FS Super Vol13 no3 by financial.standard

Volume 13 Issue 03

Opinion News

UniSuper on mergers

Net zero and super

BEHIND THE RETURNS Sonya Sawtell-Rickson, HESTA

Published by

Contents

www.fssuper.com.au Volume 13 Issue 03 | 2021

COVER STORY

BEHIND THE RETURNS Sonya Sawtell-Rickson, HESTA

16 NEWS HIGHLIGHTS

FEATURES

NEW INQUIRY PROBES SUPER'S ASX OWNERSHIP

Just as Your Future, Your Super legislation settles, MP Tim Wilson is back with a new inquiry.

THIRTEEN MYSUPER PRODUCTS FAIL PERFORMANCE TEST

APRA tested 76 MySuper products and 13 failed the inaugural round of the high-stakes test.

HOSTPLUS’ THREE MERGERS SO FAR THIS YEAR

The industry fund will merge with Intrust and Statewide, after a partnership with Maritime.

SPACESHIP HITS $1BN

The startup superannuation fund is powering ahead with growth, as it eyes a cashflow break even.

AWARE SUPER EYES INDEPENDENT ADVISERS

The second-largest super fund wants a greater slice of the assets in adviser-controlled market.

The super steeplechase Jodie Hampshire

11 Net zero and super Scott Bennett

13 For news updates like this follow us on social media

KEVIN O'SULLIVAN LOOKS BACK AT EIGHT YEARS AT UNISUPER 15 The outgoing super chief executive talks mergers, regulation and what's next.

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THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Contents

www.fssuper.com.au Volume 13 Issue 03 | 2021

News

CURTAIN CALL FOR IAN SILK ERS APPLICANTS STUNG BY BULL MARKET

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

10 12

AN EASIER RETIREMENT INCOME COVENANT BUMPER YEAR FOR MYSUPER RETURNS

News

EXECUTIVE ACCOUNTABILITY RULES FOR SUPER ROY MORGAN SUPER SATISFACTION SURVEY

News

WHAT'S NEXT FOR THE NEW PERFORMANCE TEST TIDSWELL SURRENDERS RSE LICENCE

News

AMP SUED FOR SUPERANNUATION MISCONDUCT LEGALSUPER TRIES OUT ROBO-ADVICE

News

GIGSUPER RAISES EQUITY FOR GROWTH CALPERS PUTS DIVERSITY IN SPOTLIGHT

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 Rainmaker Information company. ABN 57 604 552 874

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This material is for wholesale investors only and is not intended for distribution to, nor should it be relied upon by, retail investors. If this document is used or distributed in Australia, it is issued by BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865) located at Level 2, 1 Bligh Street, Sydney, NSW 2000.

White papers

www.fssuper.com.au Volume 13 Issue 03 | 2021

WHITE PAPERS

Retirement

WHAT AUSTRALIANS NEED FROM THEIR SUPERANNUATION By Osei Wiafe, QSuper

The author works as a retirement product manager and writes on what makes a good solution, and how group self-annuitisation products work.

Retirement

INDEXATION OF TRANSFER BALANCE CAP AND CONTRIBUTION CAPS

By Garvin Jones and Neil Irving, Nexia

This white paper lists things to watch out for in July 1 changes to the general transfer

balance cap to avoid breaches, explaining the changes with examples.

Retirement

SOLVING THE LONGEVITY PUZZLE By Fintan Thornton, Allianz Retire+

With the Retirement Income Covenant set to come into force on 1 July 2022, superannuation funds must consider more innovative investment options to meet their obligations, the author argues.

SMSFs

SIX MEMBER SMSFS

By Graeme Colley, SuperConcepts

Taxation & Estate Planning

AVOIDING MISTAKES WITH SUPERANNUATION NOMINATION BENEFICIARY FORMS By AIA Technical and Education Centre of Excellence Team

AIA's technical team lists ways to avoid errors in superannuation beneficiary nominations.

A handy list of factors to consider before opting for a six-member SMSF, including fund-

level decision-making, members' individual wants and administration.

SMSFs

SUPERSTREAM AND SMSFS By Lyn Formica, Heffron

The author discusses implications for SMSF practitioners of new rules mandating SMSFs use SuperStream when rolling money in or out of their funds from October 1 onwards.

44 50

Technology

DIGITAL ADVICE KEY TO KEEPING MEMBERS ENGAGED By Steve Davison, Midwinter Financial Services

Online tools are the solution to low member engagement at superannuation funds, the author argues.

Marketing & Communications

THE PSYCHOLOGY OF SUPER FUND MEMBER SEGMENTATION

By Simon Russell, Behavioural Finance Australia

while also accounting for the practical limits to how much about them it can realistically know.

This white paper discusses how superannuation funds can recognise differences among members

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FS Super

Welcome note

www.fssuper.com.au Volume 13 Issue 03 | 2021

Alex Dunnin executive director, research & compliance Rainmaker Information

Switching to vaudeville et the games begin. Australia’s superannuation reguL lator has now turned gamekeeper and is issuing the results of its inaugural super fund performance test. Super fund Registrable Superannuation Entities (RSEs) have every right to feel nervous because all indications are that the regulator is going hard and going early. To get a taste of what’s to come, you only need review the regulator’s July 30 letter to RSEs when they restated the law and told RSEs that ASIC will also be monitoring super funds that fail the test to ensure they notify their members within the four-week timeframe. At least the regulator has said it will work with impacted RSEs to soften the blow and help them develop a recovery plan. But the kicker is that it isn't expecting many of these plans to work. “These contingency plans would include pre-positioning to be able to give effect to an orderly transfer of members to another fund, if required,” the regulator said none too subtlely. With stakes so high, it’s surprising there is no dry test run and that legislators and regulator have allowed it to be weakened right out of the blocks. The performance test is a big deal and is likely to profoundly disrupt Australia’s superannuation system – for RSEs as well and thousands of employers and millions of fund members. To do this it needs all the moral authority it can garner. Allowing funds to be tested, using their current fee matrix rather than the actual fees they historically charged means the test will not be assessing what funds actually delivered to members. It will be assessing many funds on some artificial hypothetical measure. While this is a huge win for funds that used to charge high administration fees but which have since reduced them, it sure as anything penalises funds that have always charged lower administration fees. If this enables funds to pass the performance simply because the fee measure has artificially boosted their after-fee returns, it will be a travesty. Worse still, other

FS Super

funds that failed the test will point to the flawed results elsewhere. This is huge because Rainmaker analysis shows that while retail workplace super funds in 2020 may have charged average administration fees of just 0.5% p.a, in 2014 they charged 1.1% p.a. which is more than twice as much. And these are just averages. It’s likely there are superannuation products that could be getting a 0.5% to 1% artificial boost in the performance figures on which they’ll be tested. It begs the question why the authors of the Your Future, Your Super regulations agreed to this. While we know the real answer is politics, it was nevertheless bemusing to hear the reasons. It was because it was too hard for superannuation product providers or regulators to confirm, supply and deal with the actual fees they charged each and every year through which the performance test will be applied. If product providers and regulators can’t work this out they shouldn’t be. It was because assessing performance after applying the current fees back through the assessment period will better assesses the likelihood the fund will outperform in future. Say what? The test is not trying to assess how a super fund product performed in the past but how it likely it is to perform in the future? Brilliant. But has the government just told Australia’s prudential superannuation regulator they are now in the fortune telling business? If so, Australia’s financial regulators will now be flicking the switch to vaudeville. I can’t think of a more inane way to regulate Australia’s $2.3 trillion institutional superannuation market place. fs

The quote

If this enables funds to pass the performance simply because the fee measure has artificially boosted their after-fee returns, it will be a travesty.

Alex Dunnin executive director, research & compliance Rainmaker Information

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News

www.fssuper.com.au Volume 13 Issue 03 | 2021

Change of guard at country's largest superannuation fund Karren Vergara

T Another inquiry into super Member of Parliament Tim Wilson will lead the charge to determine if big super's domination over the Australian sharemarket is stifling competition. On August 2, the House of Representatives Standing Committee on Economics announced the launch of an inquiry into the implications of common ownership on Australia's legal framework and consumer harm. The committee will investigate the impact of common ownership and capital concentration led by institutional investors like banks, superannuation funds, investment funds and hedge funds. "There is already high concentration of ownership of ASX listed companies by an increasingly small number of 'mega funds' and that trajectory will increase," Wilson said. The Australian Consumer and Competition Commission believes common ownership poses threats to competition when it hits 10%, yet some major investors have a 30% holding. Rainmaker Information predicts super funds will hold 41% of the ASX in 2030, up from 37% at March end. This is split across not-for-profit funds (13%), retail funds (9%) and smaller funds or self-managed super funds (15%). This pace has slowed over recent years as non-for-profit super funds have looked to invest outside of Australian shares, according to Rainmaker. fs

The numbers

$21bn

AustralianSuper's inaugural asset base in 2006.

he chief executive of Australia's biggest superannuation fund AustralianSuper will step down before the end of the year. Ian Silk has led the fund since its inception in July 2006. Chief risk officer Paul Schroder will take over the top job, the fund announced. When Silk began, the fund had $21 billion in funds under management following the merger of the Australian Retirement Fund and the Superannuation Trust of Australia. In the 15 years since it has grown to to $225 billion with 2.4 million members. "It has been an amazing privilege to work with my colleagues across the fund to deliver the best possible financial returns for the more than 2.4 million members who trust us with their retirement savings. I look back with huge pride on what the team at AustralianSuper has achieved," Silk said. Before AustralianSuper, Silk worked with the Melbourne and Metropolitan Board of Works. In 1982, he joined the

Victorian government's Office of Industrial Relations, where his positions included senior policy officer, wages policy specialist and an advocate in national wage cases. He moved to the building and construction industry division of the Department of Labour and then a ministerial adviser to Labor ministers in the state government. Silk was also a director of the Department of Labour's industrial relations division. Schroder joined AustralianSuper in 2007 and over the years has overseen the new entity's growth agenda, insurance book, strategy, brand, sales and reputation. After university, Schroder's first job was assisting migrants and refugees in settling into the workforce and learning English on the job. He then went into rehabilitation work, joining the Victorian Trades Hall Council, where he worked closely with a young David Atkin, Cbus' former chief executive and now the deputy chief executive of AMP Capital. fs

Bought high, sold low: ERS applicants already missing out on the returns Members who raided their retirement savings in the pandemic's early release of superannuation scheme could have been $3100 better off at March end if they had kept their balance intact, according to The McKell Institute. The think tank found that over three million Australians who took advantage of the scheme lost out on the rapid recovery of the economy and share markets in their withdrawn money. Most super funds have since recovered up to 20% of their assets as a result of the V-shaped recovery. A member who withdrew the maximum allowable amount of $20,000 has foregone $3164 of additional savings, the institute says, and will need to make extra voluntary contributions to restore the amount. In total, super funds released $36.4 billion during 2020. Most of this went towards rent or mortgage,

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household bills and credit cards. According to the Australian Bureau of Statistics, the average withdrawals were $7728 and $7536 across the two tranches. The government should have worked with banks, landlords, lenders, financial services and utility companies to offer deferred payment schemes to all customers, McKell further suggested. "The banks themselves offered mortgage holidays, and state governments implemented moratoriums with regards to residential tenancy. However, more should have been done to avoid the necessity of Australians withdrawing from their super," it said. "Even if Australians were able to take out a loan in 2020 with an (astronomical) interest rate of 10%, this would have resulted in less foregone personal wealth than the early access to super scheme." fs

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News

www.fssuper.com.au Volume 13 Issue 03 | 2021

Bumper year for MySuper returns

Results out: 13 funds fail YFYS performance test

Annabelle Dickson

MySuper options have delivered the best annual financial returns in over three decades. The Rainmaker Information's Default MySuper Index recorded 2020/21 financial year returns of an average of 18%, after all fees and taxes. According to Rainmaker, the latest time the index recorded such high returns was in the 1986-87 financial year at 19%. This year's returns were driven by listed property (33%), Australian and international shares (28%) and global infrastructure (20%). On the other end unlisted direct property only secured returns of 3.6% followed by 0.2% from international bonds, 0% from cash and 0.8% from Australian bonds. "These returns mean Australia's 13.5 million super fund members earned $520 billion in investment earnings in the past 12 months, or almost $39,000 each," Rainmaker Information executive director of research and compliance Alex Dunnin said. Commonwealth Bank's Essential Super was the top one-year performer in MySuper, as lifecycle and retail products dominated the top ranks. Essential Super Employer - Lifestage 1980-84 returned 26.5% in the year ending June, according to Rainmaker's performance tables for workplace super (MySuper/default) which includes single-strategy as well as lifestage options. However, Essential's performance over three years puts it at 24th rank (with 8.2% p.a. returns). It is ranked 34th on five- and seven-year horizons. fs

FS Super

Kanika Sood

The quote

Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year's test or start planning to transfer their members to a fund that can deliver better outcomes for them.

ig names like Colonial First State’s FirstChoice, BT Super and Christian Super are among the 13 superannuation funds that failed APRA's inaugural performance test. In all, APRA tested 76 MySuper products in this round, of which 13 failed. This represents a pass rate of 84%. The full list of failing funds is: AMG MySuper, ASGARD Employee MySuper, Australian Catholic Superannuation and Retirement Fund’s LifeTime One, AvSuper Growth, BOC MySuper, Christian Super’s My Ethical Super, Colonial First State’s FirstChoice, Commonwealth Bank Group Super’s Accumulate Plus Balanced, EISS Balanced, LUCRF Super’s MySuper, Maritime Super's MySuper, BT Super MySuper and lastly, the Victorian Independent Schools Superannuation Fund’s MySuper product. Some failing funds have already moved to improve member outcomes. Four funds have already announced firm or planned mergers with passing funds, while CFS FirstChoice Em-

ployer announced a fee cut a day before public release of test results. BOC is merging with Equipsuper, EISS is exploring a merger with TWU, LUCRF is merging with AustralianSuper and VISSF is merging with Aware Super. All of these merger partners passed the test. Additionally, Maritime Super has pooled its investment assets with Hostplus. Meanwhile, ACSRF which failed the test was due to merge with NGS (which passed), but both funds scrapped the plans in the week before the test results. “Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year's test or start planning to transfer their members to a fund that can deliver better outcomes for them,” APRA executive board member Margaret Cole said. There are 80 MySuper products but four were not tested, as they did not have five years or more of returns. Funds that failed the test were given 28 days to notify their members of the result. This must be done in a strict format as laid down by the YFYS bill. fs

Government trims its retirement income wishlist Kanika Sood

On July 19 the government released a position paper on the Retirement Income Covenant which softens what it’s asking of superannuation funds since it first floated the idea of legislating Comprehensive Income Products for Retirement (CIPRs) in 2018. Super funds still must have retirement income products for all members by July 2022. But many of the government’s previous asks such as longevity and flexibility are now something to “consider” than the old must-haves. Frontier principal consultant David Carruthers said the new framework is much more workable. “...it is good that the government has moved away from CIPRs framework which took a more prescriptive and product-based approach to a more memberfocused approach,” Carruthers said. However, it’s not all smooth sailing for funds. The

July 19 version floats the idea that superannuation funds should look at members’ Age Pension entitlements to design retirement income solutions. It doesn’t stop there. It also wants funds to consider other income support payments such as the Disability Support Pension, Carer Payment, JobSeeker Payment and the Service Pension depending on its membership – either by collecting member data or by drawing assumptions for member cohorts from government sources such as the Australian Bureau of Statistics. “Age Pension is...#1 consideration for most members. It does really impact retirement income outcomes, and it probably the reason why super funds haven’t spent enough time on developingsolutions,” SuperEd chair Jeremy Duffield said. The Association of Superannuation Funds of Australia has formed a working group for the paper. fs

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News

www.fssuper.com.au Volume 13 Issue 03 | 2021

Roy Morgan satisfaction survey HESTA was named the winner for the six months ending June 2021 in the latest round of Roy Morgan's biannual superannuation satisfaction report. It toppled another industry fund, Catholic Super, which won the last round for the six months ending January 2021. "Our focus on putting members first in everything we do sees us continually look to improve the experience our members have with us and drives innovation in how we support members to have a better financial future," HESTA chief experience officer Lisa Samuels said. Overall, superannuation members' satisfaction in their funds ticked up to 71.7% in June 2021. This is 8.6% points higher than June 2020 and 6.9% higher than December 2020. Roy Morgan attributed the increase in satisfaction to strong markets and relatively shorter lockdowns during the June half, and it was recorded across all types of super funds. SMSFs had the highest satisfaction at 80.6% (up from 69.9% last June), followed by public sector funds at 79.7% (up from 72.1%), industry funds at 72.3% (up from 64.1%), and retail funds at 67.8% (up from 58.1%). In industry funds' satisfaction ratings, HESTA was followed by AustralianSuper, UniSuper and Cbus. In retail funds, OnePath was the highest ranking followed by Colonial First State, MLC, ASGARD, BT, Mercer and Suncorp. The results are based on Roy Morgan Single Source which is a survey of 50,000 Australians each year. fs

Hostplus on merger spree Karren Vergara

The numbers

$91bn

Hostplus's expected member asset base after Statewide merger.

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tatewide Super and Hostplus in August signed an exclusive Heads of Agreement to create a $91 billion fund with 1.4 million members. This marks the third time this year Hostplus has joined forces with other industry funds to either merge or pool the assets of members. On June 25, Hostplus signed a successor fund transfer (SFT) agreement with the $3 billion Intrust Super, as first reported by Financial Standard in May. In February, it combined its assets with the $6 billion Maritime Super. In late 2019, Club Super folded into Hostplus, growing the latter to $45 billion at the time. In the latest merger, Adelaide-based Statewide Super will bring $10.8 billion in funds under management, over 142,000 members and 24,000 employers. Hostplus, with more than 1.25 million members and 233,000 employers,

manages some $66 billion in retirement savings. Hostplus chief executive David Elia said early discussions have highlighted a fundamentally strong alignment between the two funds. Statewide chief executive Tony D'Alessandro said Statewide remains committed to South Australia and the Northern Territory, where it will continue to provide local member services, including the Statewide Super Hub in Victoria Square and the office in Darwin, and preserve local jobs. Statewide has been on the hunt for a merger partner for some time. In early 2019, the fund attempted a merger with Tasplan and WA Super but later scrapped the idea, citing the execution risk involved in a three-way merger. Hostplus's MySuper has bounced back in recent months. It ended FY21 with 21.32% in returns for the 12 months, the highest of all industry funds. fs

Financial Accountability Regime on its way for super funds and insurers Kanika Sood

The government on July 16 released the draft legislation for the Financial Accountability Regime (FAR) which will apply to superannuation funds and insurers. The FAR extends the Banking Executive Accountability Regime (BEAR) which has applied to banks since July 2018. In February 2019, the Hayne Royal Commission recommended extending BEAR to include APRA-regulated entities including superannuation funds and insurers, following which the Treasury conducted a consultation in January 2020. After a year of quiet, the Treasury expects FAR legislation to be introduced in the Parliament in spring. The implementation will start with Authorised Deposit-taking Institutions (ADIs) which have already been subjected to BEAR. The starting date for large ADIs or their licensed non-operating holding

companies (NOHC) will be the later of six months after FAR's commencement or 1 July 2022. Insurers, their NHOCs and Registerable Superannuation Entities (RSEs) are slated for a start date of 1 July 2023 or 18 months after FAR's commencement – whichever happens later. The minister has the power to set thresholds for enhanced notification requirements for entities that will be subjected to FAR. Currently, it is proposing life insurers with more than $4 billion in assets, and RSE licensees with more than $10 billion in assets to be subjected to the above enhanced requirements within FAR. The government has also released the draft legislation establishing the Compensation Scheme of Last Resort, which was also recommended by the Royal Commission. fs

FS Super

News

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Spaceship hits $1bn in total assets

Get ready to fail YFYS performance test again

The superannuation and investing startup has crossed $1 billion in total assets, after more than doubling the number in the last year. Its total assets more than doubled from $415 million in July last year to $1 billion this July, while total customer base has grown four times in two years to 200,000. The firm says its most popular age cohort is 20-39 years. About 85,000 of its clients invest regularly with investment plans, where $50 a week is the most popular denomination. Spaceship's Universe portfolio returned 46.18% in the year ending June, taking its annualised returns to 30.39%. Its flagship superannuation option GrowthX returned 23.41% over the same period, bringing its annualised returns to 15.69% since inception. Spaceship began life as a startup in 2017 focused on the superannuation savings of Australians under 45 years old, and has attracted investments from Atlassian co-founder and billionaire investor Mike-Cannon Brookes and AirTree Ventures. It has two main products: a micro-investing platform called Spaceship Voyager and its original superannuation product. It has used its investment product Spaceship Voyager to attract customers for its highermargin superannuation product, and is expecting cashflows to break even by 2023, which is five years into its life. As a Choice product with no employer relations, Spaceship's superannuation fund is immune to the new stapling and performance benchmarking requirements. fs

FS Super

Jamie Williamson

The quote

Any fund whose strategy is to rely on their brand strength and member loyalty to survive the occasional single failure should think twice.

he latest researcher to run the numbers says as many as 20% of super funds could fail the Your Future, Your Super performance test in any given year, with a strong likelihood they'll fail again in the years to follow. According to Parametric modelling, up to 20% of super funds will likely fail the performance test in any given year and there's a probability of about two-thirds that they will fail again the following year as that test will consider about 87.5% of the same data. "It will require quite a performance turnaround the next year to bring the fund back to safer ground. Any fund whose strategy is to rely on their brand strength and member loyalty to survive the occasional single failure should think twice," Parametric manager research and strategy Whitlam Zhang said. Funds will need to either decrease their levels of tracking error or increase its expected information ratio, he said. "The good news is that tracking error is within the control of a super fund. While it cannot be controlled to

a fine degree, it can be dialed up and down," Zhang said. However, he said increasing executive information ratios is difficult. "Anyone can tell you that generating excess returns is hard enough, let alone delivering it in a risk controlled and predictable manner." "It means that investment teams will need even higher conviction in their fund managers in order to compete in this market," Zhang said. "Investment strategies that will do well in this regime are solution that can deliver excess returns in a relatively more predictable manner." Willis Towers Watson ran the numbers recently too, finding a product with a 10% probability of underperformance in any eight-year period has a cumulative probability of underperformance over a 17-year period of about 35%. APRA told superannuation funds were notified of their results from the first test on August 31. The first round covered MySuper products alone. Trustee-directed products will face the test from July 2022. fs

Tidswell hands back RSE licence Kanika Sood

Tidswell has surrendered its RSE licence to APRA, as it agrees to ASIC's allegations it contravened the Corporations Act in its work for startup super fund MobiSuper. In November 2019, ASIC filed a case against MobiSuper, Andrew Richard Grover and Tidswell in the South Australia Federal Court alleging Tidswell had failed in its duties as the promoter and trustee of MobiSuper. The court ordered Tidswell and ASIC into mediation. According to the July 27 judgement, Tidswell had already applied to APRA to cancel its RSE licence. It will also pay $50,000 to cover ASIC's costs, which it has agreed will not come from the funds it holds under the Tidswell Master Superannuation Plan. The court orders on agreed facts between ASIC and Tidswell states that Tidswell contravened s 912A(1)(a) of the Corporations Act 2001 between

November 2016 and February 2018. MobiSuper used a website page called "Lost Super Search", which purported to help workers locate lost super but had the primary function of encouraging the worker to open a MobiSuper Fund account, transfer funds held in the existing funds and to take out one or more policies of MobiSuper Fund insurance. The court said – and ASIC and Tidswell agreed – that Tidswell did not take adequate steps to review MobiSuper's reporting under the promoter agreement. Tidswell is owned by Sargon (since rebranded to Certes and then Certane), which changed ownership last year after being forced into administration and then liquidation by a lender. The business owns two other RSE businesses Diversa and CCSL. Late last year, the company started moving Tidswell's super fund clients to Diversa including Spaceship, Student Super and NEOS Super. fs

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www.fssuper.com.au Volume 13 Issue 03 | 2021

Legalsuper tries out robo-advice The $5 billion superannuation fund is introducing intra-fund robo advice. With the help of Link Group's Super Blueprint, legalsuper will offer the digital intra-fund advice to its 43,000 members. Super Blueprint, which is also used by funds like Intrust Super, promises a personalised approach to delivering advice relating to investment choice, insurance, projected retirement needs and contributions. Legalsuper chief executive Andrew Proebstl said extending the partnership with Link Group into digital advice is an exciting step for the fund. "Through the use of APIs from Link Group's market leading technology, we believe Super Blueprint will provide our members with even more benefits," he said. Link Advice chief executive Duncan McPherson said: "Digital innovation is shaping the future of the super industry. The analytics and advice provided through Super Blueprint will give members a clear balance and benchmark for how their super is performing, this encourages more informed decisions on plans and a more positive attitude towards contribution." Link also announced that it partnered with personal financial management technology provider Moneysoft to streamline its advice offering for clients. The new service, Link Advice Digital Fact Find, will enable super funds to configure fact-finds to their requirements. "We've seen an opportunity to capitalise on both the increased adoption of digital platforms throughout COVID and the drive to continually improve the access and affordability of advice," McPherson said. fs

Aware Super eyes IFAs, hires lead from BT Karren Vergara

The quote

I look forward to building on the legacy of WA Super in the IFA space...

ware Super is targeting the independent financial adviser market, bringing in a former long-serving BT Financial Group staffer who will take charge of advice relationships. Warwick Gribble is Aware's new national manager of advice relationships, responsible for implementing and developing the super fund's independent financial adviser (IFA) unit, which it says it says is a holistic advice offering. The appointment comes off the back of Aware merging with WA Super last year. WA Super was active in the independent financial adviser market. Head of business development Matt Willis said that over the last 10 months Aware has been "working hard to build on WA Super's legacy in this space and develop a compelling national IFA offering".

In March, Aware restructured its financial advice offering, resulting in some redundancies. Gribble joins the fund from BT Financial Group, where he has spent more than 12 years in sales and sales leadership roles, predominantly in the retail insurance sector and working with IFAs. He also worked at Zurich Financial Services. "I look forward to building on the legacy of WA Super in the IFA space and delivering a truly national offering, supported by the expertise and resources of Australia's second-largest industry super fund," Gribble said. The $145 billion super fund with over one million members recently updated lifecycle options, resulting in younger members moving to a higher exposure to growth asserts. This will improve their at-retirement balances, the fund said. fs

AMP sued over corporate super misconduct Jamie Williamson

ASIC is suing several AMP entities over fees for no service charged on corporate superannuation accounts. The regulator has commenced civil proceedings in the Federal Court against six companies that are, or were at the time of the conduct, part of the AMP Limited group. The conduct is said to have taken place between July 2015 and April 2019, involving AMP Superannuation, AMP Life (now Resolution Life NZ), AMP Financial Planning, AMP Services, Charter Financial Planning and Hillross Financial Services. ASIC is alleging AMP pocketeded more than $600,000 in financial advice fees from 1540 customers despite having been notified that those customers had left their employer-sponsored super accounts and therefore could not access the financial advice for which the fees were charged. ASIC further alleges that AMP failed to ensure a system was in place to ensure customers that had left those super products wouldn't be charged advice fees, and that the group also contravened obligations as an AFSL to act efficiently, honestly and fairly. In a statement, AMP acknowledged the proceedings

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and said it became aware in 2018 that some AMP Flexible Super members continued to be charged fees after delinking their corporate super plan into a retail account. "AMP took action to rectify the issue, self-reported it to ASIC, and commenced a remediation process," AMP said. That remediation program saw about $900,000 refunded to impacted members and was completed in November 2019. ASIC is seeking declarations, pecuniary penalties and adverse publicity orders to be made by the court. As at 31 December 2020, AMP had paid $154 million in remediation for fee-for-no-service conduct to about 207,000 clients. It has also paid about $34 million for non-compliant advice to 2289 clients. This is just the latest in a long line of run-ins with the regulator for AMP. In May ASIC alleged several AMP companies continued to charge financial advice fees and life insurance premiums to more than 2000 customers after they had passed away. However, in July ASIC dropped investigations into AMP's Buyer of Last Resort Policy, and charging of orphaned advice clients even though they did not have an adviser. fs

FS Super

Opinion

www.fssuper.com.au Volume 13 Issue 03 | 2021

Jodie Hampshire managing director for Australia and New Zealand Russell Investments

The super steeplechase here aren’t many things in life that T we all must do. The activities we choose to take part in are – more often than not – unique to our values, interests and desires. Which is what makes superannuation so interesting. We are required to save for our retirement because if it was down to each individual to decide whether to do so or not, many would simply put it off. A problem for another day. Instead, it is legally mandated that we all take part in this activity, much like school sport is compulsory for school students. Some people have no problem with saving for their retirement, in the same way that some students are well suited to participating and competing in their annual school athletics carnival. Research shows that 11% of Australians feel that they are well on their way to achieving their retirement goals. They are engaged, they understand how their super is tracking, and they know what level of contributions they need to make to stay on track for the finish line. But for the vast majority of Australians, participating in our mandated retirement saving system is like running in those long athletics carnival events, but with hurdles ahead of them that can be difficult to clear. For these people, the task of saving for their retirement is arduous, and perhaps not well suited to their level of financial literacy. For the superannuation funds serving Australians this is a key area of concern. How do you encourage somebody to run to the best of their ability and attempt to clear the hurdles

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even if they may find it difficult, or are not really interested in the race? Like a good coach guides an athlete through challenges, good superannuation funds must understand the hurdles standing in their members way if they are to be capable of guiding their members towards the finish line. Intentions and ownership

The first hurdle retirement savers must clear is their intent to take ownership of their retirement savings. Our research shows that roughly 20% of Australians demonstrate little to no intent to engage with their retirement savings and have almost no understanding of super and how their retirement savings are tracking. For superannuation funds, responding to this challenge requires them to ask tough questions of themselves, including how robust their efforts to engage their members are. Super funds with a strong track record of engaging their members have mastered the art of getting the right message, to the right member, at the right time. Something to strive for

Whether an athlete or a retirement saver, having a goal to work towards is a crucial step in driving better outcomes. Goal setting is key in any superannuation engagement program that seeks to improve member outcomes. A clear obtainable personal goal, much like a vision for the finish line in a race, not only provides short-term motivation but also helps the member stay on track for their long-term vision. In

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Research shows that 11% of Australians feel that they are well on their way to achieving their retirement goals.

retirement saving, it’s another hurdle that many Australians struggle to clear. Research shows that roughly one third of retirement savers have thought about their retirement savings but haven’t yet set a goal for how much they need to have accumulated by retirement (or the retirement income required to fund their desired lifestyle in retirement). Desired lifestyle in retirement is inherently personal. What’s ‘comfortable’ for one person might differ markedly from what’s ‘comfortable’ for another. Which is why it’s so important that funds help individual members set a goal that reflects the income that will be required to fund their desired lifestyle, across various expenditure categories such as travel, transport, healthcare, eating out etc. Meaningful goals bring action. Our research demonstrates that retirement savers who have set a personalised retirement income goal are 67% more likely to make voluntary contributions, relative to those who do not. By making the process of setting a goal for their retirement lifestyle meaningful for their members, good superannuation funds are halfway down the track of engaging the member in their retirement journey. fs Continue reading this opinion piece at www.fssuper.com.au.

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CalPERS adds chief equity officer The California Public Employees' Retirement System is boosting its ESG capabilities with the appointment of its first chief diversity, equity and inclusion officer. Marlene Timberlake D'Adamo has been appointed to the role effective immediately. She was previously chief compliance officer, a role the pension fund is actively recruiting for. Timberlake D'Adamo will be responsible for fostering a culture of equality, respect and inclusiveness across the investment office and broader organisation. She will work with the ESG investment team to identify emerging diversity, equity and inclusion issues and opportunities that have the potential to impact the CalPERS portfolio. She will also guide the fund's framework on such matters, its employee Diversity Advisory Council, and work with the CalPERS Health Program and contracting health plans to survey member satisfaction using race, ethnicity, and gender identity data. Timberlake D'Adamo first joined CalPERS in 2016 as chief compliance officer, bringing more than 25 years of experience in financial services. Prior to the pension fund, she held roles such as managing director, senior vice president, portfolio & risk management at PNC Bank in Philadelphia; chief compliance officer of Glenmede Investment Management; and vice president of the Glenmede Trust Company. CalPERS currently oversees the retirement savings of about two billion members. It is the largest defined benefit scheme in the US and its total market value currently sits at about $615 billion. fs

LGIAsuper appoints postmerger executives Jamie Williamson

The numbers

Six

Reduction in board seats at merged LGIAsuper from 2023 onwards.

GIAsuper, which was set to finalise its merger with Energy Super in June, unveiled its new leadership team. In an update on the progression of the merger, after already announcing Kate Farrar as chief executive of the merged fund, LGIAsuper confirmed the team from July 1. Moving over from Energy Super is general manager, member services Lisa Kay, general manager, customer insight and product Sean Marteene, and general counsel and fund secretary Hamish McKellar. Kay will take on the role of chief experience officer, while Marteene has been appointed chief transformation officer. McKellar will remain in the same role following the merger. As for the other roles, Troy Rieck is staying on as chief investment officer, a role he has held since September 2019. Likewise, Shawn Chan will remain as chief risk officer, having joined the fund as head of risk in October 2018 before being promoted to his current role in October 2019. Also remaining in their roles are LGIA's chief financial officer Garnett

Hollier and Ivan Ortiz as chief technology officer. Andrea Peters will also remain as chief growth officer. Elsewhere, Energy Super's chief investment officer Kevin Wan Lum will become LGIAsuper's deputy chief investment officer. Energy Super's chief financial officer Phil Hagen, LGIAsuper's chief operating officer Eleanor Noonan and its general counsel Shelley Sorrenson are not listed among the new executive team. In terms of the fund's board of directors, it will comprise 15 members until 31 December 2022 with three employer and three member representatives, and three independent directors including an independent chair. From 2023, it will reduce to nine directors, with four employer and four member representatives and one independent director. LGIAsuper chair John Smith is one of the independent directors, along with Ronald Dewhurst and Peter Kazacos. The merger of LGIAsuper and Energy Super will see the funds continue to operate under their existing brands and form the third-largest profit formembers fund in the state. The merged funds will manage over $20 billion. fs

GigSuper eyes $1.5m raise to fund growth Kanika Sood

The superannuation startup geared at self-employed workers is looking to raise $1.5 million, as it sets it sights on 60,000 members in five years. GigSuper in July opened a crowd-funded raise for $1.5 million based on pre-money valuation of $8.1 million. It followed a similar but much smaller raise in May 2020. "We launched just prior to the pandemic [on 4 January 2020], the real focus of the business over the past 12 months has been the financial benefit we can deliver our members," GigSuper co-founder and head of product Peter Stanhope said. The fund currently has under 200 members and $2.8 million in assets. Stanhope said it wants to be the Australian Ethical of self-employed superannuation in five years, when it hopes to have

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60,000 members and over $2 billion in total assets. He said the fund will put the money from the new raise towards improving its member engagement. "With technology – that's all in place, there a few features we need to add but the product is there. The funds from this round are really about being able to scale our marketing and distribution," he said. GigSuper plans on using two main avenues for marketing and distribution: partnerships and digital marketing. "Referrals are one thing but there is education that needs to be delivered. One of the ways for us to deliver that is to work with people that want to help self-employed people," Stanhope said. He said in partnerships, the fund is looking to build relationships with accountants and bookkeepers that self-employed people may use. fs

FS Super

Opinion

www.fssuper.com.au Volume 13 Issue 03 | 2021

Scott Bennett head of quantitative research and client solutions, ANZ Northern Trust Asset Management

Meeting net zero emissions as a super fund ver the past 15 years we have O seen an evolution in the expectations of superannuation funds. With their long investment horizons, they have started to look beyond the typical mean-variance framework in order to seriously consider the exposure to actual, potential and incidental greenhouse gas emissions. In addition to the imperative for the collective good of the world, asset owners increasingly see climate risk as part of the fiduciary duty of funds to protect member investments over the long term and meet investment outcome objectives. While the task is clear, uncertainty and doubt still exist on the best way to manage the transition in a way that still fulfills risk and return objectives. There has been considerable support across the superannuation industry for achieving net-zero emissions by 2050. However, questions about how to achieve the goal, including what constitutes achievement, still linger on the minds of investment committees. For an institutional investor with positions in thousands of companies across all sectors, measurement and delivery of net zero emissions is extremely complex. For example, immediate focus on scope one (direct emissions) and scope two emissions (emissions generated upstream from activity) will soon give way to scope three emissions (emissions generated downstream from activity). So, for a superannuation fund, what are the options available to achieve the net zero goal while also meeting their investment objectives?

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Divestment

Optimised approach

The first approach open to institutional investors is straight divestment. This simply removes the highest-emitting companies (actual and potential) from the investment universe. This approach achieves reductions in carbon emissions and removes stranded assets from the portfolio. However, removing exposure to energy, materials and utilities sectors – which currently contribute the highest amount of greenhouse gas emissions – creates the potential for large active exposures to remaining sectors and industries. While this approach is highly effective at reducing carbon emissions, you could end up discarding something valuable as many companies in these sectors are transitioning their business models to be more renewable and represent some of the greatest green opportunities.

In order to address some of the issues with both the divestment and best-in-class approach, many investors utilise sophisticated optimisation techniques to better manage the competing objectives of reduced carbon emissions, improve Environmental, Social, and Governance (ESG) profiles and preserve the underlying investment considerations. Optimised approaches can help investors avoid unintended risks in the portfolio that may result from broad-brush divestment approaches and allows for more explicit emission targets to be achieved consistently.

Best-in-class

Institutional investors are also able to take a more nuanced view on sectors by removing the highest-emitting companies and allocating to better performers. This is commonly referred to as best-in-class approach. This allows funds to maintain their preferred sector exposure and invest in the companies that have the lowest greenhouse gas emissions in different sectors. As a result, funds can maintain exposure to sectors like energy, materials and utilities. However, this approach does tend to have relatively high levels of stockspecific risk and can also result in carbon footprints that are generally higher than those from other approaches.

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...questions about how to achieve the goal, including what constitutes achievement, still linger on the minds of investment committees.

Integration

The aforementioned approaches are all highly effective at reducing exposure to carbon emissions and can be very effective at managing risk. However, none of these approaches explicitly consider returns. Increasingly, investors seek to systematically integrate broader ESG insights with proven alpha sources. This approach is referred to as integration. Our experience has shown traditional fundamental return drivers such as value and quality can be enhanced through the consideration of broader sustainability issues, including exposure to energy transition risk and ESG. Systematic strategies with full integration are a great solution. fs

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Togethr Trustees doubles down on ESG and growth as new chair takes over Jamie Williamson

atholic Super and Equipsuper's Danny Casey spoke with Financial Standard about the funds' increased commitment to ESG and plans to grow membership, as he settles into the role of chair. In the July 26 interview, just weeks after taking over as chair of Togethr Trustees, Casey flagged both Catholic Super and Equipsuper have committed to net zero by 2050. He said the commitment was driven partly by member feedback but also simply by how obvious the need to invest with a social conscience has become. Holding off any longer would have come at a cost, he said, both environmentally and financially. It's the next step in the funds' respective ESG journeys which, many may not realise given its history in mining and energy, began back in 2001 for Equipsuper. Casey said this commitment should help correct any misconception that Equip was ‘brown’ on sustainability. In terms of how well its ESG investments perform, the Sustainable Responsible Investments option in the year to May returned 27.43% for super members while the pension product returned 31.82%. Meanwhile, Catholic Super's PositiveIMPACT was launched in November 2017 and in the 12 months to June 30 saw a return of 21.45% in super and 24.16% for the pension option. Catholic Super was also one of the founding funds of the Australian Council of Superannuation Investors. As part of the funds' increased commitment, PositiveIMPACT's investable universe has been expanded to now invest in organisations that generate a measurable, beneficial social or environmental impact. Going net zero has been high on the agenda for both funds for some time, Casey said, “well before it was fashionable”.

“We're not into the sort of greenwashing stuff that you see reported presently. We actually want to do something serious and have a clear roadmap to achieving it,” he said. “Returns are important, but how those returns are generated is equally important to our membership base.” As such, touching on ASIC's ongoing review of ESG products, Casey said the funds welcome any initiative that would ensure that “funds follow through in an authentic manner with what they promise”. “We have to do everything we can to make sure the world that members today, and in the future, retire to is one that's safe and environmentally sound,” he said. That retirement will also be aided by a strengthening of Catholic and Equip's retirement and lifecycle product suite, which is another key focus for the funds, particularly following the release of the government's Retirement Income Covenant position paper in early July. “It's one of our key priorities to look at what we can do better in that space... There may be further consideration needed to come to the right landing in this space. It's very helpful to have good, hard proposals on the table that can then be assessed, critiqued and improved,” Casey said. These commitments to enhancing the funds' offerings come as they set in motion a broader growth strategy, the aim of which is to hit $50 billion in funds under management by 2025. Catholic Super and Equip hope to do this both organically and inorganically, with Casey letting the industry know that Togethr Trustees is “certainly open for business”. While the funds would welcome a merger with another industry fund, Casey said that doesn't mean they're averse to conversations with corporate and retail funds. “We're always in preliminary dis-

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We showed great foresight in obtaining that licence [extended public offer] when we did, and it did take a couple of years to get it.

cussions with a whole lot of different possibilities at any one point in time, like most of the industry. We're very open to looking at partnerships where we can see that coming together would be in our members' best long-term interests,” he said. “It's got to add scale, it's got to add benefit and not complexity, it's got to add to the kit that we take to market and that we offer members...Reserves are obviously members' money, so it has to be in their best interests; we haven't got the blinkers on about what the possibilities are to better serve our members.” He's also confident that the trustees' extended public offer (EPO) licence will make them an attractive option to funds in need of a partner, largely because it's unlikely any other fund could match what's on offer. “We showed great foresight in obtaining that licence when we did, and it did take a couple of years to get it. But I think APRA's made it very clear that it's looking to make sure the industry improves its efficiency,” he said. “The time may well have passed for funds to spend several years acquiring an EPO licence. The industry may well have moved on by then.” After two years as a joint venture model using that licence, Catholic Super and Equipsuper's successor fund transfer officially completed on June 30, with Casey taking over from Andrew Fairley on July 1. Casey served as chair of Catholic Super prior to the JV and as independent deputy chair of the trustee board in the lead up to the SFT. fs

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UniSuper's O'Sullivan on what's next Kanika Sood

wo months out from his last day at UniSuper, chief executive Kevin O'Sullivan spoke to Financial Standard about his eight years at the fund, going public offer and staying away from mergers. O'Sullivan arrived at UniSuper in 2013, after a career that started as a life insurance actuary in his native country of Canada. He moved to Melbourne in 1990 for a consulting job with Towers Perrin. Later he worked as an actuary for other superannuation funds including Telstra Super, and UniSuper where he eventually became chief executive. In the eight years that he spent at UniSuper, the fund grew from about $35 billion in total assets to the $101 billion it is responsible for now. It manages about two thirds of its investments in-house, of which about $12 billion is “sustainable money”, which O'Sullivan says he is proud of even though UniSuper members may not always agree with on sustainability. UniSuper, like many other industry funds has been a beneficiary of default arrangements with employers and of good investment performance. But it now faces challenges from the government's plans to staple non-choosing Australian workers to existing funds and the drop in overseas students' arrivals with the pandemic's border closures. Going public offer

In 2017, UniSuper opened the fund to relatives and friends of existing UniSuper members, and in July this year the fund extended the eligibility to everyone. The 2017 decision was driven solely by demand from the cohort and not by regulatory reasons, according to O'Sullivan. In the three years since, the move has brought UniSuper about 20,000 new members, of its roughly 450,000 total membership base. This time around, the driver for opening the fund further is stapling and the drop in arrivals of international students to Australia – which

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has led UniSuper to conclude hiring at universities will be lower in the next couple of years. “[In 2017] we still wanted to retain the focus on the higher education sector...And it was pretty easy to get approval for that. But if we had said let's open up to everybody, that may have been seen as a dilution in our focus on the higher education sector. “So we didn't go there at the time. But two key changes that have made us go [public offer] now are stapling and impact of COVID on higher education sector,” O'Sullivan says. He says the fund has been public offer for only two weeks [at the time of the interview, July 12], but it expects good interest from workers outside of higher education. It also expects universities to continue having UniSuper as their preferred fund. Staying away from mergers

UniSuper was born out of a merger between Tertiary Education Superannuation Scheme (TESS) and Superannuation Scheme for Australian Universities (SSAU) via a successor fund transfer effective 1 October 2000. In the 21 years since, it has largely stayed away from mergers barring some smaller corporate funds in the research sector like the Walter and Eliza Hall Institute. This is a sharp contrast to UniSuper's peers; funds like AustralianSuper, Aware Super, Hostplus and Cbus have continued to merge with smaller funds and often talk about actively scoping potential partners. “For many years, we've wanted to maintain our focus on the higher education sector – it's our pedigree, it's why we exist. And because of the high contribution rates [and] size of the sector, we've been extremely successful over time. So for many years, when we've talked about [if] we need to merge, we've always [thought] why would we?” he says. O'Sullivan says the fund is in the “sweet spot” of cashflows, where it has

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I've been there eight years [and] maybe it was time for a bit of fresh blood.

enough contributions coming in the door. “There is no need for us to merge and dilute that focus on the higher education sector, and...that's why we've never considered mergers over time. Now I can never say never but I think as long as that sweet spot remains [there is no need to merge],” he says, adding APRA's scrutiny of the sector doesn't change its view. What's next

O'Sullivan says he spoke to the fund's chair Ian Martin regularly about succession planning. But it was before Christmas that he broached the idea of leaving. He says 90% of the decision was wanting more “me time”. “I think as the CEO of UniSuper, I was probably working 60-70 hour weeks for eight years and it was time to have a bit more me time,” he says. “I've been there eight years [and] maybe it was time for a bit of fresh blood...90% of the reason was just my own time [and to] spend a bit more time with my wife. And then there's a few business-related reasons but that was essentially the main one.” He wants to travel but expects Australia, not Canada to be home. After his last day at UniSuper in early September, O'Sullivan plans to go to non-executive roles and more “25-hour” weeks in a mix of commercial and charitable roles. And he doesn't want to pigeonhole himself to finance. “I'll probably use that actuarial expertise that I've got, but I'll end up probably with two or three or four advisory board roles, I'd suggest maybe in in commercial, financial services, maybe in charities, maybe possibly even in the university sector,” he says. fs

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BEHIND THE RETURNS Sonya Sawtell-Rickson, HESTA

In four short years, HESTA chief investment officer Sonya SawtellRickson has transformed the way the industry fund invests. With $64 billion in members’ money to look after, she tells Kanika Sood exactly what it takes.

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Cover story

or Sonya Sawtell-Rickson, the opportunity to work as HESTA’s chief investment officer came at just the right time. It was 2017 and she had just clocked 10 years at QIC and was starting to think about what could be next. Then came a call from a recruiter. “When I did my research and spoke to people who were more intimately familiar with HESTA, I realised what an amazing opportunity it was to work in a fund where there's such a strong authentic focus on making a difference for our members and being a responsible investor,” she says. As her other reasons for accepting the role and moving to Melbourne, she counts HESTA’s membership, 80% of which is female, and its diverse board and management. “Thirdly, to be able to really transform an investment process, to build a team, build a process, and really setting it up for success for the [future],” Sawtell-Rickson says. “It's not many times in the career that you get an opportunity to do that.” In the four years since joining, the fund has grown from $37 billion in total assets to over $64 billion. Sawtell-Rickson has grown the investment team’s size and delivered better than median MySuper option returns across most time horizons. She arrived at HESTA via Queensland Treasury, QSuper and QIC – a rite of passage for many finance leaders who grew up in Queensland.

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Sawtell-Rickson was born in Bundaberg into a family of six children. Her mother was a former nurse and her father worked as an engineer building roads. Her father passed away when she was seven years old, and Sawtell-Rickson says her mother became her first strong independent female role model. Life as a child revolved around sport and going to the beach. She played netball, basketball, touch football and even vigoro, a cricketlike game that replaces the bat with a tennis racquet. Academically, she did enough to do okay. “It wasn't until I was older, in year 11 and 12 that I really switched on. And so, when I graduated, I think I was among the top 5% in the state in year 12,” she says. Like many students who excel at school, she found herself pushed towards studying medicine at university. However, less than a year into the bachelor’s in biomedical sciences, Sawtell-Rickson realised she didn’t like blood and couldn’t see herself staying in the field. She switched over to an arts degree at University of Queensland, majoring in economics and political science. “I did a bit of everything. I did some philosophy, some sociology, obviously some economics and political science and found that I loved economics, and really enjoyed the political science angle of thinking about how you create a better world,” she says. Both the love of sports and finance have endured – she played women’s football until last year, when she finally gave up. And this year marks her 21st in finance. She started at the Queensland Treasury, in its strategic financial

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management directorate. The department was responsible for implementing accrual output-based accounting for the state government. “This idea of moving from cash account to accrual account was quite well understood but also moving from buying and funding inputs to funding outcomes was a big shift,” she says. “I think a lot of those early learnings are quite prescient now…When we are investing, we are thinking about how to have an impact alongside generating a financial return.” Next, she moved to the state’s pensions manager QSuper. The year was 1998 and Rosemary Vilgan had just started as the chief executive in what would be an 18 year-long tenure. Here Sawtell-Rickson worked as a part of the corporate finance team, focusing on financial accounting and tax policy which sparked the start of a career in superannuation investing. “That moment, I just sort of fell in love with the complexity of superannuation,” she says. “...The purpose of superannuation that these were real people's retirement savings that we were trying to grow and maximise. And I just loved the dynamism of financial markets. It felt wonderful, it felt like I had found my home.” While at QSuper, she completed an executive stream master’s in applied science from Macquarie University. The university was in Sydney, and she was in Brisbane. But the fast-tracked master’s crammed a termfull of learning into two intensive weekends. She switched from financial accounting to investments, eventually running QSuper’s investment team towards the end of her seven years with the fund. Her responsibilities included product design, the asset allocation, the QIC mandate and even things like member communication and engagement. “We weren’t actually investing in the markets… it was more focused on the investment policy side of things, and I really wanted to get closer to managing money,” she says. “The investment decision-making at a more micro level was an important skill for me to round out and that’s when I decided to apply to QIC.” At the time, QIC managed about $30 billion and was led by Brad Holzberg, who would later move in the direction opposite to Sawtell-Rickson, and take a role as QSuper’s chief investment officer. She was leading unlisted investments for QIC’s multiasset team, looking at infrastructure, real estate, and private equity. Eventually, she led the portfolio management team, and then worked on some of QIC’s biggest clients including WorkCover and the Queensland government. After 10 years at QIC, her mind turned to what was next. HESTA, then $37 billion, was looking for a new chief investment officer as Rob Fowler stepped down from the role as he headed towards retirement in 2019.

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She had been on the executive committee during her time at QSuper, but the HESTA role brought with it the need for much more direct involvement with superannuation. She also had to learn how to best manage change, which she counts as a skill in itself. The team in July 2017 had 26 people. With SawtellRickson’s arrival, Fowler’s move towards retirement and HESTA’s growing size, the fund decided to split out the investment operations. “Our mission initially was to internalise more investment capability to support the investment committee to articulate its investment objectives, interpret those objectives into investment strategy and dynamic asset allocation positions, and then execute on those decisions,” she explains. She says this was accompanied by changes to its staffing and governance of the new processes. In the four years since HESTA’s total assets have grown to $64 billion, while investment staff has grown to over a 100. On the way, it has invested in data and analytics platforms used by the investment team. One part of getting the investment governance right

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That moment, I just sort of fell in love with the complexity of superannuation.

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The quote

And the magic is really where you can get those bottom-up insights and intel and you bring them together with the topdown view and lense on the world.

was setting up an investment committee. She says in the time since, the structure of the investment committee hasn’t changed but its agenda has become more ruthless. Last year HESTA split its team into three parts: a portfolio design team led by Stephanie Weston, a portfolio strategy team led by Jeff Brunton, and a responsible investments team led by Mary Delahunty. The portfolio strategy team takes a top-down view of the world, working on things like economic analysis and forecasting, long-term risk premiums and historic versus current valuations of asset classes. It uses these insights to set HESTA’s strategic asset allocation and expected returns. The second team, the portfolio design team takes an opposite – or bottom-up – view of the world, looking at the markets on a more granular level. This is the team that is in the markets every day, looking at managers and selecting securities. “And the magic is really where you can get those bottom-up insights and intel and you bring them together with the top-down view and lens on the world," she says, describing the teams as intersecting Venn diagrams where everything in the middle is what actually ends up in HESTA’s portfolio. As an example of how the different parts work together, Sawtell-Rickson cites the pandemic triggered downturn in markets last year. “A traditional quant model was almost useless coming into the COVID crisis because the drawdown was so rapid, that the data wasn't yet reflecting the new environment,” she says. “And so, you needed to have people who were out in the market, who could bring those important insights that allowed us to take a perspective on the environment, the risks and opportunities, and land on our probability-weighted view on where value might be. Because our traditional qant models wouldn't be able to do that in this environment we knew that.” When COVID hit, HESTA’s investment leadership team met a couple of times a day to debrief on the markets. Sawtell-Rickson says the fund was working with its partners across the world to get the best insight possible on the virus. “We also had people out there getting information from the markets, in terms of what was trading what wasn't not, how the spreads were moving, and the probability around RBA or central bank intervention,” she adds. “This was incredibly helpful and insightful, as we were thinking through our liquidity, what we needed to do, opportunities that were arriving and how we might take advantage of those.” HESTA entered COVID underweight to equities. During the downturn, it added 10% to its equities holdings. It also took advantage of repricing of other risk assets and increased its exposure to some like high-yield debt.

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It’s MySuper option ended FY21 with 18.8% in returns for the 12 months - better than the median fund’s 18.1%. Its three-year annualised returns sat at 8.3% (rank 21), while 10-year returns were 8.7% (rank 15). The fund also sailed through APRA’s inaugral performance test at August end, while 13 MySuper products failed. The investment team has three forums a month, where the two teams share and debate ideas. They may not always see eye to eye – something that Sawtell-Rickson approves of. “I'd be so disappointed if they always agreed. That would be a failure of the process, there would be no value in having two teams. So yeah, absolutely there's divergence and debate and I think that's fantastic,” she says. The third team includes the fund’s responsible investment experts. They undertake assessments of assets that HESTA invests in and lead its engagement and advocacy strategy. They are currently working towards the fund’s plans to have net-zero emissions by 2050, and its push to have 40% representation for women at executive (not just board) levels in ASX 200 companies. It is one of the 22 superannuation funds that publicly release its voting record on environmental, social and governance issues (ESG), according to the Australasian Centre for Corporate Responsibility (ACCR). ACCR found HESTA supported 63% of ESG proposals last year. HESTA also publishes a self-audit of gender diversity in investment teams of managers it uses including its own – in much-needed disclosure for the sector where Sawtell-Rickson is one of the few women holding chief investment officer roles. In the midst of the three teams, Sawtell-Rickson sees her role as creating an environment where the culture is right and the framework transparent, so that when different teams talk they have a common language. In stressing the importance of transparency, she echoes her favourite investor Ray Dalio who pushes Bridgewater employees to be “radically transparent” to the point they are always able to express a critical thought. Her office is in the middle, and she says she likes to “walk the floor”, checking in with people on what they are hearing and thinking, to build strategic alignment across its leadership team. “Often one of the challenges the different teams have their own way of talking about the markets,” she says. “So top-down strategists focus on concepts like risk premiums and GDP, [while] bottom-up people may be talking about ROEs and earnings growth. “I think my job is to try and help create a common language and framework that helps them to come together for quality discussion.” fs

FS Super

The quote

Often one of the challenges is, everybody has their own way of talking about the markets.

Tables

Watching the charts Pooja Antil

research manager Rainmaker Information

The Rainmaker MySuper Index returned 18.8% for the 12 months ending June 2021, the highest financial year return in 34 years. This is only the third time the financial year return has crossed 15% in the last three and half decades. The spectacular annual return was driven by strong equities performance which drove the month-by-month return as high as 5.1% in November 2020. Monthly returns went negative only once in the past 12 months, which was in September 2020. The MySuper return for the month of June was 2%, propped up by a monthly return of 3.1% for both international equities and property investment options. However, cash and fixed interest returns lagged due to growing inflationary fears, returning less than 0.5% during the month. Australian equities, international equities and property were the highest performing superannuation asset classes with sector median returns of 26%, 28% and 21.3% respectively over the 12-month period. Fixed interest and cash were the lowest performing delivering only marginally above zero. MySuper returns over three years were 8% p.a, while fiveyear returns were 8.6% p.a. and 10-year returns were 8.3% p.a. fs

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Best super funds: Top 30 MySuper

PERIOD ENDING 30 JUNE 2021

FUND & INVESTMENT OPTION NAME

Strategy Growth assets

1 year

Risk category

3 years

5 years

Rank

GuildSuper - MySuper Lifecycle Growing

100%

High Growth

25.5%

% p.a. Rank % p.a. Rank 10.3%

9.7%

Virgin Money SED - LifeStage Tracker 1979-1983

90%

High Growth

22.0%

10.0%

N/A

Mine Super - High Growth

89%

High Growth

26.1%

10.0%

10.1%

Australian Ethical Super Employer - Balanced (accumulation)

70%

Balanced

17.5%

9.8%

9.1%

Active Super Accumulation Scheme - High Growth

95%

High Growth

23.5%

9.5%

10.6%

Telstra Super Corporate Plus - MySuper Growth

89%

High Growth

24.6%

9.5%

10.3%

AustralianSuper - Balanced

66%

Balanced

20.2%

9.3%

10.2%

3 12

UniSuper - Balanced

68%

Balanced

17.4%

9.0%

9.4%

smartMonday PRIME - MySuper Age 40

86%

High Growth

20.7%

9.0%

10.0%

Vision Super Saver - Balanced Growth

70%

Balanced

18.8%

8.9%

9.7%

QSuper Accumulation - Lifetime Aspire 1

61%

Balanced

16.9%

8.8%

8.4%

Mercer CS - Mercer SmartPath 1979-1983

89%

High Growth

21.8%

8.8%

9.5%

VicSuper FutureSaver - Growth (MySuper)

68%

Balanced

18.2%

8.8%

9.2%

ANZ SCSE - ANZ Smart Choice 1980s

80%

Growth

22.2%

8.7%

9.3%

Aware Super Employer - Growth

68%

Balanced

17.8%

8.6%

9.5%

Cbus Industry Super - Growth (Cbus MySuper)

73%

Balanced

19.1%

8.6%

9.6%

HESTA - Balanced Growth

69%

Balanced

18.8%

8.3%

9.2%

HOSTPLUS - Balanced

81%

Growth

21.2%

8.2%

10.0%

Australian Catholic Super Employer - LifetimeOne LifetimeStart LC

89%

High Growth

20.7%

8.1%

N/A

6 N/A

Media Super - Balanced

67%

Balanced

16.7%

8.1%

9.1%

Prime Super (Prime Division) - MySuper

65%

Balanced

18.1%

7.9%

9.0%

FirstChoice Employer - FirstChoice Lifestage (1980-1984)

90%

High Growth

25.7%

7.9%

9.1%

BUSS(Q) MySuper - Balanced Growth

74%

Balanced

17.0%

7.8%

8.3%

AvSuper Corporate - Growth (MySuper)

81%

Growth

20.5%

7.8%

8.6%

AMG Corporate Super - AMG MySuper

70%

Balanced

17.9%

7.7%

7.3%

NESS - NESS MySuper

78%

Growth

18.8%

7.6%

8.2%

CareSuper - Balanced

77%

Growth

17.1%

7.6%

8.8%

NGS Super - Diversified (MySuper)

72%

Balanced

17.2%

7.6%

8.8%

legalsuper - MySuper Balanced

74%

Balanced

16.8%

7.6%

8.4%

StatewideSuper - MySuper

71%

Balanced

18.0%

7.5%

8.9%

Rainmaker MySuper/Default Option Index

18.8%

8.0%

8.6%

* Limited public offer fund. Note: This table includes AAA products only.

SelectingSuper Benchmark Indices: Workplace Super Index Names

1 year

3 years p.a.

5 years p.a.

Rainmaker MySuper/Default Option Index

19%

Rainmaker Growth Index

23%

10%

Rainmaker Balanced Index

17%

Rainmaker Capital Stable Index

Rainmaker Australian Equities Index

27%

10%

Rainmaker International Equities Index

28%

12%

13%

Rainmaker Property Index

21%

Rainmaker Australian Fixed Interest Index

Rainmaker International Fixed Interest Index

Rainmaker Cash Index

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FS Super

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Retirement:

What Australians need from their superannuation By Osei Wiafe, QSuper

Indexation of transfer balance cap and contribution caps By Garvin Jones and Neil Irving, Nexia

Solving the longevity puzzle By Fintan Thornton, Allianz Retire+

Retirement

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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 sole purpose of superannuation to provide income in retirement, this paper critiques three alternative types of retirement products in terms of how they can provide retirees with a reliable income stream for life, irrespective of market or economic concerns. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

What Australians need from their superannuation

T Osei Wiafe

he sole purpose of superannuation is to provide income in retirement. It is therefore no surprise that a large proportion of people primarily want their savings to generate a stream of income in retirement. Evidence from talking to members suggests that besides the need for periodic income from their superannuation balance, they expect to be able to have easy access to their balances for lump sum drawdowns providing them spending flexibility. Many retirees also expect to be able to leave some of their superannuation balances to their beneficiaries or reversionary as a bequest in the event of early death. This demonstrates that to support their members, super funds may require a retirement strategy and available resources. This could be a suite of education, advice, products and services. The diverse retirement needs of Australians may not be met with a single product, but possibly a combination of products and services. Many super funds provide general advice about topics such as investment options, insurance options, consolidation and super contributions to their membership at no additional cost.

What makes a good retirement income solution? It is important to have a good understanding of the benefits of different retirement income solutions and how they meet member needs.

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The heterogeneity of retirement means any solution should have the flexibility to accommodate the different phases of retirement, and the varying income and capital needs of retirees. From the reduction of minimum drawdowns in the aftermath of the GFC, to the current halving of income drawdown rates, simply sticking with the minimum drawdown strategy may not be a reliable strategy for many retirees. A more reliable strategy can help ensure that when such volatile events occur, the retiree has options within their portfolio to maintain a steady income stream at a level relevant for their life stage. Retirees could also use a simple layering strategy, with a basic annuity style product, ensuring that their everyday needs are met with a guaranteed level of income irrespective of market movements. The relevance of such reliability for income streams in retirement and the importance of lifetime income cannot be understated.

Advice and education Good professional advice is an integral part of any good retirement solution. However, many people do not seek professional financial advice in the lead up to retirement, and funds and advisers overwhelmingly recommend account-based pensions.1 Pre-retirees who tend to get advice are generally those with high superannuation balances and other assets, seeking a way to manage their wealth in retirement. This has led to what is termed biometric risk, in that most advised clients are often wealthier and therefore healthier than the average, resulting in longer than average lives.

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Retirement

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Advice and education about retirement and retirement planning can help people to feel more confident about their retirement. Unfortunately, surveys have shown that the decision to engage a professional adviser is positively correlated to wealth and income levels, and to a lesser degree, marital status, age, and educational level.2 This means the wealthy are more likely to receive advice and be confident about their retirement while the more vulnerable may not. Although not an end in itself, good advice adds value to a person’s portfolio, and there are research findings to support the conclusion that obtaining and implementing financial advice in the retirement planning process leads to a demonstrable increase in the level of sustainable retirement spending.

Retirement products

might be impacted. While market volatility is a key investment risk that is widely covered and well understood, another important investment risk is inflation risk. This is the risk that investment returns do not grow enough above inflation, meaning that the spending power of a retiree’s money will be reduced because of increases in goods and services. Retirees can be vulnerable to inflation risk when in times of market uncertainty as they move their funds into conservative assets such as cash in search of ‘safety’. This could increase the risk of early depletion of funds, but there is the potential for negative real returns from cash and other conservative assets in the current low yield environment. With current low cash rates, retirees are effectively paying a premium for the ‘safety’ of their retirement funds.

Account-based pensions

Annuities

The account-based pension (ABP) continues to be the most popular retirement product in Australia. It is a product designed to draw an income from the retirement savings accumulated over one’s working life. The ABP gives members the flexibility to access their super while they receive a periodic tax-free income from their savings. Their savings remain invested and can continue to grow even in retirement. Most ABPs offer a range of investment options to choose from, which are designed to help retirees protect and grow their investment by utilising different asset classes. Super funds usually offer a default investment option if no choice of investment option is selected by the individual. For members who fail to make an active choice, the fund’s default investment option aims to support their need for a stable income and steady fund growth. All investment comes with risk. The key for retirees is to understand the different types of risks and how they

Annuities are not as popular in Australia as they are in the United Kingdom or the United States of America. According to APRA, annuities make up 6% of pension member accounts and 3% of Australia’s total pension member benefits.1 An annuity product can be purchased with a lump sum from a life company, in return, the life company guarantees to pay the holder a regular stream of income over a specified period or for the rest of their life, depending on the type of annuity. In Australia, retirees can use savings outside super or super money to purchase annuities from a life company. A life annuity provides lifelong periodic income, and by itself or with the Age Pension, can provide a basic level of income to cover everyday retirement needs. Annuities provide a reliable source of income, not subject to market fluctuations, giving retirees the confidence that they will not run out of money in the later stages of life.

FS Super

Osei Wiafe, QSuper Wiafe is the retirement product manager at QSuper. He is responsible for the design and management of fund’s retirement income product and service solutions. He is also an adjunct research fellow at the Griffith Centre for Personal Finance and Superannuation. He holds a PhD in finance and investments from the Queensland University of Technology, and a bachelor of science with first class honours in actuarial science from the Kwame Nkrumah University of Science and Technology, Ghana.

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Retirement

Figure 1. Meeting retirement needs through a combination of GSA and ABPs.

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although this income level may vary from time to time. New means test rules have also been put in place to encourage the uptake of such products. Under the new means test rules, 60% of all payments from lifetime income streams will be assessed as income. For the assets test, only 60% of the purchase price of the product will be assessed up until the person’s life expectancy at purchase, and then 30% for the rest of the person’s life. With the increased possibilities for product development, a soft start for super funds will be an annuity style product with the certainty of one, while giving members the flexibility of being able to access their funds when they need it.

Is GSA the supplement superannuation needs? Source: QSuper

Despite some benefits of annuitisation, they remain a comparatively unpopular product among Australian retirees. This has led to what some researchers have called the “annuity puzzle”. There are many possible explanations for the annuity puzzle. Researchers have hypothesised both rational and behavioural factors, including pricing, bequest motives and lack of understanding. Group self-annuitisation products (GSA)

The quote

Group selfannuitisation, also known as pooled annuities, provides members with lifetime income by sharing longevity experience within a pool. A benefit of such a pooled product is that a large enough pool almost eliminates individual longevity risk.

Group self-annuitisation, also known as pooled annuities, provides members with lifetime income by sharing longevity experience within a pool. A benefit of such a pooled product is that a large enough pool almost eliminates individual longevity risk. Pool members will still face some level of systematic longevity risk, if the whole population is living longer, although this can be managed through income adjustments. A simple GSA structure will involve the fund setting initial payments based on assumptions to expected mortality rates, investment returns, fees and costs. Subsequent payments will be adjusted to reflect actual investment returns and mortality. A well-designed group self-annuitisation scheme will provide income for life for all members without any significant increase in the risk of running out of money. Super funds can pool these members together to provide them with payments for life from their super, in a way similar to annuities with a life insurance company. With the certainty of a lifelong income stream, retirees can confidently manage their remaining resources to meet their retirement needs as shown in Figure 1.

A world of possibilities A number of post retirement income products can now have tax-free investment earnings on their underlying assets thanks to recent changes to legislation. These include deferred superannuation income streams and certain ‘innovative income streams’ such as pooled pensions. These can be offered by life companies or super funds, and they promise to provide an income for life,

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Many super funds have a large number of members in the retirement phase. There are approximately 3.9 million retirees with another 500,000 Australians intending to retire in the next five years.3 Superannuation funds with members in the retirement phase can design ways to provide a lasting income for these members, giving them the confidence to spend in retirement. One such product is a GSA. For super funds to provide such a scheme for members, it is important to address the nagging issues that arise from the reluctance to annuitise retirement wealth. Although a GSA has some similarities with annuities, they are also different in several ways. GSA schemes may be cheaper than traditional annuities. With no requirement for a super fund to hold capital, unlike a life company, a fund can invest in any of their investment options with a long-term proven record. Using a well-known investment option or strategy can result in good returns over the long term which will flow on to provide higher payment levels for the members. Also, as it can be designed to pay in line with fund’s investment option performance and mortality experience, payment may go up or down, reducing the need for a strict capital requirement. A GSA may provide a form of money-back protection. This is akin to a guaranteed period for annuity payments when you make a purchase from a life company. This ensures that the retiree does not feel that they ‘lose out’ on purchasing this annuity if they die soon after purchase or are deemed terminally ill. A GSA can be designed such that if a retiree passes away before receiving income payments at least equal to their purchase amount, the balance of their purchase price will be paid to their estate. A similar arrangement is made in case of a terminal illness. With this arrangement, the retiree can overcome the feeling of ‘loss’ of their funds, if their circumstances change soon after starting a GSA. Such a product can also offer the option for payments to continue to a spouse after the passing of the member. This is like a joint annuity, where payment is made until the death of the longer living spouse. Mortality salience is not lost on anyone, but such a product is a simple insurance for a member loved one.

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Retirement

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If a GSA meets certain government legislation, members may be entitled to the discounted treatment in the assessment of their assets and income tests for the Age Pension. This legislation is called the capital access schedule, placing a limit on the amount of money one can access from a product, either through voluntary exit or in the event of death. If a GSA is designed to meet this limit, then retirees will receive this discount on their asset and income assessment for the means test. This discount may enable retirees to receive the Age Pension, which they otherwise may not have been entitled to, or receive a higher level of Age Pension than they ordinarily would. It may also make some members eligible for the pensioner concession card, for which they may not have been eligible previously.

Conclusion Many retirees are not confident in their spending, with legitimate concerns about running out of money. In most cases, they underspend, with many passing away with large unplanned bequests. By providing a reliable lifetime income stream, members can be assured that irrespective of market or economic outcomes, an income will be available to them. fs Notes 1. Financial Services Inquiry Final Report, 2014. 2. Harlow WV, Brown KC & Jenks SE, ‘The use and value of financial advice for retirement planning’, The Journal of Retirement Winter 2020, vol. 7(3) pp. 46-79. 3. Retirement and Retirement Intentions (2018/2019), Australian Bureau of Statistics (ABS), 2020.

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. When compared with alternative retirement solutions, group self-annuitisation products: a) may entitle members to a more favourable assessment of their assets and income b) are designed to encourage underspending c) provide greater flexibility in terms of lump sum access to members invested capital d) will likely be more expensive than traditional annuities 2. Which of the following investment risks do retirees face in today’s economic environment? a) Negative real returns b) Market volatility c) Early exhaustion of retirement savings d) All of the above 3. Group self-annuitisation products: a) lack any form of money-back protection b) segregate member’s funds to avoid longevity risk c) pool members’ funds to counter longevity risk d) require super funds to hold capital 4. What issue does the author highlight regarding Australia’s retirement income landscape? a) The minimum drawdown strategy may not be reliable b) There are way too many product-service combinations c) The new means test rules stifle the appeal of many postretirement income products d) Those who seek financial advice tend to squander any insights regarding sustainable retirement spending 5. According to the paper, the sole purpose of superannuation is to provide income in retirement. a) True b) False 6. The author highlights that annuities are gaining popularity with Australian retirees. 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.

FS Super

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Retirement

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The onset of the 2021/22 financial year brings with it, for the first time, indexation of the transfer balance cap (TBC). Unlike indexation of the general contribution caps, indexation of the TBC will result in different outcomes among individuals and, as this paper explores, may well lead to unintentional breaches of the TBC rules. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Indexation of transfer balance cap and contribution caps Added complexity may lead to unintentional breaches of TBC rules

Garvin Jones, Neil Irving

he All groups CPI figure for the December 2020 quarter has triggered upward indexation of the general transfer balance cap (TBC) and any unused part of an individual’s TBC from 1 July 2021. This sounds like good news, but the bad news is that the indexation system to be used for any individual’s cap space is quite complex potentially leading to errors and unintentional breaches of the TBC rules. Also, the movement in average weekly ordinary time earnings (AWOTE) has triggered an upward indexation of the general concessional contributions cap from 1 July 2021. This means the general non-concessional contributions cap, which is set at four times the contributions cap, will also increase.

Transfer balance cap When the concept of the transfer balance cap (TBC) was introduced in July 2017 as the upper limit for pension balances in the retirement phase, the general transfer cap was set at $1.6 million. In the year a person commences a retirement phase pension for the first time, their individual TBC is set as equal to the general

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TBC for that financial year. Until now, everyone has started with a TBC of $1.6 million. The general TBC and any unused part of an individual’s TBC, also termed cap space, are potentially subject to indexation for movements in the CPI, but until now the movement in the CPI has not been enough to trigger any increase. It has therefore been easy to calculate the amount of any cap space by subtracting the balance of an individual’s transfer balance account (TBA) from the general TBC of $1.6 million. However, for the first time since July 2017, the general TBC [was slated to] rise by $100,000 to $1.7 million on 1 July 2021 due to increases in the CPI. For an individual commencing a retirement phase pension for the first time in the 2021/22 financial year, $1.7 million will become their individual TBC. This may be good news if the individual can delay starting their first retirement phase pension until after 30 June 2021. Indexation also potentially applies to the cap space of an individual who already has a retirement phase pension in place on 1 July 2021, but has not fully used their individual TBC, but the details of how it is applied can lead to confusion. When a person has not fully used their individual TBC, their TBC will be increased by a dollar amount calculated as:

FS Super

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Retirement

Garvin Jones, Nexia

Increase in personal TBC = unused cap percentage x indexation increase where: unused cap percentage is the percentage of the individual’s TBC not used and rounded down to the nearest whole number. indexation increase is the dollar amount by which the general TBC is increased by indexation ($100,000 in the 2022 financial year). It is important to note that the ‘not used’ part of an individual’s TBC is calculated using the highest balance in their TBA at any time before 1 July 2021, not just the TBA balance as at 30 June 2021. For example, if Amir’s TBA briefly hit $1.5m in the past but is now $1m, his unused cap percentage would be based on $1.6m - $1.5m = $0.1m as a percentage of $1.6m (or 6%), not on $1.6m - $1m = $0.6m as a percentage of $1.6m (or 37%). So, using Amir’s situation, on 1 July 2021 his TBC will be increased by 6% x $100,000 = $6,000 and become $1.6m + $6,000 = $1.606m. As the unused cap percentage is rounded down to the nearest whole number, there are potentially 100 differ-

FS Super

ent unused cap percentages (1% to 100%) to be applied to an individual’s TBC. Further, it is necessary to know an individual’s complete TBA history to determine their highest TBA at any time before 1 July 2021. The result is that the dollar amount by which each individual’s TBC will increase due to indexation must be calculated for each and every person. In effect we go from a situation where the TBC was $1.6m for everyone, to one where the TBC is potentially different for every person with any unused cap space on 30 June 2021. As well as the complexity of the method used to calculate the increase resulting from indexation, there are the practical problems in determining the highest balance in a person’s TBA in the past has been. Unfortunately, the ATO’s records of TBAs are dependent on timely lodgement by superannuation funds of annual returns, transfer balance reports and the correction of errors. It is possible that when the indexation provisions were drafted, there was limited appreciation of how difficult they would be to implement in practice. In its submission to the 2021 Federal Budget, the SMSF Association recommended simplification of the system by either doing away with indexation of cap space altogether or retaining

Jones is a director of the superannuation division at Nexia Sydney. He has worked as an accountant for over 20 years and specialises in superannuation, family business and estate planning.

Neil Irving, Nexia Irving is a manager in the business advisory team at Nexia Sydney. His experience includes working with a range of clients from individuals through to ASXlisted companies.

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Retirement

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The quote

With the increase in the general TBC to $1.7 million on 1 July, an individual’s ability to make non-concessional contributions might be restored in the 2021/22 year, provided their TSB is not greater than $1.7 million on 30 June 2021.

indexation of the cap space but reducing the potential number of percentage steps from 100 to five or some other appropriate number. Unfortunately, no simplification of the process was announced in the Budget. The following three examples demonstrate the application of indexation to an individual's TBC. Example 1:

Brian began a retirement phase pension before 1 July 2021 and at that time used his entire TBC of $1.6m. There have been no other transactions in his TBA since then. As his cap space on 1 July 2021 is zero, the indexation of the general TBC is no benefit to him. Example 2:

Shusmi began a retirement phase pension before 1 July 2021, using $1m of her TBC. There have been no other transactions in her TBA since then. On 1 July 2021, her cap space will be $1.6m - $1m = $0.6m. Her unused cap percentage will then be $0.6 / $1.6 = 37.5% or 37% rounded down to the nearest whole number. The increase in Shusmi’s personal TBC on 1 July 2021 will be $100,000 x 37% = $37,000 so Shusmi’s personal TBC will then be $1.6m + $37,000 = $1.637m. Shusmi has used $1m in establishing her retirement phase pension, so with the indexation increase on 1 July 2021 the unused balance of her TBC will become $1.637m - $1m = $0.637m. Example 3:

Tod commenced a retirement phase pension in 2018 us-

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ing $1m of his TBC. He also began a second retirement phase pension in 2019 using a further $0.4m of his TBC but commuted the second pension back to accumulation later in that year. An increase in the second pension account balance meant that the commutation gave rise to a $0.5m debit to his TBA. Although the balance of Tod’s TBA on 1 July 2021 will be $1m + $0.4m - $0.5m = $0.9m, his cap space for indexation purposes is calculated using the highest balance in the TBA at any time before 1 July 2021. This would be calculated as $1m + $0.4 = $1.4m. Tod’s cap space on 1 July 2021 will therefore be $1.6 - $1.4 = $0.2m and not $1.6m - $0.9m = $0.7m. As a result, Tod’s unused cap percentage will be $0.2m / $1.6m = 12% rather than $0.7m / $1.6m = 43% (both rounded down to the nearest whole number). The increase in Tod’s personal TBC on 1 July 2021 will be $100,000 x 12% = $12,000, and his personal TBC will become $1.6m + $12,000 = $1.612m. With indexation the unused balance of Tod’s TBC on 1 July 2021 will become $1.612m - $1m - $0.4m + $0.5m = $0.712m. It is also worth noting an interesting consequence of the increase in the general TBC to $1.7m on 1 July 2021 that relates to members who have been unable to make non-concessional contributions in the 2020/21 year because of the size of their total super balance (TSB). A person is considered to have a non-concessional contributions cap of zero if their TSB at the preceding 30 June is greater than the general TBC for the year in which the contributions would have been made.

FS Super

Retirement

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With the increase in the general TBC to $1.7m on 1 July, an individual’s ability to make non-concessional contributions might be restored in the 2021/22 year, provided their TSB is not greater than $1.7m on 30 June 2021.

CPD Questions

Contributions caps The general concessional contribution cap of $25,000 and the general non-concessional contributions cap, which is set at four times the concessional contribution cap, will also increase on 1 July 2021 to $27,500 and $110,000 respectively, due to increases in the AWOTE index. Broadly, this means that the maximum non-concessional contribution a member who triggers the bring forward rule on or after 1 July 2021 can make will be $330,000. Table 1 summarises the relationship between the new thresholds for the TSB, the non-concessional contributions cap and the bring-forward periods for 2021/22. Table 1. Relationship between TSB and bring-forward thresholds for 2021/22 Total super balance on 30 June 2021

Less than $1.48m

Non-concessional contributions cap for the first year $330,000

$1.48m to less than $1.59m $220,000 $1.59m to less than $1.7m

$110,000

$1.7m or more

Nil

Bring-forward period

3 years 2 years No bring-forward period. Non-concessional contributions cap applies.

Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Jung started a pension with $1.2m in 2020. From 1 July 2021, what percentage of the indexation amount will Jung have access to? a) 0% b) 100% c) 25% d) 75% 2. Sam commenced a pension in 2020 with $1.1m and a second pension shortly after with $300,000. He then commuted $100,000 to buy a sports car. What is Sam’s transfer balance account (TBA) value at 30 June 2021? a) $1,300,000 b) $1,400,000 c) $1,100,000 d) $1,700,000 3. Li’s highest TBA balance at 30 June 2019 is $1.5m. What balance is used to calculate her cap space for indexation purposes from 1 July 2021? a) $200,000 b) $1,500,000 c) $1,700,000 d) $100,000

Non-concessional contributions cap is zero

Source Nexia Australia

The maximum amount of the brought forward cap is set by reference to the general non-concessional cap applicable in the year the bring forward is triggered. It is important to note that this means that if a bring forward is triggered on or before 30 June 2021, the increased non-concessional caps which would otherwise apply in 2022 and 2023 do not apply. fs

4. Jacqui commenced a pension with $1.6m during 2018. What amount of indexation will Jacqui have access to from 1 July 2021? a) $100,000 b) $1,700,000 c) $0 d) $10,000 5. The new non-concessional ‘bring forward’ maximum of $330,000 will be available to all members with a total super balance less than $1.7m. a) True b) False 6. Indexation of the general concessional contributions caps is linked to AWOTE, and indexation of the TBC is linked to CPI. a) True

b) False

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Retirement

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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 focuses on the challenges facing retirees and superannuation funds in dealing with longevity risk. For retirees, it consider adjustments they are making to earn sufficient returns in a lower interest rate environment and for superannuation funds, how product innovation can allow retirees more confidence in the future sustainability of their income streams. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Solving the longevity puzzle How superannuation funds can help their members via product innovation

T Fintan Thornton

he risk of members outliving their retirement savings presents a significant challenge for retirees and superannuation funds alike. With the Retirement Income Covenant (the covenant) set to come into force on 1 July 2022, super funds need to consider more innovative investment options to deliver greater income confidence to

retired members. Longevity risk, or the uncertainty about how long an individual will live, is foremost in many retirees’ minds as they worry about outliving their savings. In a survey of 1,007 current and prospective retirees conducted by Allianz Retire+, three quarters of respondents did not know how long their money would last in retirement; half said they did not feel financially secure; and two thirds said that they were only buying necessities. It is also a key issue for superannuation funds, grappling with the implications of the imminent Retirement Income Covenant legislation. Originally scheduled for July 2020, and now postponed to July 2022, the covenant will require superannuation trustees to consider the needs and preferences of retiree members, and ensure they have greater choice in how they access their superannuation benefits in retirement.

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The delay in implementation of the covenant has provided the industry with some welcome breathing room. But with just [less than a] year to go, funds need to be considering how they will meet the covenant’s imperative to deliver a greater range of options to retiree members.

The risk of a long retirement While no two retirees are the same, it is safe to say that most share a common goal – to generate enough money so they can enjoy life after work. It is therefore no surprise that many retirees worry their savings will not last the distance. In fact, according to the National Seniors Feeling Financially Comfortable report of 2019, around 60% of Australians aged between 50 and 70 share this concern to some degree. One of the reasons behind this fear is that we are living longer, which of course, also has a definite upside. According to data from the Australian Bureau of Statistics, in 1960 the average life expectancy for a 65-year-old Australian man was 78, and for an Australian woman, it was 81. Fast forward 60 years and, with ever-increasing mortality improvements, the life expectancy for 65-year-old Australians is now 85 for men and 87 for women. And for a 65-year-old couple, there is more than a one in three chance that one of them will be alive at age 95. So, an individual who has just turned 65 and is about to retire will want to make sure their retirement savings will last at least 20 years.

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The quote

The risk of members outliving their retirement savings presents a significant challenge for retirees and superannuation funds alike.

That is a significant jump on the 13 to 16 year retirement that a person leaving the workforce in 1960 could expect. And for women, who tend to retire with less money but live longer than men, the prospect of a lengthy retirement can be especially daunting.

Traditional approaches no longer apply A further challenge is that the current, persistent lowinterest-rate environment is rendering traditional retirement investment models less effective over the longer term. To earn a sufficient return to sustain their increasing lifespans, retirees need to hold more growth assets (equities), and fewer defensive assets (cash and fixed interest), than in years gone by. The traditional 50/50 split between equities and cash or fixed interest is no longer able to deliver comfortable retirements for most. The result is that retirees are having to take on more equity exposure at a time of heightened share market volatility. In its Risky Business, 2019 research, Callan Associates found portfolios must contend with six times as much volatility (standard deviation) to earn the same returns as 20 years ago. Consider how this affects retirees. Low returns on defensive assets mean they need to own more growth assets to earn a sufficient return. But with that comes higher risk given the share market volatility and occasional wild swings in wealth that terrify many and do not promote a sense of confidence in drawdown behaviour. So instead, retirees are adjusting to ever-lower income returns on their savings, poorer standards of living, and unnecessarily preserving too much of their capital. The federal government’s Retirement Income Review, released in 2020, found that many retirees are living frugally, drawing down only the minimum from superannuation, and dying with high balances remaining in their super funds.

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This disconnect between their fear of running out of money and the reality of dying with large super balances, suggests that current income models are failing to provide adequate confidence for many retirees. It also points to an under-served opportunity to develop better investment choices for retirees, for example, protected equity products that enable retirees to fully or partly hedge their equities exposures in a cost-effective, convenient way. It is about achieving a balance and helping retirees tactically use their capital when rates are low, through innovative protection strategies that are long overdue in this market.

Getting the sequence right While the focus on longevity risk is well in frame, sequencing risk has emerged in recent times as another of the thorniest problems facing product designers in the retirement income space. The now well-studied phenomenon refers to the ‘danger zone’ in the years immediately prior to and after retirement when member savings generally peak, therefore, remain most vulnerable to market volatility. Most super fund members have a substantial allocation to risk assets both in the lead-up to retirement and for several years post the event and most new retirees, facing 20 to 30 years without paid income need to retain a decent exposure to growth investments to fund their retirements, particularly in a constrained yield environment. However, in a market crash, the first year of retirement could easily wipe out a large chunk of those savings. With less time to recover, many members could see their retirement dreams substantially downgraded along with fading income expectations. While most retirees do not articulate it in industry terminology, they no doubt experience sequencing risk as a hidden, unquantifiable fear.

Fintan Thornton, Allianz Retire+ Thornton leads the Allianz Retire+ institutional business, where he is responsible for co-developing partnerships with superannuation funds. He is an actuary and has worked in both actuarial consulting and senior executive super fund roles during his 20 plus years in financial services.

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Retirement

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. What percentage of Australians between ages 50–70 were worried they would outlast their savings, according to data cited? a) 75% b) 60% c) 40% d) 50% 2. One proposed innovation in product development being considered by trustees to assist members meet their retirement goals is: a) accessing longevity protection via ongoing premiums, rather than by lump sum payment b) allowing members to top up their pension accounts with non-superannuation assets c) using buy-and-hold indexing strategies to support retirement pensions d) adding enhanced features to their deferred annuities 3. Research cited found that for investment portfolios to earn equivalent returns now, to those of 20 years ago, they must embrace: a) increased levels of asset diversification b) a significantly more concentrated portfolio of investments c) an 80/20 portfolio spilt in favour of growth over defensive assets d) increased volatility of returns by a multiple of up to six times 4. When is the so-called ‘danger zone’ for retirees regarding greatest vulnerability to sequencing risk? a) The years leading up to their retirement b) The years immediately after their retirement c) The years immediately before and after retirement d) Only the years during which a retirement pension is being drawn

Potentially, some retirees are being overly conservative with their investment strategy or perhaps taking on more risk than they know. A well-designed retirement income product, though, can help get the balance right by including some protection against sequencing risk, as well as an innovative longevity buffer, giving retirees comfort they will be able to sustain their lifestyles even amid falling share markets.

Innovating for better outcomes The covenant is expected to require trustees to assist members to meet their retirement income objectives throughout retirement, by developing a retirement income strategy for members. As such, the covenant has become an important catalyst for the industry to reconsider its retirement investment options and start thinking outside the square. In the past, superannuation has been focused on the accumulation phase, but now attention is turning to the drawdown phase. As a result, it is hoped that super funds will be able to offer future retirees a portfolio of retirement income products to better align to differing preferences and income needs. Already, discussion is taking place on the development of innovative approaches and products for the retiree market. In its 2019 submission to the Retirement Income Covenant, the Financial Services Council explored: • whether longevity protection can be purchased through ongoing premiums, rather than a lump sum premium payment, such as for the acquisition of a deferred lifetime annuity • if satisfaction with the longevity protection component for Comprehensive Income Products for Retirement (CIPRs) can be improved by utilising non-superannuation savings vehicles • how variable investment returns from capital can be leveraged to support a lifetime retirement income stream. In any case, the introduction of the covenant should herald a period of intense innovation and focus on retiree investment options. For those in the industry, it is a great opportunity to provide compelling offerings to attract and retain the large superannuation balances held by retirees. And for retirees themselves, it is a chance to face retirement with greater confidence about the years ahead. fs

5. The Retirement Income Covenant will require superannuation trustees to factor the needs and preferences of retirees into future product innovation. a) True b) False 6. Based on current ABS statistics, a 65-year-old couple has a one in four chance of both surviving through to age 95. 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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SMSFs:

Six member SMSFs

By Graeme Colley, SuperConcepts

SuperStream and SMSFs

By Lyn Formica, Heffron

SMSFs

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Before increasing member numbers up to six, SMSF trustees need to understand the implications for the fund decision-making and administration. For instance: Is the current trustee structure suitable? How will voting rights be determined? Will investment strategies change? Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Six member SMSFs They sound like a sensible idea

S Graeme Colley

ix member SMSF funds sound like a sensible idea. Put the family in one super fund, make joint investment decisions, help the children save and heaps more reasons. Why not? The Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 (the Bill), was introduced in the Senate on 2 September 2020. It remains before the Senate although the Senate Economics Legislation Committee has recommended it be passed (albeit with the Labor senators issuing a dissenting report). [It has since received Royal Assent]. Among other things, the Bill proposes to amend section 17A(1) (a) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) to require an SMSF to have fewer than seven members (instead of fewer than five) in order to satisfy the definition of an SMSF. Besides allowing SMSFs to have up to six members, the main change that will occur relates to the signing of a document which will require at least half of the trustees or directors of the trustee company to sign certain fund and regulatory documents. The Bill also standardises the wording used in the SIS legislation so that reference to small funds is consistent. The best advice about the family SMSF is to ‘look before you leap’, make sure you have done your homework and have concrete reasons for the final decision. Do not forget that if you do not get it right, you

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and maybe the rest of the family may end up with no safety net and a big mess.

What needs to be done? • Understand the impact of the increase in SMSF members on decision-making and fund administration. • Appreciate the difficulties that can arise by the increase in SMSF members on investments and benefit payments. • Recognise the benefits of increasing SMSF members from a wealth transfer angle. Experience shows that the decision to include family members as part of an SMSF can work well, but only in a limited number of cases. If everyone understands the purpose of superannuation, their responsibilities, and respects each other’s views, then it can work without any question. However, issues can arise when there are differences in members’ ages, and younger family members may lack interest and skills compared to their parents who may be close to retirement. There is also the potential difference in investment choices by members as younger members may have longer investment time horizons than their parents. With those basics in mind, let us have a look at the essential technical requirements of having an SMSF. The most essential requirement for an SMSF is that, under the current rules, you cannot have any more than four members but if

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the (amending) Bill is passed, that will increase to a sixmember limit. This puts families with five or more out of the question if they are after just one fund. However, it could be possible to have two or more funds for larger families. Maybe mum and dad in one fund and the kids in another.

What to think about? • Pros and cons of more members in an SMSF. • Review lifestyle considerations. • Establishment. • Investments. • Paying benefits.

Trustee structure is important The trustee structure of the SMSF is important to enable the fund to be administered properly. The general rule is that all members of an SMSF who have legal capacity must be trustees of the fund or directors if there is a corporate trustee. If the children are under 18, they will need to have mum and/or dad to act in their place as fund trustee as they do not have legal capacity. In the case of individual trustees, the fund’s trust deed may provide rules relating to the appointment and dismissal of trustees as well as meetings and trustee voting rights. These are important, especially with a family fund, as they will lay the ground rules on who does what and rules about the fund’s operation. It is better to have these rules in writing than just some loose understanding which can be misunderstood when things get hot under the collar.

Voting rights Voting rights can be important when it comes to decisions about the fund both from the point of view of individual trustees and a corporate trustee. The superannuation legislation requires each member to be a trustee or director, however, it does not stipulate the voting rights of those trustees or how a casting vote operates. While it is usual that each trustee has one vote, it is possible to have voting rights based on each member’s balance or any other method. If the trustee is a company, in addition to the fund’s trust deed, the constitution of the company may provide rules on directors’ meetings and voting rights.

Member rights on death It is important for members to ensure that their rights are protected if they were to pass away. This can be protected by the legal personal representative becoming a trustee or a director on the member’s death. Careful wording of the trust deed can ensure this occurs automatically on death. Having the legal personal representative as trustee will help ensure the fund is administered correctly and the benefits are paid according to members’ wishes as provided in the fund’s trust deed. This is very important when it comes to family superannuation funds.

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Reversionary pensions or BDBNs To ensure benefits are paid as fund members wish, members may consider providing a reversionary pension to qualifying dependents or make a binding death benefit nomination (BDBN). If a member is receiving a pension at the time of their death which has a reversion to a survivor, they (the survivor) will continue with the pension until their death or they may have the option to convert it to a lump sum and withdraw the amount from the fund. If there is a BDBN in place then superannuation benefits can be paid to a member’s dependants upon death and/or to the member’s legal personal representative and have the amount distributed according to their Will. Correct legal drafting of these documents will help ensure that the nominations or instructions are not subject to challenge.

The investment side Then there is the investment side of the fund which is the main thing about superannuation. Having members of different ages is not an impossible problem to solve as they may all agree on a range of assets that are diversified and take the long-term perspective of the fund into account. In some situations, if the family is involved in a small business, it is possible to have a business property in the fund which can use superannuation savings effectively by leasing the property back to the family business. In the long term, if the children continue with the business, they may retain the property in the fund as part of an intergenerational transfer of assets which can be tax-effective. Also, assets that are held in a superannuation fund are protected from creditors in the event of a member’s bankruptcy.

Moving benefits The day will probably come when the children may wish to move their benefit to another superannuation fund, so they can have their family share in the benefit of a family SMSF. This is something that needs to be planned just like the original decision to have the original family SMSF in the first place. This will require decisions concerning the change in trustee or directors of the fund, reviewing investments and investment strategies as well as transferring benefits to the new fund. It is worthwhile seeking advice to ensure this happens as smoothly as possible. So, there are some things to think about for those thinking about having a family SMSF. Good planning and understanding the reasons for having the fund are essential to avoid any potential mess that may prove impossible, or extremely difficult and costly, to fix.

How many members are a good idea? Irrespective of the maximum members for a small fund, the main question to consider is how many members is a good idea in the circumstances. Most SMSFs have one

Graeme Colley, SuperConcepts Colley is executive manager, SMSF technical and private wealth at SuperConcepts. He is a wellknown figure in the SMSF community with a long-standing reputation as an educator, technical expert and advocate for the sector. He has held senior roles in the Australian Tax Office, worked as assistant commissioner for the Insurance and Superannuation Commission, and most recently held the role of director, technical and professional standards at the SMSF Association.

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SMSFs

The quote

No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. But it provides greater flexibility for families with more than four members to benefit from the change.

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member (23%) or two members (70%) and there are a lot fewer funds with three and four members. No one really expects that an increase to a maximum of six members of an SMSF will result in a torrent of new funds. But it provides greater flexibility for families with more than four members to benefit from the change. In some situations, there may be special reasons to have up to six members. No matter how many members are permitted in an SMSF, there are pros and cons that apply. This may include the operation of the fund, investment decisions and paying benefits to members.

Establishment and administration

The main advantages of the proposed increase to six members are: • larger families are catered for. • there is most likely a reduction in operating costs compared to a family that would require two or more funds to achieve the same outcome. • more efficient fund administration as a corporate trustee is required for a fund with more than four members to meet the state trustee legislation. • greater ability for the SMSF to qualify as an Australian superannuation fund when one or more members travel overseas for a prolonged period, saving in administration costs.

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Disadvantages of a six-member fund may include: • ensuring the fund’s trust deed is able to cater for the increase in member numbers. • difficulty in the administration of an SMSF due to the number of members involved. • reduced efficiencies in decision-making. • overall control and management of the fund, for example, the decision of the trustees/members to appoint or remove trustees.

Fund investments The positives for making fund investments are the additional investing powers of an SMSF with six members should have greater negotiating and purchasing power, and taxation strategies may be implemented more efficiently. The negatives around fund investments also need to be managed properly as investment considerations may be indecisive. In addition, due to the range of members’ ages, investment choice may vary significantly and naming conventions may hold up the final decision.

Benefit payments The main positives from benefit payments are that estate planning can be streamlined with a greater number of members and the ability to assist with the intergenerational transfer of wealth. This can provide

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taxation advantages as family members join and leave the superannuation fund. Negatives can arise out of relationship breakdowns involving fund members, lack of clarity when it comes to the distribution of death benefits to nominated beneficiaries and potential financial abuse.

Looking forward to the increase? The increase in the minimum number of members of an SMSF may not be the perfect cup of tea for some, but it may be something others may have been looking forward to for some time. fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. The primary purpose of the Treasury Laws Amendment (SMSF) Bill 2020 is to: a) enhance the voting rights for all SMSF member trustees. b) increase the number of allowable members in an SMSF from up to four to up to 10 c) raise the maximum number of allowable members in an SMSF from four to six d) require all trustees to be a signatory on all regulatory documents for their fund 2. Why is it vital to ensure there is careful wording of the trust deed for a family SMSF? a) To ensure the deed can cater for any increase in member numbers b) To protect each member’s wishes regarding payment of their benefits upon death c) To provide clear rules around trustee meetings and voting rights d) All three options 3. Which of the following statements is offered as the best advice about family SMSFs? a) When possible, include all family members in an SMSF b) Look before you leap c) Ensure each member has a BDBN in place d) Each member/trustee must have equal voting rights 4. A potential disadvantage of a six-member SMSF would be: a) increased complexity in fund control and management b) heightened risk of fund non-compliance due to one or more members travelling overseas c) larger size of new investments sought by the fund d) higher operating costs as compared with two smaller self- managed funds 5. The majority of SMSFs have just two members. a) True b) False 6. Current superannuation legislation specifies how the voting rights of trustees for any SMSF are determined. a) True

b) False

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SMSFs

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: For SMSFs, implementation of SuperStream only becomes compulsory on 1 October 2021. This paper describes the steps SMSF trustees and other practitioners must take to ensure an SMSF is ‘SuperStream ready’ and the potential penalties for trustees failing to comply with SuperStream rules and processes. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

SuperStream and SMSFs How will the changes affect practitioners?

S Lyn Formica

MSF trustees now need to use, or at least be preparing to use, SuperStream when rolling monies in or out of their fund with the Australian Taxation Office (ATO) stating that 1 October 2021 is a hard deadline and no further extensions will be granted. So, what does this mean for practitioners? SuperStream is an electronic gateway used to streamline the process of making superannuation contributions for employees and rolling over benefits between superannuation funds. It requires payments and the associated data to be sent and received electronically. In the case of SMSFs, this transfer of data is facilitated using an electronic service address (ESA). Currently, using SuperStream is compulsory when: • a non-SMSF is rolling over benefits to another non-SMSF • an employer is paying superannuation contributions to a non-SMSF • an employer is paying superannuation contributions to an SMSF and the employer is not a related party of the SMSF trustee. Where benefits are being rolled in or out of an SMSF, it is not currently compulsory to use SuperStream but it will be from 1 October 2021. For example, it will be compulsory to use SuperStream when: • an individual’s superannuation benefits are currently in a nonSMSF and they wish to rollover all or in-part to an SMSF from 1 October 2021

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• an individual’s superannuation benefits are currently in an SMSF and they wish to rollover all or in-part to another SMSF. This could be in the event of adult children rolling out of their parent’s SMSF to their own SMSF, business partners separating or couples divorcing from 1 October 2021 (Note: superannuation received as part of a family law split is covered by different rules) • an individual’s superannuation benefits are currently in an SMSF and they wish to rollover all or in-part to a non-SMSF, for instance on wind up of the SMSF from 1 October 2021. Whilst it will not be compulsory to use SuperStream for SMSF rollovers until 1 October 2021, the various software providers and gateways are currently in the process of testing and transitioning to the new system. This means they may begin voluntarily using SuperStream for rollovers in or out of SMSFs well before the 30 September 2021 cut-off.

What do these changes mean for practitioners working with SMSFs? Extending the SuperStream system to SMSF rollovers will mean multiple changes for practitioners. For example, from 1 October 2021 it will no longer be acceptable to roll benefits out of an SMSF by sending a cheque and a paper rollover benefits statement to the receiving fund. Instead, the transfer of data such as the information

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usually found on the rollover benefits statement and the payment must happen electronically. The impact is likely to be greatest on SMSF administrators who do not use specialist SMSF accounting software. However, the following steps can be taken now to ensure a successful transition: 1. Ensure affected funds have an ESA

SMSFs who are required to use SuperStream to receive contributions should have their systems well and truly bedded down as the rules have been in place for many years. However, the new rules mean a greater number of SMSFs will need an ESA including: • any SMSF receiving rollovers into the fund (e.g. on establishment of the fund) • any SMSF rolling benefits out of the fund (e.g. on wind up of the fund). So there are no delays, SMSFs should ensure they have access to an ESA as soon as the fund is established and for existing funds, as soon as the decision to wind up is made. An ESA can be obtained from: • the software provider, for funds processed via specialist SMSF accounting software • SMSF messaging providers for funds not processed via specialist SMSF accounting software (some providers will charge a fee and not all may provide the service for rollovers). It is important to note there is currently no requirement for member contributions or contributions from related employers to SMSFs to be made via SuperStream and presently there are no plans to change that. 2. Ensure SMSF’s bank account details held by the ATO are up to date

Before rolling over benefits to another fund, the transferring fund is obliged to perform a number of checks designed to ensure the rollover is not part of an illegal early release scheme and that the member’s identity has not been compromised. One of these checks is ensuring that the receiving SMSF’s bank account details, as shown on the rollover request, match those held by the ATO. To avoid delays in the rollover process, SMSF trustees should ensure the fund’s bank account details held with the ATO are up to date. 3. Determine most appropriate method to request the rollover

There are a number of ways for an individual to request the rollover of their benefits to another fund including: • via their myGov account, if requesting the transfer of their whole balance • by completing the ATO paper form ‘Request for rollover of whole balance of super benefits between funds’ [NAT 75359] and lodging it with the transferring fund, if requesting the transfer of their whole balance • contacting the transferring fund directly.

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If a rollover request is made via the myGov website, the ATO will verify the member's identity and membership details before sending the information to the transferring fund for processing. In contrast, if the rollover request is made using the paper form, the transferring fund will often need to seek further information from the member to: • confirm their identity • if the receiving fund is an SMSF, confirm the fund’s bank account details. 4. Become familiar with how to use the preferred specialist software

The process for receiving a rollover into an SMSF via SuperStream is expected to be similar to that for receiving contributions. However, a full understanding of how to process a rollover out of an SMSF via SuperStream is vital particularly if the fund is using an external ESA. If there has been only a recent transition to using SMSF specialist software from previously using an external ESA, it may be appropriate to change the funds’ ESA to gain the maximum benefit from the new software. Using the ESA of the chosen software provider will ensure the data can feed automatically to the relevant member account.

The quote

From 1 October 2021 it will no longer be acceptable to roll benefits out of an SMSF by sending a cheque and a paper rollover benefits statement to the receiving fund.

5. Be aware of the time frames for processing rollover requests out of SMSFs

In theory, a written request to rollover out of an SMSF via SuperStream will need to be actioned no later than three business days after the trustee receives certain information in line with regulation 6.34A of the Superannuation Industry (Supervision) Regulations 1994. In practice however, it is expected that many SMSF trustees will struggle to comply with this timeframe for a number a reasons including: • the legislation allows trustees to ask, and requires members to provide, certain information such as their personal details, information to confirm their identity, and details of the receiving fund. The ‘three business days’ rule commences on receipt of this information. However, to facilitate a rollover out of the fund, the SMSF trustee will still need to calculate the member’s balance at that time. The complexity of the fund’s transactions, whether those transactions are processed regularly among other things will determine how quickly the SMSF trustee can calculate the member’s balance and action the rollover request. • many SMSFs hold relatively illiquid assets. If those assets need to be sold to allow for the rollover out, this can take some time. Even the process of selling listed securities can sometimes take more than three days. • a member may be seeking to rollover their benefits out of the SMSF due to a dispute with the trustees. A disgruntled trustee is unlikely to be any more co-operative with a three- business day deadline than they are now.

Lyn Formica, Heffron Formica is the head of SMSF technical and education services with Heffron. She specialises in providing technical advice on superannuation matters to the accounting, legal and financial planning industries. She is also an accredited SMSF Specialist Advisor of the SMSF Association.

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SMSFs

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Up until 1 October 2021, the use of SuperStream is only voluntary in the event of: a) rolling over benefits from one non-SMSF to another non-SMSF b) employers making contributions into a public offer fund c) the rollover of benefits into or out of an SMSF d) contributions into an SMSF by an employer not a related party to the SMSF trustee(s) 2. From where can an SMSF obtain an electronic service address (ESA)? a) The Australian Taxation Office b) Each member will provide their own ESA c) The provider of banking services to the SMSF d) The SMSF’s software provider 3. What potential penalty can the ATO impose for failure to follow the SuperStream rules? a) Disqualifying one or more offending trustees of the SMSF b) An administrative penalty of up to 20 penalty units per SMSF trustee c) An administrative penalty of up to 40 penalty units per SMSF for each contravention d) Imposing an enforceable Undertaking on offending trustees

So, what is the potential penalty if an SMSF trustee does not follow the SuperStream rules or processes the rollover outside the three-business day requirement? Essentially the trustee will have breached the operating standards of the Superannuation Industry (Supervision) Act 1993. The penalty for such could include an administrative penalty on each trustee of up to 20 penalty units, which is currently $4,440. However, the ATO may allow remission of this penalty, in full or in part, for trustees actively seeking to comply with the law.

What else is changing? Where an SMSF has an ESA and the ESA provider has transitioned to using SuperStream for rollovers, the ATO will begin issuing release authorities via SuperStream. This may occur where a member has excess concessional contributions and has elected to release an amount from their superannuation fund. Sending release authorities via SuperStream is designed to ensure the request is processed faster. It will be important to understand how to access and action a release authority received electronically. Where an SMSF does not have an ESA or the ESA provider has not yet transitioned to using SuperStream for rollovers, paper release authorities will continue to be issued. Whilst there is still [some time] until the 1 October 2021 deadline, it is important for practitioners to familiarise themselves with the change in rules now. If SMSFs are not SuperStream ready by 1 October 2021 this will have the following implications: • a non-SMSF will be unable to process a rollover request to an SMSF • a rollover out of an SMSF may lead to penalties being imposed on the SMSF trustee. fs

4. Which of the following consequences will SMSFs face if they are not yet ready for SuperStream by 1 October 2021? a) They will be unable to process rollovers from non-SMSFs b) Members will be forced to roll over all benefits to a non-SMSF c) The trustees will be required to wind up their SMSF d) Member contributions will be treated as excess contributions and taxed accordingly 5. SMSF trustees will be expected to action a written request for a rollover of funds from an SMSF within three business days. a) True b) False 6. All member contributions to an SMSF will be expected to be made via SuperStream from 1 October 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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Technology:

Digital advice key to keeping members engaged

By Steve Davison, Midwinter Financial Services

Technology

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Low member engagement is an ongoing issue for superannuation funds. With the rising use of digital products and services by Australians, this paper explores how superannuation funds can employ digital technology to improve both their members’ engagement and retirement outcomes. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Digital advice key to keeping members engaged

D Steve Davison

igital advice is set to play a vital role for superannuation funds wanting to engage their growing memberships and steer them toward better retirement outcomes. The era of the mega super fund has just begun, and it is quickly reshaping the value proposition superannuation funds offer their members, including their investment in capability to provide financial help, guidance and advice to more members. There are now at least seven super funds that each serve more than one million members, and more are likely to be created by mergers over the next one to two years. Australian Prudential Regulation Authority deputy chairperson Helen Rowell, in a speech to the Australian Institute of Superannuation Trustees (AIST) Conference of Major Superannuation Funds in May 2021, said funds with less than $30 billion in assets will be uncompetitive and should consider merging. While that level of minimum assets is debatable, there is no question that large funds will increasingly dominate the industry. Effectively engaging and supporting hundreds of thousands, if not millions of members is an opportunity for business growth, and more importantly, an opportunity to set more Australians up for a better retirement. The future of retirement will likely depend on how these mega-

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funds communicate, engage and help their growing memberships through digital and hybrid channels.

Member engagement: The new frontier The problem of low member engagement is not new. The Productivity Commission dedicated 48 pages of its 2018 industry report on this issue alone. The compulsory, or non-discretionary nature of the superannuation guarantee, combined with a preservation age often decades in the future does little to help people make decisions today that could improve their outcomes later in life. The retirement system is also inherently complex, and low levels of financial literacy do not help. This, combined with the perception that professional help – advice – is too expensive for many people, means members will often turn to avenues such as friends and family for help. The result is little engagement, which can have material consequences on retirement outcomes. Superannuation providers also have a good reason to boost member engagement—to attract and retain members. The Treasury Laws Amendment (Your Future, Your Super) Bill 2021 passed both houses of Parliament on 17 June and includes several major reforms to the superannuation industry. The introduction of ‘stapling’ and fund performance reporting are additional incentives for change.

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Technology

The quote

For super funds to prosper, they need engaged members. Better engagement will also help members make better decisions that lead them to a more comfortable retirement.

The Retirement Income Review signals the potential for further change. The interaction of three pillars of the retirement system in superannuation, the Age Pension and assets (including the family home) would see financial advice shift beyond the scope of the intra-fund advice relied on by many super funds today. For super funds to prosper, they need engaged members. Better engagement will also help members make better decisions that lead them to a more comfortable retirement.

Digital is the new normal in a postCOVID world Digital services have been playing an increasingly larger role in how organisations do business and now COVID-19 has turbocharged the pace of transformation. The 2020 McKinsey & Company report How COVID-19 has pushed companies over the technology tipping point – and transformed business forever, based on a global survey of executives found companies have accelerated the digitisation of their customer and supply-chain interactions, as well as their internal operations, by three to four years, as is shown in Figure 1. Meanwhile, the share of digital or digital-enabled products in their portfolios accelerated by seven years.

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Moreover, the McKinsey report said: What's more, respondents expect most of these changes to be long lasting and are already making the kinds of investments that all but ensure they will stick. The rising investment in digital is meeting growing demand from customers. Young digital natives, that is individuals aged 18 to 34, have grown up online and expect their service providers to offer convenient digital ways to interact. According to research by the Australian Communications and Media Authority (ACMA), The digital lives of younger and older Australians, around 92% of young Australians go online to do their banking and other common activities such as shopping or reading. Digital use by older Australians is now catching up, with 77% of older Australians using online banking in the six months to June 2020, compared to just 59% three years earlier, according to the same ACMA research. An estimated 15% of those aged 65 and above started using online legal, financial or other professional consultations for the first time. However, many older Australians may be less than satisfied with their digital experiences as the ACMA research found:

Steve Davison, Midwinter Financial Services Davison is the chief commercial officer at Midwinter Financial Services. His career spans digital platforms, SaaS, fintech, financial advice, sales and corporate strategy.

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Figure 1. The acceleration of digitisation of customer interactions post COVID-19.

The quote

Integrated digital advice is also highly customisable by super funds and can start small with intra-fund advice.

Years ahead of the average rate of adoption from 2017 to 2019. Source: McKinsey How COVID-19 has pushed companies over the technology tipping point—and transformed business forever.

Figure 2. How retirees use their savings: With or without advice

Source: Investment Trends October 2017 Retirement Income Report. Note: 651 respondents.

The majority continue to feel overwhelmed by change in the digital environment, suggesting that increases in the use of technology among this group are potentially the result of the changing, more digitised environment that emerged during the COVID-19 period. In a sense, older people are engaging with technology out of necessity, rather than choice. It underlines the need for intuitive digital experiences that deliver results.

Technology set to drive super fund engagement Even with the assumption super funds deliver strong investment returns for their members, few people are comfortable with the prospect of retirement. Too many retirees draw down the minimum amount possible from an allocated

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pension because they fear running out of savings. Many can afford a better retirement lifestyle, and according to the government's Retirement Income Review: People need better information, guidance and good, affordable advice tailored to their needs. The review quoted research showing that people who do not use a financial adviser at retirement transfer too much of their wealth into cash and similar low-returning assets. This is likely to produce lower retirement incomes, as shown in Figure 2. Super funds have an opportunity to offer accessible and affordable advice to plug this gap. Currently, many super fund members do not seek face-to-face financial advice. With adviser numbers forecast to fall and scant evidence of productivity gains, the cost of face-to-face advice is unlikely to fall.

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The answer for growing super funds is to provide more financial help through digital advice. While there is still much conjecture around the ability to provide digital advice, the technology exists today. Some funds are taking this a step further by integrating advice with their registry and other digital platforms. Digital advice is a key part of that journey. The integration of digital, advice and administration platforms enable member journeys to be executed automatically across the front, middle and back office thus reducing time, cost and the risk of human error. This creates a far more compelling proposition for members. It allows advice to be implemented quickly and accurately and sets the foundation for straight-through-processing. For example, the research above shows that an unadvised member retiring is likely to allocate too much of

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Technology

their assets to cash. A fund can target these 'at risk' members directly as part of a digital advice campaign because the technology is fully integrated into its systems. The member can then go to the fund's website or app, establish their objectives, provide their personal details, and receive personal digital advice about how they should invest their retirement savings. This advice automatically generates a compliant Statement of Advice. Integrated digital advice is also highly customisable by super funds and can start small with intra-fund advice. However, digital journeys should also allow for automated escalations to human advisers based on certain triggers or member needs, and a fund can use the digital advice platform to move between self-directed advice to human supported advice, whether it be face-to-face, phone or video, depending on need, circumstance or preference.

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Technology

The recent example of the early super release scheme during the peak of COVID-19 provides a good case for digital advice. There are plenty of informed views on the scheme and the likely impact for an individual assuming average aggregate or cohort data. However, this is not a substitute for accessible real-time advice at the point of access. Digital advice would enable a member to quickly model the longer-term consequences of withdrawal against an alternative such as paying down a mortgage. This new era of technology will transform members' relation-

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ships with, and perception of their super funds, and many of their advice interactions will become as seamless and self-directed as the relationship they have today with internet banking. Funds now have ability to licence digital advice technologies to offer their members services that rival the best digital experiences available, not just by rival super funds, but across industries. The reward will be more financially literate, engaged members with better retirement prospects that truly value their super funds as custodians of their retirement savings. fs

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Which reason(s) does the author offer for the ongoing low level of member engagement with superannuation? a) Generally low levels of financial literacy b) A preservation age typically well into the future c) The compulsory nature of the superannuation guarantee d) All three reasons 2. According to the McKinsey report, from June 2017 to July 2020 the average share of digital customer interactions in Asia-Pacific: a) rose by 34% b) increased by 31% c) increased by 38% d) rose by 21% 3. R esearch quoted by the Retirement Income Review showed that compared to advised retirees, unadvised retirees allocated a significantly higher proportion of their savings into: a) retirement income products b) non-superannuation investments c) lower-earning assets including cash d) property assets

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4. W hat percentage of older Australians were found to be using online banking in the six months to June 2020, according to ACMA research? a) 77% b) 59% c) 15% d) 92% 5. A PRA deputy chairperson Helen Rowell claims superannuation funds with assets under $30 billion are uncompetitive. a) True b) False 6. Research conducted by ACMA suggests that older Australians are engaging more with technology by choice over necessity. 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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Communications & Marketing:

The psychology of super fund member segmentation

By Simon Russell, Behavioural Finance Australia

Communication & Marketing

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: The paper identifies the types of member information that superannuation funds should collect and use as the basis for segmenting their member base and personalising ongoing communications, while also highlighting the risks in making unwarranted assumptions based on incomplete member data. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

The psychology of super fund member segmentation

S Simon Russell

uperannuation fund members are not all the same but neither are they all entirely different. The more a fund can understand about its members, the more it can personalise its engagement to each of their needs and preferences. The question is how to recognise relevant differences between fund members while also accounting for the practical limits to how much about its members a fund can realistically know. One current problem is that some very useful information about members is not being used enough by some funds. The funds that fail to sufficiently personalise their member engagement should not be surprised when their members ignore their communications. On the flipside, there are some pieces of information that can lead funds to believe they understand their members better than they actually do. Attempts at personalisation that do not match a member’s actual needs and preferences do not help either.

A member’s age: A good start If there is only one piece of information available about a member that would help to understand their needs, it would be their age. For a start, it would indicate how a bunch of important rules apply to that member, such as whether they were eligible to draw a pension. A member’s age also provides a guide to their likely retirement

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planning and broader financial requirements by giving a clue to their remaining life expectancy, their likely remaining period of employment, and their life stage and therefore, for example, the potential for them to have family commitments and/or a mortgage. A member’s age is also useful for understanding some of the key psychological issues that are likely to be most relevant when engaging with each member cohort about their superannuation. For example, how can a fund make the idea of retirement salient for younger members for whom it is, understandably, likely to feel very distant? And how can a fund engage with elderly members when some of them might be suffering from cognitive decline? Unfortunately, some funds do not send different communications to different age groups, even when age is clearly a relevant consideration. This has resulted in 80-year-old members receiving fund communications about planning for retirement, when they are already retired, and to 30-year-old members being informed about the eligibility rules for contributing to superannuation in their 70s which is far from relevant for them. These funds should at least start the journey to personalisation by tailoring their communications for different age cohorts.

A member’s account balance: Becoming increasingly relevant Similar to a member’s age, their account balance can also be directly relevant in applying the law both for members with small accounts for

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Communication & Marketing

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The more a fund can understand about its members, the more it can personalise its engagement to each of their needs and preferences.

Simon Russell, Behavioural Finance Australia

whom fees might be capped, and for those with larger accounts who might approach limits on how much can be transferred into a retirement account. By segmenting based on account size, funds can communicate about these issues only to the members for whom they are relevant. When combined with a member’s age, their account balance also allows a fund to get an idea of each member’s projected retirement income. Funds could use this information to compare against different measures of adequacy and to nudge those with lower projected retirement incomes to contribute more if they can, or potentially to invest more aggressively. Of course, members with lower account balances might not be poor. They might have a second and larger superannuation account that their fund is unaware of, or an unusually large amount of non-superannuation assets. However, with increasing consolidation, the introduction of stapling, and superannuation projected to make up a larger proportion of people’s retirement wealth for younger cohorts, these problem should diminish with time.

A member’s contributions history: Pretty good too As with age and account balance, a member’s contribu-

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tions history speaks directly to the application of different superannuation-related laws that will be relevant for some members. Funds can use a member’s contribution history to gauge whether they should be talking to each member about approaching or exceeding various contributions caps, or about the possibility of accessing a government co-contribution, or receiving a tax benefit. There is no point in funds suggesting that their members take actions that the fund should have reasonable grounds, on the basis of each member’s past contributions history, to believe the member would not benefit from or be in fact ineligible. Informing members that ‘eligibility conditions apply’ might be factually correct and might satisfy a fund’s lawyers, but leaves members wondering whether what the fund has suggested is even worth their trouble investigating. While these types of disclaimers might be unavoidable, to prevent members throwing their hands in the air in exasperation, communications should be only sent to those members who it is believed would benefit, and explain to them why it is relevant for them. Each of the three measures discussed earlier (a member’s age, their account balance and their contributions history) is imperfect. While the inferences a fund can

Russell is the founder and director of Behavioural Finance Australia. He provides specialist behavioural finance training and consultancy services to financial advisers, fund managers and major superannuation funds. His most recent book, Behavioural finance: a guide for financial advisers, is intended to help financial advisers prepare for the behaviouralfinance-related components of the FASEA exam, and improve their client engagement skills.

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Communication & Marketing

The quote

There are some pieces of information that can lead funds to believe they understand their members better than they actually do.

make about its members are likely to be right in most cases, it is easy to imagine exceptions; a younger member could have terminal cancer and, therefore, a shortened remaining life expectancy, while an older member could be starting a new family and need to top up their insurance. Surely there is more to know about members than just their age, account balance and contributions history? Each member has their own personality, goals, aspirations and circumstances. Can we do better? Maybe, but to do so is to enter the danger zone. When moving on from these easier-tomeasure, relevant-for-most-people, big-ticket issues, we will need to tread carefully. There is a danger that our good intentions will actually making things worse.

A member’s gender: Men and women are different, sometimes What if a member’s gender is known? The good news is that this should allow a fund to refine some of the estimates they have made already based on the member’s age, account balance and contributions history. For example, women will have longer remaining life expectancies compared with men of the same age. On that basis, theoretically the fund should encourage a female member aged 40 to choose the same investment option as, say, an otherwise equivalent 36-year-old male. However, while this difference in life expectancy is important at a population level, at a member level this differ-

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ence is arguably swamped by the uncertainty about how long each individual member will actually live. Women might live a few years longer on average, but there is a lot of variability around that average, for both men and women. Given this uncertainty, it seems unreasonable to expect a segmentation model to be so granular that a fund would communicate differently to 40-year-olds and 36-year-olds about their investment options simply on the basis of their different life expectancies. The benefits of knowing a member’s gender do not stop there. This knowledge might also enhance a fund’s understanding of a member’s likely future income. If women are more likely to have their income disrupted by family responsibilities or tend to work in industries with less opportunity for income growth, then there is an increased risk of women with small account balances retiring with inadequate savings and financial security. Arguably, there is therefore more reason to encourage these women to contribute more to superannuation if they can, or to invest more aggressively for the long term. To be clear, this gender overlay is a refinement rather than a replacement to the segmentation model based on age, contributions history and account balance. If it is known that a member is a high-income-earning 50-yearold with a large account balance, the fact that she is also a woman is likely to be less relevant to her future financial security. What about the fact that women have different person-

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alities? Or that women are less confident managing their finances? Or that women tend to have lower financial literacy than men? Sure, each of these things is correct on some measures, in some contexts, to some extent. The problem is that while these types of differences are measurable at a population level, there tends to be a large overlap between the genders. While women might be less confident financially overall, there are plenty of men who lack confidence in managing their financial affairs, or who have low financial literacy. Some women have higher financial literacy than most men. While there is more to gender differences than just the factors mentioned earlier, when it comes to superannuation, the fact is that most people have limited knowledge, regardless of whether they are male or female. If all members are engaged using good behavioural principles, including using simple language, clear visual representations, appropriate layering and chunking of information, designing good choice architectures, and creating frictionless processes with just-in-time action-oriented financial education, then all members can benefit.

A member’s risk aversion: Important, but often too unreliable Unfortunately, while a member’s risk aversion is theoretically fundamental to their investment choice, it is practically difficult to measure. For a variety of reasons, even many of the risk-profiling questionnaires used in face-to-face financial advice conversations are inadequate. Across the broader industry, there is no shortage of ways to improve how we understand and communicate risk. A member’s risk tolerance can be thought of like a personality trait. Even when each of the members’ personalities is known, for instance if each member had completed a personality profiling questionnaire, the correlation between the personality attributes and those members’ behaviours would still be modest. As Kahneman, Sibony & Sunstein point out in their recent book Noise: A Flaw in Human Judgment of May 2021: The validity of broad traits for predicting specific behaviours is quite limited; a correlation of 0.30 would be considered high. Decision-making research demonstrates that in the face of unreliable information we should be hesitant in moving away from what is likely to be best for most members, sometimes referred to as ‘statistical base rates’. When it comes to risk, generally speaking, younger members should invest more aggressively, older members less so. Given that the consequences of deviating from this maxim can be extremely dangerous, only on the basis of reliable information, preferably in the context of a financial advice conversation, should it be comfortable to suggest otherwise.

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Rather than preferring one channel or another per se, perhaps a member likes doing some online research via a fund’s website before giving the fund a call if and when needed. Despite noticing that this member rarely calls them, it would be prudent for their fund to still offer them both online and in-person engagement options. But what if some members had not engaged with their fund via any channels at all? Perhaps it could be assumed that these members feel overwhelmed and so to reduce this feeling give them only one thing to think about at a time, and make things simple to understand and easy to do. This sounds reasonable; should we do that with all members anyway?

Retention risk: Not as obvious as it might seem Finally, what if a fund has noticed a cluster of member activity that has historically tended to precede those members rolling into a new fund? Should the fund then identify other members who display a similar set of activity, anticipate that these members might be thinking of rolling out also, and give them a call? Perhaps these members falsely believe that they need to change funds in order to switch their investment options, for example, a false belief that a call could disabuse them of, thereby preventing their move. Maybe, but it depends on: • How reliable is the prediction that the member will roll into a new fund? Will 90% of the members who are identified as a retention risk change funds in the near future? Or will it be only 10%? While 10% is a lot higher than the chance of a randomly selected member

Communication preferences: Still need to give options What if some members have visited the fund’s website, some have contacted the call centre, and some others have clicked on a link in the most recent email sent them? Can this information be used to communicate with members via their preferred channel? Yes, it can. However, we would also have to recognise that people’s preferences are likely to vary at different times, for different types of information, in different circumstances. Put differently, people’s preferences and behaviour are often context-dependent and, as psychologists would say, ‘unstable’.

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Communication & Marketing

changing funds, it would still mean that 90% of the calls the fund made were to members who were not actually going to change funds at all. • How effective are the calls at preventing members who would otherwise change funds from doing so? Conversely, how often does a call to a member who was not going to change funds actually lead them to do so by prompting them to make a decision and take action, or by making them feel uneasy or suspicious about their fund ‘stalking’ their online activity? Modelling cannot be simply relied upon to answer these questions. By its nature, modelling is likely to ‘over-fit’ to match historical patterns of member behaviour. This means that to some extent it is actually less able to predict future member behaviour than it seems. The fact that a member ultimately did not switch funds could be the result of the call the fund made to the member, or it could be the result of the model misidentifying the member as a retention risk in the first place. To determine if the retention strategy was effective requires calling a sample of members, not calling other members who display a similar pattern of behaviour, and comparing the results. In short, a controlled study needs to be run. Drawing from experience in other financial services domains such as with financial advice clients and mortgage clients, the uncertainties related to identifying churning clients, and the cost and limited efficacy of the retention initiative can easily result in them causing more harm than good. As counterintuitive as it might seem, sometimes it is better to do nothing. Alternatively, rather than doing nothing at all, funds could choose

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to call only those members for whom the quality of the prediction and the efficacy of the initiative are both high. At the extreme, this could involve responding to members who request information about changing funds. Analysing the text of member conversations could help to provide the richness of insight needed to boost the reliability of the predictions. By providing member engagement that is relevant for each member’s needs and preferences more generally, funds can reduce the likelihood of members wanting to change funds in the first place. The broad conclusion from each of these measures, beyond member age, account balance and contributions history is that they probably offer some benefits, but that each presents risks. There is a risk that they lead a fund to believe that they know more about each member than they actually do, and make unwarranted assumptions based on increasingly less reliable information. More detailed segmentation models that incorporate a greater number of factors are not necessarily better. In fact, when talking about predictive models more generally, research shows that simple models are often the best. As Kahneman et al. state in Noise: A Flaw in Human Judgment: Complex rules will often give you only the illusion of validity and in fact harm the quality of your judgments. It is not just that simplicity is a virtue, it is that simple models are often more accurate. Partly this is because, according to Kahneman et al. The advantages of true subtlety are quickly drowned in measurement error. Asking a member’s age is easy, whereas measuring their individual preferences is tricky. Explaining to a member a complex set of

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factors that underpin an assumption that has been made about them might be trickier still. Once these limitations are recognised, what else can funds do?

Just-in-time behavioural segmentation If member behaviour is context-dependent, perhaps the most reliable approach is to engage with them in the specific contexts in which their funds see them behaving. For example, if a fund sees a member failing to complete a process, that fund could ask what support they could give to help the member succeed. It might be difficult to predict whether a specific member has a mortgage and family and, therefore, might need more insurance. However, if a fund sees a member attempt but fail to complete an insurance application form, then the fund can make a strong prediction that the member has unmet insurance needs. Given that they are often a conduit to satisfying a member’s needs, the design of forms and the engagement around them rarely gets the attention they deserve. Alternatively, if a fund sees one of its members attempting to switch their investment options via the fund’s website, the fund could ask what nudges or frictions it could apply to help the member to avoid making a rash choice which could potentially cause adverse longterm consequences. The 25-year-old who is trying to switch to cash, for example, could be prompted to call the fund or to seek advice. In each of these cases, members pop in and out of micro-segments in which they can benefit from targeted assistance. Because that assistance aligns with the Design and Distribution Obligations, it is something that funds should already be at least preparing to implement.

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Communication & Marketing

Self-selection Another approach that recognises the difficultly in knowing members’ individual circumstances, preferences and needs, is to make it easier for them to self-select the types of engagement that suit them. Members can be guided through choices with decision-trees, whereby their responses to simple questions help them to navigate through complexity. However, too often funds provide their members with lists of features or lists of considerations, and leave the member to discern how to assimilate those disparate pieces of information into a decision that is relevant for them. When funds formulate this type of engagement, a subtle but important mindset shift is required from just giving members the information required to make a decision, to helping members actually make the decision.

Conclusion The broad conclusion from all this is that some funds have not gone far enough with segmenting and personalising their engagement, while others have potentially gone further than their knowledge of their members warrant. By focusing on the things that are more certain, funds can maximise the benefit for the majority and reduce the risk of making unwarranted assumptions. Where gaps in a fund’s understanding of their members inevitably persist, by being transparent about it, by giving members options, and by helping them to exercise choices that suit their individual needs and preferences, members are allowed to add the nuance that the segmentation lacks. fs

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Communication & Marketing

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CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. In terms of avoiding unwarranted assumptions about member segments, the author recommends that super funds: a) explore the non-mainstream metrics to achieve an edge b) focus on the certainties that benefit most members c) prioritise disclosure obligations over other information d) realise that personalised communications are best avoided 2. In relation to gender and member segmentation, the author highlights that: a) the same conclusions often apply to men and women b) gender has major flaws when applied at a population level c) the gender overlay should replace age-based segmentation d) different conclusions apply consistently for men and women 3. T he author believes that super funds need to understand that members’ communications preferences are: a) highly predictable b) unworkable c) fluid d) largely predetermined

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4. W hat consideration does the author highlight in relation to retention risk in the context of predictive modelling? a) A fund may think it knows more about a member than it does b) Segmentation models with numerous factors are not always better c) Subtleties can be engulfed by measurement error d) All of the above 5. T he author sees risk aversion as relatively straightforward to quantify. a) True b) False 6. According to the author, a member’s account balance as an insightful metric is set to strengthen in the future. 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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Taxation & Estate Planning:

Avoiding mistakes with superannuation nomination beneficiary forms

By AIA Technical and Education Centre of Excellence (TECE) Team

Taxation & Estate Planning

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CPD Earn CPD hours by completing the assessment quiz for this article via FS Aspire CPD. Worth a read because: Awareness of the requirements for a valid superannuation death benefit nomination is vital to the efficient distribution of member benefits on death. These requirements, alternative nomination types accepted by a fund and how death benefits are paid in absence of a valid nomination are set out in the paper. Visit www.financialstandard.com.au and click ‘FS Aspire CPD’ in the menu or call 1300 884 434 to gain access to the platform.

Avoiding mistakes with superannuation nomination beneficiary forms

AIA Technical and Education Centre of Excellence (TECE) Team

Superannuation death benefit dependants

t is generally well understood that an individual is unable to include directions in their Will in relation to the distribution of death benefits by a superannuation fund trustee. Instead, individual members may nominate a beneficiary or legal personal representative (LPR) to receive their superannuation benefits in the event of their death. Unfortunately, many superannuation fund members are not aware of this limitation, or opportunity. For a superannuation fund trustee to accept a member’s nomination of beneficiary, the member must nominate either a beneficiary who meets the definition of dependant in the Superannuation Industry (Supervision) Act 1993 (SIS Act), or their LPR, who may then distribute the proceeds in accordance with the Will. SIS dependants include the member’s spouse including defacto and same sex partners, children of any age, a financial dependant, and any person with whom the person has an interdependency relationship. The LPR will either be the executor of an estate with a valid Will, or the administrator of an estate if there is no Will.

A superannuation death benefit can be paid directly to SIS dependants of the member, thereby allowing the distribution of the benefit to avoid the estate. This is a helpful strategy when there is risk of a challenge to a member’s Will, or if there is no Will at all. The death benefit can also be directed to the member’s LPR to deal with on behalf of the estate. Directing benefits to the LPR may be appropriate if there is a Will, depending on the member’s estate plans. This strategy may be beneficial, for example, if testamentary trusts are part of their financial plan, or where there are no SIS dependants to whom the member wishes to direct their benefits. A member may nominate an individual both as their LPR and as a dependant beneficiary in their own right, being careful to indicate in which capacity the individual is acting. The member’s Will should line up accordingly.

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Methods of nominating a beneficiary A member can direct or influence a fund trustee as to how they want their death benefits distributed by completing a non-binding, binding, or non-lapsing binding nomination of beneficiary form, a rever-

FS Super

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Taxation & Estate Planning

The quote

Some superannuation funds offer nonlapsing binding nominations that can apply indefinitely and do not require updating every three years.

sionary pension nomination, or in the case of an SMSF, executing a trust deed amendment. It should be noted that not all funds will provide all options to their members, and completion of these forms is best done by members in conjunction with their financial adviser and an estate planning lawyer, particularly in the first instance.

Non-binding nominations Where a non-binding nomination is used, the trustee of the superannuation fund has discretion to pay the benefit to one or more SIS dependants, or to the deceased’s estate and that includes the decision on who to pay and in what proportion rests with the trustee. The trustee will make their decision in accordance with the sole purpose of superannuation, which in essence is to fund for a member’s retirement or to support a member’s dependants in the event a member dies prior to retirement, after taking into account all of the matters it considers to be reasonable. These matters may or may not include the member’s non-binding nomination, their Will or any other evidence provided to the trustee, including that of claim-staking by dependants.

Binding nominations In contrast to a non-binding nomination, a binding nomination which is valid at death must be followed by the trustee. A valid binding death benefit nomination provides certainty for a member by requiring the superannuation fund trustee to pay the superannuation death benefit directly to their nominated beneficiary/s or their LPR.

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A binding nomination is only valid if all of the following conditions are satisfied: • it is in writing • the proportion of the benefit to be paid to each beneficiary is readily ascertainable • it is signed and dated by the member in the presence of two witnesses who are each at least 18 years of age and not a nominated beneficiary on the form • it is within three years of the first nomination, last confirmation or amendment, unless the trust deed/ governing rules fix a shorter expiry period • the nomination has not been revoked by the member • the beneficiary is the LPR or a SIS dependant, at the time of nomination and at the date of death. A member may revoke their nomination at any time, in writing. The nomination can be accepted by the trustee if: • each death benefit nominee is a SIS dependant, or LPR of the member • the proportion to be paid to each nominee is certain or readily ascertainable • the notice is in the approved format. It is important to note that while a trustee must clarify information provided in a nomination of beneficiary form, if it is not sufficiently clear to allow the trustee to pay the benefit this does not mean that the trustee, on receipt, will assess the validity of each individual as a SIS dependant or LPR as indicated by the member. Often, it will only become evident that a nomination is invalid once assessed following the death of the relevant member. A particular nominated beneficiary may no longer be a

THE JOURNAL OF SUPERANNUATION MANAGEMENT•

Taxation & Estate Planning

The quote

Superannuation beneficiary nominations, whether binding or non-binding, are fund-specific and are not duplicated whenever money is rolled over within the superannuation system.

dependant at the time of a member’s death. In this case, the governing rules of the relevant fund will determine if the entire nomination fails or if only the nomination of the non-dependant fails. The governing rules and SIS Act requirements will determine if the benefit must be paid as a lump sum or if the trustee will offer a beneficiary the ability to receive the benefit as a pension or a combination of both.

Non-lapsing binding nominations Some superannuation funds offer non-lapsing binding nominations that can apply indefinitely and do not require updating every three years. Keeping these up to date is imperative as the nomination may remain valid despite changes in a member’s circumstances such as separation. On the other hand, the nomination, at least part of it, will be invalid to the extent that any nominated beneficiary is no longer a SIS dependant at the time of death.

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moved in certain circumstances subject to the governing rules. In the event that this occurs generally the pension would need to be commuted and rolled over to a new income stream. Due to the complexities of relevant legislation, most funds will restrict reversionary pensioners to individuals that are both SIS Act and Income Tax Assessment Act 1997 (ITAA 1997) dependants. This includes a current spouse, including same sex or de facto, or a dependent child that is under age 25 or permanently disabled.

No nomination If no nomination is made, the death benefit will be paid in accordance with the superannuation fund rules, resulting in either the trustee exercising its discretion or automatic payment to the LPR, which again may be problematic either way.

Reversionary pensions

Nominations of beneficiary are fundspecific

When a member commences a superannuation pension they may have the option to either nominate a beneficiary or to have a reversionary pensioner. A surviving reversionary pensioner will, at least initially, automatically continue to receive pension income payments upon the member’s death. However the reversionary pensioner may still opt to commute the income stream to a lump sum, subject to the trust deed and particular pension rules. A reversionary pensioner is generally nominated at the commencement of an income stream and can only be re-

Superannuation beneficiary nominations, whether binding or non-binding, are fund-specific and are not duplicated whenever money is rolled over within the superannuation system. So, if a member has more than one fund, then a separate nomination form needs to be submitted to each respective fund. One instance in which this is often missed is when the member is using an enduring partial rollover facility to transfer an amount from their accumulation fund to an insurance-only superannuation fund, to pay for their

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life cover in super. In this case the source, or originating, super fund needs a valid nomination of beneficiary form to lock in a beneficiary for the accumulated super benefit in that fund, and the recipient fund that is housing the insurance policy also needs a valid binding nomination form to lock in the beneficiary/s for the life insurance proceeds that will be paid out as a superannuation death benefit if a claim is paid. In the absence of a valid binding nomination at the time of death, the trustees of the respective funds will exercise discretion to determine the superannuation dependants and ultimate beneficiaries of the superannuation death benefit. For situations such as just described, this could lead to two different outcomes, conflict amongst potential recipients and the risk that the capital may end up in the wrong hands. Finally, it is important to regularly review even non-lapsing binding nominations, especially around major life events. For example, a binding nomination in favour of a married spouse is still valid if death were to occur whilst the member and their spouse are separated. It is only upon divorce that any prevailing nomination becomes invalid. fs

Taxation & Estate Planning

CPD Questions Earn CPD hours by completing this quiz via FS Aspire CPD. 1. Whom would be accepted as an eligible beneficiary to a member’s superannuation death benefit? a) A financially-dependent father b) The 45-year-old daughter c) Their defacto d) All of the above 2. One of the conditions for a binding nomination to be considered valid is: a) it has been witnessed by a JP b) only a SIS dependant(s) are nominated as beneficiary(ies) c) each beneficiary’s entitlement is, or can be, clearly determined d) it is incapable of being revoked by a member anytime in the future 3. If a nominated beneficiary is no longer an eligible beneficiary upon death of a superannuation fund member then: a) The member’s entire Will becomes invalid b) The balance of the nomination form may remain valid if fund rules permit c) The entire beneficiary nomination is automatically invalidated d) A replacement beneficiary can be nominated if they are a SIS dependant 4. Most superannuation funds limit who can be nominated as a reversionary pensioner to individuals who are: a) dependants under both the SIS Act and ITAA 1997 b) financially dependent upon the member c) dependent children who are under 25 or permanently disabled d) the current spouse including same sex or defacto 5. Upon death of an individual who failed to have a valid Will, the administrator appointed to their estate is their LPR. a) True b) False 6. An advantage of a valid binding beneficiary nomination form is that it binds the trustees of each super fund in which a member holds an account. a) True

b) False

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Quick reference

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News and opinion

White papers

AMP 10

Retirement What Australians need from their superannuation

AustralianSuper 6

Indexation of transfer balance cap and contribution caps

Aware Super

Solving the longevity puzzle

Association of Superannuation Funds of Australia

Australian Prudential Regulation Authority

7 10

CalPERS 12

Catholic Super

36 40

8, 13

Essential Super

SMSFs Six member SMSFs

FirstChoice Employer

SuperStream and SMSFs

Frontier 7

GigSuper 12 HESTA 8

Technology Digital advice key to keeping members engaged

Hostplus 8

Intrust Super

LGIAsuper 12

Communications & Marketing The psychology of super fund member segmentation 50

The McKell Institute

Legalsuper 10

Northern Trust Asset Management

6 13

Parametric 9 Roy Morgan Russell Investments

Taxation & Estate Planning Avoiding mistakes with superannuation nomination beneficiary forms

Spaceship 9 Statewide Super

SuperEd 7 Tidswell Financial Services

UniSuper 13 Willis Towers Watson

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