships with the ATO assessment tool, and seeking legal advice should give you a reasonable chance of ensuring you meet your obligations. fs

Please note this paper is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Which of the following contract elements meet the ATO's definition of “wholly or principally” for the labour of a person? a) The individual is paid upon completion of a specified task or outcome b) The individual is paid for the time worked or via a commission per item or activity c) The individual may only delegate tasks requiring specialist knowledge or skills d) At least 50% of agreed work relates to quality of materials provided by the individual 2. To fully rectify a situation where superannuation was payable but not paid, an employer is required to pay: a) a monthly ATO administration fee plus unpaid superannuation

4. Under which of the following employment scenarios would superannuation be payable? a) Sarada is contracted to complete an audit of the business accounts for a travel agency b) Joseph is contracted to demolish a dwelling by a developer c) Tori is contracted as a dental nurse for a newly established orthodontic practice d) Rahul is contracted to write an article on superannuation for a consumer magazine 5. Superannuation will never be payable to a contractor who operates under a corporate or other type of entity.

b) a penalty interest charge on the unpaid superannuation c) only the unpaid superannuation

a) True

b) False

d) All of the above

6. An employer-employee relationship is more likely established when a contractor is paid for their time rather

3. Which steps should an employer take to help minimise the chances of overlooking their superannuation obligations? a) D ocument all employment agreements, and use ATO

than for a specified outcome. a) True

b) False

assessment tool b) P ay superannuation to all individuals working in any capacity, and secure legal advice c) A void contracting with corporate entities, and always seek legal advice d) Ensure the individual personally performs all assigned work, and provides all materials

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Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

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Quick reference

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News and opinion Actuaries Institute

White papers 6, 12

AMP 6

Investment From hurdler to hero

AustralianSuper 7

Trading at London 4pm and the illusory benefits

Insurance Life insurance in superannuation

Club Plus Super EISS Super Energy Super GuildSuper

7 10 8, 9 7, 10

HESTA 6 IFM Investors

KiwiSaver 6 LGIAsuper Link Group

8, 9 8

Mercer 9 NAB Asset Servicing

Rest 8 Smart 7 Statewide Super Suncorp Portfolio Services TAL Tidswell Master Superannuation Plan

Striking the balance

Retirement A new contribution cap for 2021/22: What are the implications

Revisitng grandfathered account-based pensions

Raiz 9

State Street

Technology

Administration & Management Do you have to pay super to your contractors?

10 6 8, 9 9, 12 9

TWUSUPER 10 UniSuper Vanguard Super Virgin Money

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8, 7 12 7

FS Super

FS Super Vol13 i02

Articles inside

MERCER TAKES OVER TAL SUPER FUND

GUILDSUPER CHOOSES NEW ADMINISTRATOR

AMP LOSES DEFAULT KIWISAVER MANDATE

RETAIL FUNDS TAKE OUT MYSUPER PERFORMANCE

LGIASUPER MARCHES AHEAD WITH MERGERS