Super Review - June 2010

T H E L E A D I N G I N D E P E N D E N T J O U R N A L FO R T H E S U P E R A N N U AT I O N A N D I N S T I T U T I O N A L F U N D S M A N A G E M E N T I N D U S T RY JUNE 2010

Volume 24 - Issue 5

Super industry apolitical on super tax 10 BUDGET ROUND-UP Hockey under fire over SG opposition

In the wake of industry funds comments about the Federal Government’s proposed resource industry super profits tax, the superannuation industry is making clear it wants no part of a political debate. MIKE TAYLOR reports.

S 12 DEATH BENEFITS Avoiding the sting of regulatory and legal troubles

14 ASSET ALLOCATION

Print Post Approved PP255003/01111

Why investing in the past is a road to nowhere

18 EQUITIES The question marks over the outlook for international equities For the latest news, visit superreview.com.au MANDATES

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NEWS

confined to the superannuation guarantee,” one source said. “Everyone was caught off-guard when Whiteley started in on the mining companies.”

Immediately following the meeting with the Government in Canberra, Whitely said the mining companies should cease their political campaign and enter into discussions with the Government.

By comparison, IFSA remained silent while ASFA’s head of research, Ross Clare, confined ASFA’s comments to the superannuation guarantee.

ASFA chief executive Pauline Vamos, who was overseas at the time of the Canberra talks, confirmed that her organisation did not wish to become embroiled in the super profits tax debate.

She said she believed it was inappropriate to adopt a position on the tax when the details were not clear but that funding an increase in the superannuation guarantee represented a very small proportion of what might ultimately be raised.

One senior figure whose company is a member of IFSA said views remained strongly divided in the superannuation

enior superannuation industry officials have sought to place distance between their organisations and the stance adopted by the Industry Super Network’s David Whiteley over the Federal Government’s resource industry super profits tax.

Whiteley succeeded in causing consternation within some sections of both the Investment and Financial Services Association (IFSA) and the Association of Superannuation Funds of Australia (ASFA) when a statement he made following industry group discussions with the Federal Government were interpreted as having been made on behalf of the whole of the super industry.

Super Review has been told that the presence of ASFA and IFSA representatives at the meeting with the Government was predicated on their organisations’ support for the Budget announcement that the superannuation guarantee would be lifted to 12 per cent and not their support for the resource super tax.

“There was an agreement going into the meeting with the Government that any public statements would be 3

EDITORIAL

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ASSET ALLOCATION

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EQUITIES

Pauline Vamos

Everyone was caught off-guard when Whiteley started in on the mining companies.

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APPOINTMENTS

industry on the Government’s approach to the resource companies super tax.

“The debate is ongoing and no one should be claiming a fixed industry position on this,” he said.

It is understood the approach taken by Whiteley in the wake of the talks with the Government has caused some within both IFSA and ASFA to question the merit of further ‘joint’ industry approaches involving the outspoken industry funds spokesman.

It seems that joint industry approaches will, if they occur at all, be more likely to involve ASFA, IFSA and the Australian Institute of Superannuation Trustees, which is regarded as having a less doctrinaire approach. SR 23

EVENTS

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Slight majority backs super profits tax

By Chris Kennedy MEMBERS of the investment community attending the Legg Mason Investment Symposium in Sydney have shown a slight majority support for the Government’s proposed resources

super profits tax.

Although 81 per cent believed such a tax would have a negative impact on client investor portfolios, 60 per cent still agreed with the concept of the proposed tax.

Legg Mason Australian equi-

ties chief investment officer Reece Birtles said Australians understand the merit of a super profits tax on the extraction of Australian resources.

“Investor concerns are around the very low return on investment hurdle for taxing super profits and

Cooper continues pressure for fund mergers SUPERANNUATION funds will remain under pressure to pursue scale through amalgamation if the chairman of the Cooper Review, Jeremy Cooper, has his way.

Cooper has used a speech to the Committee for the Economic Development of Australia (CEDA) to restate his view that the pursuit of scale in the superannuation industry will drive greater efficiency and therefore lower fees.

Citing a Deloitte report commissioned by his review panel, he said it provided empirical data that scale matters in super.

“Specifically, the Deloitte report showed that a member with an account balance of only $25,000 in super would be paying around $200 a year and in some cases less than half that in total costs under the MySuper proposals,” he said.

the impact on Australia’s sovereign risk rating and future investment given the retrospective nature of the change,” he said.

The surveyed audience included financial advisers, investment managers, asset consultants and research analysts. SR

Reece Birtles

April returns hit by sovereign debt worries

Jeremy Cooper

Cooper said the Deloitte report had shown once again the power of economies of scale in reducing per member investment and operating costs.

However, Cooper acknowledged that there were impediments to achieving that scale and cited instances where fund mergers had not occurred because boards could not agree on matters as relatively trivial as the name of a fund or the number of trustee directors.

“More seriously though, there are systems issues, taxation issues and legal technicalities that can hinder efficient mergers, and the review is looking at solutions to some of these,” he said. SR

CONCERNSabout sovereign debt and the value of the euro appear to have dampened Australian superannuation fund returns, according to the latest data released by Chant West.

The Chant West data revealed that the median superannuation growth fund remained flat in April, returning negative 0.1 per cent for the month.

The company’s analysis noted that the month had started off strongly but markets had then retreated due to concerns about Greek sovereign debt and the possible contagion of other economies.

Chant West principal Warren Chant said there were signs the global financial crisis had still not fully played out.

“Markets were generally flat in

April, but already in May we’ve seen more nervousness and some very extreme movements,” he said. “Nevertheless, at the end of April growth funds were up a healthy 14.8 per cent for the financial year to date, and members are still certain to see the first positive financial year return since 2006-07.”

Chant said that the negative result in April meant that the positive financial year number would not be as strong as it seemed likely back in March.

He said the fortunes of industry funds and master trusts had continued to reflect the performance of listed share and property markets, meaning that industry funds had outperformed their rivals for the third time in the past 14 months. SR

Mandates Recieved by National Australia Bank AQR Wholesale Delta Dimensional Investec Asset Management

Type of mandate Master custody and investment reporting services Hedge fund Australian equities Emerging market equities

Issued by QSuper Tasplan Medibank Private AMP Capital Investors

Amount NA $21 million $45 million $150 million JUNE 2010

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Solid Tower undertakes capital raising INSURER Tower Australia has announced a capital raising on the back of what it describes as a solid first half result, reporting a 5 per cent increase in net profit to $28.4 million for the six months to 31 March.

The capital raising takes the shape of a new one-forseven renounceable pro-rate share entitlements issue aimed at raising $96 million, which the company said would be used to strengthen its capital base and position it “to take advantage of any opportunities that may arise”.

Tower chief executive Jim Minto used the first-half results to express concern about the shape of market consolidation occurring within the life and superannuation industries.

He said he remained concerned that large-scale financial services consolidation could

Jim Minto

restrict the right or ability of consumers through their advisers to pick their life insurers from a range of companies.

“We welcome the Australian Competition and Consumer Commission’s recognition that competition in the platform space may be an issue – although it has stopped short of actively encouraging multiple life insurance offers on platforms to help overcome the obvious

downside of less insurance choice as platforms continue to consolidate,” Minto said.

He said Tower believed the technology existed to provide consumers with choice of life insurance on platforms and the present system was an area of restricted competition, which was of major concern.

Looking at the company’s underlying performance through the half, Minto said business growth had been achieved across all channels but that there had been some slowing in growth rates across the retail advice market in the first quarter.

He said the company had been successfully bedding down its group insurance mandate with AustralianSuper, and had “concurrently continued to win new mandates and maintain high levels of service to existing customers”. SR

Medicare Australia’s performance scrutinised MEDICARE Australia, the agency the Federal Government has appointed to act as the superannuation clearing house for small employers, has received a critical analysis from the Australian National Audit Office (ANAO) regarding its handling of the Pharmaceutical Benefits Scheme (PBS).

An ANAO report, tabled in the Parliament, broadly endorsed Medicare’s administration of the PBS – but it also pointed to a number of deficiencies, including the accuracy of claims processing and performance. It also found that better operational guidance should be provided to key decisionmakers.

The ANAO report has been tabled at a time when other specialist superannuation clearing house operators have questioned the ability of

Medicare to handle the task demanded of it by the Government.

Among the issues raised by the ANAO was its observation that Medicare Australia had adopted a practice “of adjusting Medicare Australia’s authority approval records to accord with the medicines actually dispensed in cases where there was a mismatch”.

The report said this practice carried with it the risk of failing to react to, or manage, evidence of incorrect dispensing of medicines.

It noted that Medicare had advised that it intends to address the issue through its nationally consistent quality control action plan, which it has recently endorsed.

Medicare has responded to the ANAO report by accepting the majority of its recommendations, some of which it said had already been implemented. SR

LUCRF Super free to offer advice LUCRF Super has announced it will soon introduce a financial advice service in a bid to improve member services, following in the steps of HESTA and other industry funds.

The announcement follows the Australian Securities and Investments Commission’s approval to extend the fund’s Australian Financial Services Licence.

LUCRF Super chief executive officer Greg Sword said the new licence would allow the fund to provide a higher level of assistance to its members in a cost effective and relevant way.

“One of the driving forces behind this decision was that during the global financial crisis we noticed that some members made changes to their investments and looked to us for financial advice,” Sword said.

“Our innovative approach features the majority of advice on super being provided as a free integrated service. More intricate financial advice may attract a fee, however, this will be limited only to what is necessary,” he added. SR

Hostplus expands presence HOSPITALITY industry fund Hostplus has continued with the expansion of its regional presence, announcing the opening of offices in Parramatta and Darwin.

Hostplus chief executive David Elia confirmed the office openings and said they represented a response to continued growth for the fund.

“Local offices in Darwin and Parramatta provide a platform for further growth,” he said.

Elia said the Darwin office gave Hostplus a presence in every state and territory in Australia. SR SUPERREVIEW

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David Elia

NEWS 5

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Tasplan and Legalsuper embrace unit pricing TWO major Australian funds, Legalsuperand Tasplan, have announced a complete transition from crediting rates to unit pricing, effective from 31 March, 2010. All member accounts are now expressed in units, and unit prices are issued weekly.

Legalsuper chief executive Andrew Proebstl said the board had decided that unit pricing was the best practice within the industry and a more timely method of attributing investment earnings to members.

“Relative to crediting rates, unit pricing provides

our members with a more up-to-date valuation of their superannuation balance,” Proebstl said.

Tasplan chief executive officer Neil Cassidy said the transition from crediting rates to unitisation would add to the

fund’s transparency.

“The move was designed to keep Tasplan operating at best practice standards, whilst also providing improved reporting services for members,” Cassidy said.

“Members and regulators want funds to be more

accountable,” he added.

Proebstl explained that unitisation also brought greater equity across members through the application of a buy/sell spread “that quarantines the costs of buying and selling investments to

those members who transact rather than spreading those costs across all members, as often is the case with crediting rates”.

Both chief executives stated the transition was an important and complex project for their funds. SR

Andrew Proebstl

Russell ramps up admin RUSSELL Investments has moved to end its administration outsource model with IBM, bringing 70 roles in-house backed by the company’s offshore back-office capabilities.

Russell Australia and New Zealand managing director Chris Corneil said the move to expand the Australian Administration Centre had been driven in part by the direction of government policy.

The company said the member administration back-office functions currently provided by IBM would be progressively transferred to the new offshore centre from October to December this year, following a period of parallel processing.

The insourcing will see the Australian Member Administration Centre move to new premises in Sydney.

Russell said it was actively pitching for new administration business. SR

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JUNE 2010

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500 convicted on tax and super issues NEARLY 500 people were convicted for tax and superannuation offences in the first quarter of 2010 alone.

The offences ranged from failure to lodge forms to instances of fraud, such as GST refund fraud.

The Australian Taxation Office (ATO) stated that in the last financial year it conducted 16,000 audits, reviews and investigations, which resulted in the successful prosecution of nearly 3,000 cases of non-compliance.

Tax commissioner Michael D’Ascenzo said those who commit serious fraud, fail to declare all of their income or fail to meet their obligations cheat the majority of the community who do the right thing.

Michael D’Ascenzo

“We have a range of ways to detect people who seek to avoid their tax and superannuation responsibilities by not

lodging returns, through tax evasion or criminal fraud,” he said. “Methods of detection include data matching, comparing third party information and analysing industry norms.”

The ATO’s track record for convictions is expected to improve this financial year, with the investment in new technology that will help identify sophisticated as well as basic scams.

“These tools are proving to be extremely efficient at identifying suspect claims for refunds and ensuring that Australia’s revenue is protected,” D’Ascenzo said.

Examples of the convictions between 1 January and 31 March include the sentencing of a New South Wales business-

man to three and a half years imprisonment for committing GST fraud. He submitted a false Business Activity Statement (BAS) and tried to claim $500,000 in his role as a company director.

In another case, a Victorian woman was found guilty of GST fraud after lodging false BASs under three different Australian Business Numbers and receiving over $233,000 in refunds, following which she attempted to make a further claim of over $132,000. She was found guilty on all four counts and sentenced to 20 months imprisonment.

Subject to good behaviour, she will serve six months in jail and pay a $1,000 bond. SR

NAB awarded QSuper mandate NATIONAL Australia Bank (NAB) has been awarded a master custody and investment reporting services mandate by Queensland-based superannuation fund QSuper.

The mandate was announced by QSuper chief financial officer Michael Cottier, who said it followed an extensive review process that was started in 2009 and conducted by QSuper’s Investment Services team and Mercer division, Mercer Sentinel.

Cottier said that NAB had been awarded the mandate on the basis of having clearly understood the required services

Primacy remains with super, says Vamos THE Government’s decision to deliver tax savings on deposits, but at a less attractive rate than applies to superannuation funds, has been welcomed by the Association of Superannuation Funds of Australia (ASFA).

Commenting on the Federal Budget, ASFA chief executive Pauline Vamos said that the concessional tax treatment offered to bank accounts and other savings was at a less attractive level than that applied to super.

“Superannuation funds justifiably retain their tax-prepared status when compared to other savings vehicles,” she said.

Vamos said that superannuation was the only vehicle that could ensure preservation of savings until they were really needed.

“Getting the tax treatment of non-superannuation savings is important, but even more important is having the right incentives and support for superannuation,” she said. SR SUPERREVIEW

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for the fund’s operating model.

“Appointing NAB as custodian will allow QSuper to manage its custody relationship directly and provide our members with a more efficient, cost-effect investment administration platform,” he said.

Cottier said two recent decisions had contributed to the fund establishing a direct relationship with NAB; a Board of Trustees decision to create greater internal control and the granting of a Registrable Superannuation Entity licence by the Australian Prudential Regulation Authority (APRA). SR

AMP consolidates super offering AMP Financial Services has launched what it is describing as an “all-in-one super and retirement product”, providing a catalyst for the closure of four of the company’s super products.

The company announced to the Australian Securities Exchange (ASX) that it was launching AMP Flexible Super at the same as streamlining its corporate super product range.

It said the change reduced the number of AMP superannuation and pension products on offer from six to two.

Commenting on the move, AMP Financial Services managing director Craig Meller said the changes were in response to changing customer demand and positioned the company for growth.

He said AMP Flexible Super would provide customers with one account for life and catered to AMP’s broad customer base by offering a single entrylevel option, which could then be added

Craig Meller

to through different life stages.

Meller said AMP Flexible Super replaced the existing retail and employer versions of the AMP Flexible Lifetime superannuation retirement products.

He said these products together with corporate super products CustomSuper and SuperLeader would be closed to new business from 1 July. SR

Prime Super urges caution on SG increase PRIME Super, the superannuation fund heavily exposed to rural and regional Australia, has qualified its support for the Government’s proposed lifting of the superannuation guarantee to 12 per cent, arguing care needs to be taken with respect to small businesses, partnerships and sole traders.

The fund said that while it supported any measures that improved the superannuation situation of its members, it believed careful consideration needed to be given to how the increase was phased in, particularly for small business.

“It is essential that the implementation of this change does not overly burden employers or solely impact employees,” the fund’s chief executive, Lachlan Baird, said.

“Small businesses are the lifeblood of rural and regional communities and we would urge the Government to consider the impact on them as well as large corporates,” he said. SR

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Investor education the key IF the Government and the industry continue to focus on lowering fees without addressing investor education levels, investors are going to end up even worse off, according to Australian Unity group executive for investments David Bryant.

At a luncheon in Melbourne, Bryant noted that there was no discussion from the Government and the industry regarding educating investors about super and investments.

There hadn’t been a single suggestion in all of the reviews to fix investor education, Bryant said.

In a later interview with Super Review, Bryant said that if the Government

was going to raise the super guarantee, both the industry and the Government needed to fix the problem of investor education.

“The two things that people are concentrating on are price and choice, and if we are serious about going to 12 per cent super, we’re talking about very substantial sums of money, and if we focus only on price and not on quality then people are going to end up far, far worse off, because the emphasis is on the wrong point,” he said.

Bryant also warned that proposing a broad “mechanical setting” for super to serve a wide audience was fraught

with danger because it would not suit everybody.

“Teaching people that the only thing that matters is the price ... is a very poor point of focus and really needs to stop being the centrepiece,” he said.

Better investor education would also reduce the need for more legislation, and the industry would no longer need to deliver “dumbed down” solutions to investors, Bryant said.

Maximising super was a combination of what you put in, which fees you pay, and even more importantly, how well it performed, he said.

Bryant suggested that instead of

David Bryant

pushing fees down, super funds should “redeploy” their super fees to place a portion of their total revenue in investor education.

If the industry educated investors, it could solve all the problems it was dealing with, he said. SR

AQR fund wins Tasplan mandate Simon Woodfull

Bravura extends UniSuper licence BRAVURA Solutions has extended a contract with industry super fund UniSuper to license its online ePASS system for use by participating employers for a five-year term.

In 2008, UniSuper purchased a five-year licence for ePASS to be used by its nonparticipating employers who make superannuation contributions on behalf of former university employees. ePASS will now be progressively rolled out to participating employers that contribute on behalf of current

university employees. ePASS is an online service that can be used across different savings and retirement products to allow superannuation providers to deliver online services to employers, members and advisers.

“Extending the ePASS solution at UniSuper will contribute significant reductions in administrative overheads.

It will also improve the fund’s accuracy and efficiency when processing member contributions,” said Bravura group chief executive officer Simon Woodfull. SR

Legalsuper reappoints JANA JANA Investment Advisers has been reappointed for a further three years as the asset consultant for Legalsuper.

The extended mandate was announced by Legalsuper, with the fund’s chief executive, Andrew Proebstle, saying it had followed a review process during which several asset consultants were asked to provide expressions of interest.

He said that JANA had been reappointed following a competitive tender process. SR SUPERREVIEW

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THE AQR Wholesale Delta fund has won a $21 million mandate with Tasmanian-based industry super fund Tasplan.

This takes the Australian fund’s assets under management to approximately $50 million since its launch in September last year.

The fund, which offers investors access to a diversified portfolio of core hedge fund strategies, has received strong support from institutional consultants and research houses.

AQR principal Gregor Andrade said the fund was launched to provide Australian investors with

risk-controlled and cost-effective exposure to a range of classic hedge fund strategies.

“Despite, or perhaps because of, the challenging market backdrop of the past 18 months, Delta’s design has resonated with investors who seek a stable return stream, unrelated to the direction of traditional markets … which are based on sound economic principles,” he said.

AQR Capital Management, the Connecticutbased parent company of AQR Australia, manages over $500 million in the Delta strategy. SR

Super bodies support reforms

By Chris Kennedy AUSTRALIA’S five leading superannuation bodies have called for bipartisan support of the Government’s recent proposed changes to Australia’s superannuation system in a joint statement.

The Association of Superannuation Funds of Australia (ASFA), the Australian Institute of Superannuation Trustees (AIST), the Investment and Financial Services Association (IFSA), the Industry Super Network (ISN) and the Self-Managed Superannuation Fund Professionals’ Association of Australia (SPAA) warned that opposing the changes could leave millions of Australians with inadequate retirement savings in the future.

The changes – including an increase in the super guarantee from 9 per cent to 12 per cent by 2019, low income tax measures and top-up arrangements for the over 50s – would see “super accounts boosted for average workers by $110,000 and aggregate national retirement savings up by half a trillion dollars”, the super bodies said.

Super strengthens the Australian economy by helping to meet the challenge of an ageing society, deepening the nation’s savings pool and providing a source of funds for long-term infrastructure investment, the bodies noted. It also played a crucial role in helping to cushion the economy from the worst effects of the global financial crisis.

“The Government’s schedule

for the increase is both well telegraphed and measured, enabling employers, employees and unions to come to suitable arrangements,” the bodies said.

“History has shown that businesses were not adversely affected when compulsory super was introduced back in 1992. Almost 10 years later, company profits had risen and labour costs had dropped – while at the same time Australia’s retirement savings pool had grown substantially. Our universal system is internationally recognised as being world’s best practice across OECD nations.”

The reforms would also lift the retirement savings of lowincome workers and reduce the burden on government pension payments, the bodies said. SR

NEWS 9

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Few managing their super ONLY 16 per cent of Australians are actively managing their superannuation, and only around 4 per cent have chosen an investment plan or consulted a financial planner to assist them, according to new research released by West Australian super fund GESB. GESB general manager of wealth management Fabian Ross said the research pointed to a concerning lack

of engagement in what would be one of the largest assets most Australians would own in their lives – second only to their home.

“Even small adjustments to investment plans or fee structures can have a significant effect on the final savings of Australians, often in the tens of thousands of dollars,” he said.

“With the expectation of longer retirements, Australians can no longer afford

to neglect or forget about their super.”

Ross said the research indicated that both government and super funds had a role to play in fostering greater engagement, with around half of the people surveyed suggesting additional information from the Government would encourage more active management of their savings.

He said 25 per cent of respondents said easier access

AIST backs tax preference Fabian Ross

to comparisons of fees, performances, products and services would help them become more involved. SR

RBC Dexia wins HSH pension scheme mandate RBC Dexia Trust Services Hong Kong will act as trustee and scheme administrator for the Hongkong and Shanghai Hotels Limited (HSH) pension scheme under a new mandate.

The mandate will see RBC Dexia Trust Services Hong Kong manage the Occupational Retirement Scheme Ordinance, which

at its inception holds over $57 million.

HSH finance director and chief financial officer Neil Galloway said the company decided to partner with RBC Dexia because of its ‘best in class’ standard.

“RBC Dexia allows us to take advantage of its strong global capabilities whilst leveraging its specialist expertise and solid track

record of good governance and efficient service,” Galloway said.

RBC Dexia head of Asia Pacific sales and distribution Scott McLaren said his company was well versed in supporting the needs of clients like HSH. He added that he looks forward to the mutually beneficial partnership. SR

THE Australian Institute of Superannuation Trustees (AIST) has called for superannuation to retain its preferential tax treatment to ensure it remains the retirement savings vehicle of choice.

AIST chief executive Fiona Reynolds said Australia was not a nation of savers, which meant measures to build a national savings culture were welcome.

“But so is the Government’s acknowledgement that super continues to receive favourable tax concessions relative to other forms of savings,” she said.

“Even when we get to 12 per cent [superannuation guarantee], many workers, particularly those now approaching retirement, will still need to make voluntary contributions,” Reynolds said.

“Super must have preferential tax treatment as you are asking people to lock away their money until retirement,” she said. SR

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10 BUDGET ROUND-UP

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Govt defends cost of super changes THE superannuation changes announced in the Federal Budget, including the lifting of the super guarantee to 12 per cent, will cost the Government $2.4 billion over the next four years, according to the Minister for Financial Services, Chris Bowen.

In a ministerial statement delivered to the Parliament, Bowen said those who suggested the changes to superannuation would not cost the Government any money did not understand the facts or, worse still, chose to wilfully misrepresent those facts.

“Increasing the superannuation

Chris Bowen

guarantee, refunding the tax paid on superannuation for low income earners and raising concessional contributions for those aged 50 or over with lower superannuation savings reduces the tax burden on working Australians,” he said. “As such, these measures will cost around $2.4 billion over the next four years.”

Bowen also claimed that it was the level of Australia’s superannuation savings that had helped the country weather the global financial crisis.

“In the 2009 financial year, at a time when liquidity was being rapidly withdrawn from markets around

the world, Australia remained an attractive place to raise capital,” he said. “Australian listed companies raised $90 billion of equity. Investor support, including from Australian institutional investors, helped to restore the capital base of companies that together employ over 1.6 million Australians.

“To put this in context, at the height of the financial and liquidity crisis, a greater proportion of the total market capitalisation of listed companies was raised in Australian than in any other major economy,” Bowen said. SR

Actuaries says Budget doesn’t cut it THE Institute of Actuaries of Australia has welcomed Federal Budget measures to increase national savings and establish Australia as an international finance hub, but said not enough was done to address Australia’s longevity issues.

Institute president Bozenna Hinton said she was concerned about the lack of Budget funding to tackle the issue of Australia’s ageing population as well as the absence of measures announced

in the Henry Review response.

“If we do not act soon, the resulting longevity risk could be devastating,” Hinton said.

To address these issues, the institute recommended allowing the age pension to be deferred, removing barriers to innovation in the annuity product market and encouraging workforce participation by removing earned income from the age pension means test. SR

Bowen hits Hockey on SG THE Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, has criticised the Coalition’s opposition to increasing the super guarantee to 12 per cent.

The Shadow Treasurer, Joe Hockey, opposed an increase funded by the mining tax in his Budget speech at the National Press Club and claimed the Resources Super Profits Tax was a “blatant money grab”.

“It seems odd that taxing an industry so heavily should lift investment and growth ... It is not the role of government to collect taxes for anything more than the need to fund the necessary public services that have the support of the Australian people,” Hockey said.

However, Bowen said the Shadow Treasurer’s Budget reply was a huge disappointment for SUPERREVIEW

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Joe Hockey

millions of Australians looking for bi-partisan support on a super guarantee increase.

“Increased superannuation savings will play a key role in

financing Australia’s future infrastructure needs and will reduce our reliance on foreign funds,” Bowen said.

The Federal Opposition instead proposed $47 billion of savings by axing the computers for schools program, green initiatives and the plan to put all Medicare records on a centralised computer database.

Investment and Financial Services Association (IFSA) chief executive John Brogden called on the Opposition to reverse its decision to oppose the increase in the superannuation guarantee.

The IFSA chief said that increasing the super guarantee rate to 12 per cent over a number of years combined with cuts in corporate tax would have ensured the increase was not a burden on industry. SR

John Brogden

Brogden slams Coalition over SG THE Federal Opposition’s failure to support a lifting in the superannuation guarantee has earned a reprimand from the Investment and Financial Services Association (IFSA).

IFSA chief executive and former NSW Liberal Opposition Leader John Brogden has called on the Federal Coalition to reverse its decision to oppose increasing the superannuation guarantee to 12 per cent.

Responding to Opposition Treasury Spokesperson Joe Hockey’s vow to oppose the SG increase, Brogden said: “The Coalition must reverse its position.

“This is a bad outcome for Australians and their retirement outcomes,” he said. “Australians need more superannuation if they are to get anywhere near an adequate retirement.”

Brogden said IFSA had been explaining to governments for years that Australians had not saved enough for their retirement and the superannuation guarantee had to increase to at least 12 per cent.

“Our research shows that Australians face a $690 billion savings gap, and 9 per cent superannuation is simply not enough,” he said. SR

EDITORIAL 11

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Keeping the SG pure The Government’s Budget promise to lift the superannuation guarantee to 12 per cent is one thing, but to do so within the context of a debate around a new tax is something else entirely.

Mike Taylor

T

he superannuation industry, quite properly, welcomed the promise contained in the Federal Budget to gradually lift the superannuation guarantee to 12 per cent. By any measure, it is an initiative that is long overdue.

Equally, the Rudd Government’s approach to its implementation is extremely cautious, not to say timid.

And it says something about the Government’s broad strategy and attitude towards superannuation that the delivery of its policy became immediately enmeshed in its implementation of the highly controversial so-called resources company super profits tax.

While the entire superannuation industry has welcomed

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lifting the super guarantee, it is a policy objective capable of standing on its own merits and unencumbered by the imposition of a tax which, of itself, arguably serves to undermine the value of some superannuation fund investments.

Linking the superannuation guarantee to a tax quite simply represents bad policy. It may provide the Government with some persuasive arguments to take to a Federal Election campaign, but it also serves to give the super guarantee the taint of a tax.

The superannuation guarantee was never envisaged as a tax and it should not become one. Not even by association. The superannuation guarantee must remain as it is now: a tax-advantaged nonwage benefit designed to lift Australian retirement incomes adequacy.

Placed in the context of the Government’s timetable to lift the guarantee to 12 per cent, it represents the delivery of the equivalent of a 3 per cent wage rise over five years, or

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The Rudd Government has not only set an undesirable precedent, it has arguably broken faith with the architects of the original system.

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less than 1 per cent a year – something that should be entirely affordable for most employers. Indeed, it is within the power of the Commonwealth’s own tribunals to ensure any increases in minimum wage rates take account of the increased super guarantee.

However, by constructing a set of circumstances whereby delivery of the promised super guarantee increase is reliant upon the implementation of a tax, the Rudd Government has not only set an undesirable precedent, it has arguably broken faith with the architects of the original system.

Nor have the Coalition Liberal and National parties covered themselves in glory. Their insistence that lifting the superannuation guarantee will place Australian employers under pressure and restrict the creation of new jobs does not hold water.

While it is true that employer organisations complained loud and long about the original implementation of the superannuation guarantee, there is no consistent evidence suggesting jobs were lost or that companies went broke as it was progressively lifted to its current level of 9 per cent.

History, too, tells us that the reason the SG was not lifted beyond 9 per cent owed more to political baggage carried by

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some within the former Howard Government than to the underlying ability of the Australian economy to afford the increase.

Now, as Australia moves inexorably towards the next Federal Election, there exists the very real possibility that the proposed 3 per cent increase in the super guarantee will fall victim to the inevitable party political and sectoral horsetrading that will take place around the resources companies super profits tax.

What is to be most regretted is that the Government’s approach to the issue has all but eliminated the small measure of bipartisanship that existed around superannuation, making it difficult for the Coalition parties to support lifting the super guarantee any time in the near future.

However, the greater danger to the superannuation industry is the suggestion, no matter how oblique, that increasing the superannuation guarantee is tantamount to raising taxes. It is a nexus that can and must be broken.

The Government’s intentions in raising the superannuation guarantee may be well-meaning, but it has failed to appreciate the broader implications, and the industry can ill-afford the collateral damage. SR

expresssed in Super Review are not necessarily those of Super Review or Reed Business Information. © 2010

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Average Net Distribution Period ending Mar '10 2,327

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12 DEATH BENEFITS

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Death benefits contain a The payment of death benefits within superannuation can represent a legal and regulatory minefield for fund trustees. STEPHEN GRAHAM outlines how to avoid the pitfalls.

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he sole purpose test requires a superannuation fund to pay death benefits to the member’s legal personal representative, to any or all of the member’s dependants, or to both.

Therefore, unless otherwise set out in the trust deed, the trustee has discretion and must decide how best to distribute a deceased member’s death benefit between the legal personal representative (LPR) and dependants.

The decision must also be made in accordance with the trustee’s duties to give due and genuine consideration and to exercise reasonable care. This often requires the trustee to weigh-up the merits of competing claims.

There is now a debate over whether this discretion should be removed by legislation given the fiduciary commitment that it requires from trustees.

There is a view that trustees should pay death benefits to the deceased member’s LPR in all cases.

In its Phase 2 Issues Paper, the Cooper Review raised the question of whether “it would be useful to mandate that, in the absence of a binding death benefit nomination, any death benefit would simply be paid to the deceased member’s estate?”.

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Similarly, at the 2008 Association of Superannuation Funds of Australia conference, Michael Rice of Rice Warner Actuaries and Tower Australia’s managing director, Jim Minto, were part of a roundtable discussion on the topic of ‘should death, disability insurance and super be bed mates?’. The discussion was wide-ranging and included a view that trustees could become bogged-down in claims and that death benefits might not always be paid in accordance with the wishes of the deceased. Some participants in the discussion clearly agreed with the intent of the question posed by the Cooper Review.

There are a number of arguments in favour of removing the trustee’s discretion in death benefit payments. These include: ■ providing certainty to members about who will receive their death benefit; ■ extricating the trustee from the claim-staking process and allowing the courts to deal with disputes under the family provision legislation; and ■ accelerating the payment of death benefits because no discretionary decision is needed.

At face value, these arguments are self-evident to benefit members. However, prob-

lems can arise when a death benefit is paid to the deceased member’s LPR, which means no changes should be made to the existing arrangements.

CREDITORS GET THE FIRST BITE OF THE CHERRY In the wake of a death, the first requirement of a LPR is to discharge the deceased member’s debts and liabilities.

Only then can distributions to beneficiaries be made. An LPR who distributes estate assets without paying known debts is in breach of the duty to pay debts and becomes personally liable for the loss suffered by the deceased member’s creditors.

He/she cannot seek a refund from the beneficiaries.

Superannuation death benefits are not protected like payments from life insurance policies and are available to creditors.

WHAT HAPPENS IF THE MEMBER DOES NOT HAVE A WILL? Given the general distrust of politicians in Australia, it is amazing that 42 per cent of us allow them to decide who receives our estate when we die.

For these Australians, the way their estate is distributed is set out in legislation.

However, following this course of action can lead to an

unintended outcome due to the nature of this one-size-fits all legislation. For example: ■a deceased member is survived by their de facto partner of many years and a son from a previous marriage that ends in divorce; ■ the son lives overseas and is estranged from the member; ■ the member has indicated to his de facto partner that he intends to make a will under which she will receive his entire estate, apart from a small legacy of $10,000 to assist his son; ■ the member (who lives in New South Wales) dies before he gets the chance to make this will;

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sting IN MANY CASES THE WILL IS INVALID ANYWAY As the Law Society of New South Wales notes on its website: “There have been very many cases where homemade wills were either unclear, not properly drawn up or caused an unwanted tax liability. Many of these cases end up in court and carry on for years, causing distress and perhaps hardship to the family of the deceased.” Costs may also be borne by the estate.

Where the court cannot rectify the will, an administrator will be appointed to deal with the estate under the law of intestacy, which can lead to the problems discussed above.

THE RISK OF DEALING WITH ‘INTERMEDDLERS’

■ the member’s death benefit is $1 million; and ■ the only other assets in the estate are personal effects worth $10,000 and investments worth $40,000.

Under New South Wales legislation, the de facto spouse would be entitled to the personal effects, a statutory legacy of $393,924 and one half of the remainder of the estate, which would amount to $323,028. Rather than receiving a small legacy of $10,000 as intended by the deceased, the estranged son would receive a distribution of $323,028 from the member’s estate.

In many cases, the size and nature of the assets in an estate means that it is not economic to obtain a grant of representation (ie, probate or letters of administration).

This means that there is no LPR to pay the death benefit to and the trustee is forced to deal with an executor de son tort (otherwise known as an intermeddler).

It is important to note that there is no requirement in superannuation law for a trustee to request a grant of representation before paying an LPR like there is in the life insurance law. In fact, the definition of the term ‘personal representative’ in the Superannuation Industry (Supervision) Act 1993 (SIS Act) does not require a grant of probate because it refers to the executor of the will of a deceased person.

Where the trustee pays a death benefit to an intermeddler, there is a risk that it may have to pay the death benefit again, without the ability of recovering the original payment from the intermeddler, where the intermeddler: ■ does not account to the creditors and beneficiaries of the deceased member; ■ no longer has estate assets for distribution; and ■ it can be argued that in paying the intermeddler, the trustee did not act diligently, or acted unfairly or unreasonably.

FAMILY PROVISION CLAIMS MAY CHANGE THINGS Where a deceased member has not adequately provided for the proper maintenance, education or advancement in life of an eligible person in their will, the court may in its discretion do so under state family provision legislation. This means that while a deceased member makes a will and the trustee pays the death benefit to his/her LPR, there is no guarantee that the death benefit will be distributed in accordance with the member’s wishes.

Again, where a will is challenged, legal costs are borne by the estate, reducing the final amount payable to beneficiaries.

BINDING NOMINATIONS ARE NOT A PANACEA Unfortunately, in many cases what may appear to a member to be a binding death benefit nomination will not actually bind the trustee, which means that the trustee still has discretion. These cases include where: ■ the nomination is more than three years old and has not been confirmed or replaced;

■ a non-dependant (such as a non financially dependent parent or sibling) has been nominated; ■ the nomination has not been correctly witnessed; and/or ■ the portion of the death benefit to be paid to each nominee is not readily ascertainable.

Another difficulty with so called ‘binding nominations’ is that the underlying death benefit may form part of the notional estate of a deceased member under the family provision legislation because the nomination would lead to the deceased member’s property being held by another person for no consideration. Accordingly, although the deceased member may have taken active steps to ensure that his/her death benefit is not part of the estate, the court can deem it to be part of the estate and adjust the entitlements of all beneficiaries under the member’s will to take the death benefit into account.

It is possible that the binding nomination provisions in the SIS Act may cover the field and therefore override state family provision legislation to the extent of any inconsistency. However, this has not been tested and the ‘cover the field’ argument is notoriously difficult to apply in practice.

THE VALUE OF PROPERLY CONSIDERED TRUSTEE DECISION MAKING The current discretion in death benefit payments provides trustees with the flexibility needed to prevent these problems from occurring. It also ensures that the most appropriate outcome is achieved through a duly considered

claim-staking process.

Procedural fairness is also provided through the trustee’s internal dispute resolution procedure and the ability to make a complaint about the trustee’s decision with the Superannuation Complaints Tribunal (SCT). This process has significant advantages over the process for obtaining a family provision order because it is cheaper and not adversarial in nature.

THE IMPORTANCE OF THE SCT The SCT is required to enquire into and resolve complaints in a fair, economical, informal and quick manner.

When coupled with the advantages of properly considered trustee decision making on death benefits, the SCT process means that claimants can have an independent government body quickly and cheaply (when compared to a court) review the trustee’s decision to ensure that it is fair and reasonable. The court process takes much longer and leads to significant costs for the estate, which reduces the final amount payable to the beneficiaries.

CONCLUSION The payment of death benefits by the trustee conveys valuable estate planning benefits to the member and their dependents, which takes account of personal circumstances and complexities. This is one of the main unseen benefits of superannuation and avoids benefits being potentially consumed via the legal system. SR Stephen Graham is trustee advocate at Tower Australia.

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14 ASSET ALLOCATION

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Looking in the wrong With a number of funds having gone from hero to zero on the back of unwise asset allocation calls, DAMON TAYLOR reports that reliance on past performance represents a foolish strategy.

S

ince the inception of member choice, the Australian superannuation industry has broadened and improved its skill set. From insurance offerings to access to financial planning, members have any number of ways to differentiate individual funds, and yet the reality is that for many, asset allocation and the returns it yields represents the ultimate measure of a fund.

Like it or not, an increasingly competitive superannuation environment means that performance continues to be on peoples’ radars, but according to Mike Wyrsch, senior consultant at Frontier Investment Consulting, it isn’t past performance that’s important. “Clearly, asset allocation explains the bulk of returns but what we’re also seeing now is an environment where you have member choice,” he said. “And broad asset allocation calls aren’t always made by trustees.

“But the question here is what past performance tells you about future performance,” Wyrsch added. “Some funds have gone incredibly well for a period of time and then subsequently gone incredibly poorly.

“You really have to understand how these funds have set their asset allocation and what flexibility they have to change them if conditions alter, because it’s what happens in the future that actually counts.”

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Simon Eagleton, business leader for Mercer’s Investment Consulting business in Australia and New Zealand, said a focus on short-term performance was one of the more unfortunate by-products of increased competition in Australia’s super industry.

“Obviously there is evidence of more and more short-term perspectives on performance,” he said. “It’s disappointing though and clearly not in the best interests of long-term retirement savings.

“Fortunately, I’m not seeing a lot of evidence that super funds are overly sensitive to the trend,” Eagleton continued. “Most adhere to well diversified long-term strategies, but focusing on short-term numbers is always a danger, particularly in a highly competitive environment.”

Of course, a focus on shortterm performance has not come solely from increased competition. The massive market upheaval seen through the global financial crisis (GFC) has had all investors on edge and had an impact on superannuation account balances that many members have been unable to ignore.

Yet while the impact upon super funds’ investments and returns was significant, Wyrsch said that most super funds had been cautious in making significant shifts to their strategic allocations.

“I think people have been

aware for some time that markets aren’t efficient and that there are times when they’re going to be better value than others,” he said. “But there are always lessons in these things, and there were certainly lessons from the GFC. “Many are probably still mulling over and reviewing those lessons and how they might better go about things, but I think that a lot of people actually saw this coming,” Wyrsch continued. “Sub-prime was something that was pretty clear fairly early and most investors made sure they weren’t exposed to it.

“It certainly spread further than most people thought it would and I think there were definitely lessons around how quickly these kinds of events can move and exactly how much they can impact.”

LIQUIDITY MISMATCH In line with Wyrsch’s sentiments, Eagleton said that one of the key lessons of the GFC had been in liquidity mismatch.

“A lot of funds have seen that running at a huge liquidity mismatch was a dangerous thing to do,” he said. “So many will have rethought their entire portfolios in that area.

“There would also have been lessons in terms of diversification,” Eagleton continued. “There would be funds out there which thought they were diversified but then saw everything go to custard at the same time.

“Investors have to look underneath asset classes because assets like fixed income, which they might have thought of as defensive, had become more and more exposed to credit and in that kind of environment, of course it was going to go down.”

According to Eagleton, in addition to super fund investment teams rethinking the roles of specific assets, he had also seen a lot of interest in genuinely alternative strategies. “So investments that are truly diversified and assets that have nothing to do with capital markets,” he said.

“Those hedge funds where the returns are coming from manager skill have also garnered increased interest, but overall there seems to be a lot more consideration of operational risk.

“Trustees are looking very carefully at what is happening where the rubber hits the road and realising that they just haven’t done enough work there.”

Commenting on whether there had been assets that had failed to deliver the diversity expected through the financial crisis, Nicole Connolly, director of alternatives consulting for Russell Investments, said funds had certainly been looking very carefully at asset correlation.

“Without a doubt there’s been closer scrutiny of a number of asset classes that perhaps were more highly

correlated than was expected or anticipated,” she said. “You could say that hedge funds fell into that category, but if you look back at hedge fund returns over the last couple of years, the reality is that they have provided a superior risk adjusted return compared to many other risky assets such as equities or property.

“They did fail to deliver on an absolute return basis over

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direction

2008 and that was certainly disappointing for some investors, but hedge funds shouldn’t be expected to deliver absolute returns every single year,” Connolly added.

“Over the longer term they’re designed to give a cash-plus return, but there will be years where they will produce negative returns, and obviously 2008 was an example of that.”

Alternatively, Eagleton said

the problem lay in the fact that hedge funds did not always rely on their managers’ skill.

“The ones that do are the ones we like but they aren’t all like that,” he said. “Many held large exposures to risky assets during the GFC, large exposure to directionality and gave what was illusory diversification,” he said. “It’s proof that there’s just no

substitute for good detailed manager research.

“To some extent, it’s simply about being more discerning.”

Asked whether she felt trustees were re-examining hedge funds on the basis of what had occurred through 2008, Connolly said that many probably were, but not on the basis of the returns that they provided.

“It relates more to the

structural issues of the intermediaries or the hedge fund of fund managers,” she said.

“Often there was a mismatch in terms of liquidity, so the fund of fund was offering liquidity provisions that didn’t match the liquidity provisions of the underlying managers.

“There were also extreme currency movements late in 2008, which meant that fund of funds often had to raise

capital within their structures by selling down highly liquid and often more profitable managers,” Connolly continued. “So a lot of people were unable to get their money out of fund of fund hedge funds during that time, and that caused concern for investors.

“It’s not necessarily that they were disappointed with Continued on page 16

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16 ASSET ALLOCATION

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Looking in the wrong ☞ Continued from page 15 hedge funds per se, it was the access mechanism to hedge funds that was the problem.”

Of course, hedge funds are just one part of the alternative investment picture. For the last few years it seems exposure to alternatives has become increasingly popular for super funds, but while Wyrsch said he hadn’t seen any evidence of the trend altering, he warned there were lessons to be learned here as well.

“Our clients have been well set in alternative options for quite some time, so it’s not something we’re particularly increasing our focus on,” he said. “But there does seem to be a greater focus on alternatives within the industry and a realisation that, as with any other asset class, you have to look through at what the value is and understand what you’re investing in.

“This is probably yet another lesson out of the GFC,” Wyrsch continued. “And it’s about how important the capital structure is and, regardless of what investment you have, if you gear it too highly you’re going to have problems in a distressed environment.

“It really doesn’t matter how defensive it is or how strong the earnings are or how impervious the revenues are to economic downturns, if you’ve over-geared it then you’re going to be in trouble.”

In saying that she saw investment into alternatives continuing for super funds, Connolly pointed out that the asset class held clear diversification benefits.

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private equity is a clear return enhancer for any portfolio where you expect a listed equities return plus a premium,” she said. “Alternatively, hedge funds are designed to be a volatility dampener where you’re targeting a more consistent return over time, and then there’s infrastructure investments that provide a yield driven return, and in some cases are linked to inflation.

“There are a number of options available in alternatives and I think a lot of trustees have recognised that.”

SOCIALLY RESPONSIBLE INVESTMENT But with respect to what seems to be an increasing propensity towards environmentally and socially responsible alternative investment (SRI) on the part of institutional investors, asset consultants seem to have mixed views.

“There’s a feel-good element to investing in these types of strategies but increasingly there’s an investment case as well,” she said. “And certainly the Government’s target to have 20 per cent of electricity supply coming from renewable energy sources by 2020 is a large part of it.”

Similarly, Wyrsch’s take on SRI investment was that while funds were open to them, they had to stack up on investment grounds.

“It’s an area that will be ongoing for many investors,” he said. “But ultimately, it will be subject to exactly the same disciplines as any other investment.”

Eagleton said that while Mercer had clients with exposure to what was broadly

referred to as responsible investments, he didn’t see any widespread increase in demand from the super industry.

“It’s more about product availability and picking up the right opportunities as they arise,” he said. “But we are seeing increased interest in the policy aspects of investment.”

The unlisted assets that had been the bread and butter investments of industry super funds for so long might also find their place in portfolios questioned this year.

With valuations lagging the listed markets, they are an asset class that still seems to be in a recovery phase, but within portfolios Wyrsch said he could see trustees having a greater appreciation for why an illiquidity premium existed.

“I think people have now got more appreciation for why you have an illiquidity premium,” he said. “But what I would also say is that the unlisted asset class was a real standout in the way they were managed during the

GFC because they didn’t typically raise money.

“Equity was at its most expensive, but they didn’t flee from investments and they didn’t favour some investors over others,” Wyrsch continued. “I actually think that the GFC was a real advertisement for the benefits of unlisted assets and unlisted funds.

“On the one hand, yes there’s a cost to liquidity, but on the other hand, in terms of governance and the way these funds behaved, there were some real benefits in comparison to the listed market.”

Connolly said that while the GFC had highlighted the problems with illiquid investments, most super funds had managed their unlisted exposures well.

“Most trustees and investment teams managed illiquidity within their fund by targeting no more than perhaps 30 per cent exposure to unlisted assets,” she said. “And while that was stretched and pushed to its limits during the crisis, most funds managed to get

through that period relatively well.

“Funds are looking closely at the type of illiquid investments they have within a portfolio, but the diversification benefits of having an illiquid exposure is still very relevant.”

Ultimately, there is no doubt that there will always be common themes within super fund allocations. They are, after all, put together to foster the best possible retirement income for members, but while investment choices are bound to reflect that, Connolly said there were points of difference.

“It would probably be in the alternative investment strategies that asset allocation differs the most,” she said. “For example, private equity, infrastructure, hedge funds, commodities, active currencies – it’s whether or not super funds or investors consider these strategies within the broader asset allocation framework or as a separate allocation.

“Most do to a certain degree, but I think that it is within

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direction those strategies that you’ll see the most divergence in allocations.”

From the Frontier perspective, Wyrsch said that the variation to be found within Australian super fund asset allocations had a lot to do with how well the local market had performed in recent years, but he added that asset consultants could only work within the objectives that trustees had set.

“That has a big bearing on where asset allocations might be,” he said. “But things are pretty good in Australia compared to most of the world, and I think Australian funds have probably been able to take more positions in risk than we’ve seen offshore, both psychologically as well as physically.

“That fact certainly helped in the last year but I think there’s also different views on how much illiquidity you want to take as risk,” Wyrsch continued. “Clearly some people are of the view that the world is always ending whereas others simply see opportunity.

“But the key difference is in how much risk people are wanting to take at the moment, and there’s different views on that and different timeframes.”

And adding yet another perspective to the mix, Eagleton said that he saw the bulk of allocation variation in unlisted investment philosophies.

“So that’s mainly funds’ tolerance to unlisted property exposure, infrastructure exposure and so on,” he said.

“But there are also differences in funds’ preparedness to diversify globally, and that’s something Mercer is a strong

You’ve got to put the tilt on when markets are about to outperform and then take it off when they’re about to underperform, and that can be easier said than done.

proponent of in terms sourcing alpha as well as exposure to different underlying asset classes.

“The one other point of difference is in super funds’ preparedness to deviate and shift their allocations in response to medium-term risk or opportunity. In an increasingly competitive industry, like it or not, trustees need to have some regard for medium-term performance.

“They need to be aware of the need to rebalance.”

On the topic of dynamic asset allocation or mediumterm portfolio tilting, Wyrsch said it was a strategy Frontier had advocated for some time, but that he also saw trends towards it growing.

“We’ve done it for some time and I think there is probably a greater focus on it, but it’s about how you execute these things,” he said.

“I’d say there’s a theoretical advantage in doing it at times but you’ve got to be able to actually do it, and it’s not always easy.

“You’ve got to put the tilt on when markets are about to outperform and then take it off when they’re about to underperform, and that can be easier said than done.”

When all is said and done, though a super funds’ returns and the asset allocation that yields them might have the most significant bearing on members’ retirement savings, the reality is that there are very few ways by which this can be measured. Various research houses provide fund performance figures periodically, but for Eagleton, those figures can not reflect all of what makes

up an investment strategy.

“There are a lot of things going on in a super fund’s investment strategy,” he said.

“Part of it is asset allocation, part of it is their active strategies, part of it is recognising opportunities to shift, part of it is the cost of implementation, part is tax management and so on.

“So looking at any particular fund’s performance over the long term is difficult, and in the short term, people should realise that a lot of what is measured is noise – it can have more to do with luck than skill,” Eagleton said. “Of late, I think there’s been too much focus on relative performance and not enough on whether a fund is achieving what it has set out to achieve and provide for members.

“Thankfully the industry has done a pretty good job of achieving those outcomes, but if people are going to draw any conclusions over whether one super fund is better than another, it has to be done over the long term.”

MEASURING PERFORMANCE With regard to the return figures released by research houses, Connolly said that super funds could not help but be aware of their own relative performance.

“I used to work at a super fund and we certainly looked at the super returns on a monthly basis,” she said.

“You do look at them and you do compare yourselves to them.

“You certainly know which funds you’re going to see at the top of the charts in certain environments and you

know that there’s going to be others at the bottom of the charts when that environment changes.

“It’s probably something members shouldn’t be looking at on a monthly basis and, to be honest, we as an industry probably shouldn’t be looking at them either.”

Reiterating his point that past performance had little to do with future performance, Wyrsch said that providing members with the retirement benefits they would at some point rely upon was what counted.

Simon Eagleton

“When it comes right down to it, funds are interested in retirement benefits for members that are a consumer price index [CPI] based measure,” he said. “The trouble is, you really can’t invest in CPI plus 3 per cent, at least not directly.

“So when these figures come out and people measure themselves against them, all things being equal, it’s better to be at the top than the bottom,” Wyrsch continued. “But at the end of the day, it’s about providing retirement benefits for members.

“That’s what’s got to count.” SR JUNE 2010

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18 INTERNATIONAL EQUITIES

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Uncertainty a global Markets may have been recovering but, as DAMON TAYLOR reports, sovereign debt and other issues have emerged to create new challenges and uncertainties around allocating towards international equities.

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ithin Australia’s superannuation environment, investment into international equities has always held strong diversification benefits across both developed and emerging markets. Yet in what can still be termed the global financial crisis (GFC) aftermath, overall market uncertainty means that offshore investment continues to be a bumpy ride and, according to Stuart James, senior investment specialist, international equities, for Aberdeen Asset Management, one requiring careful navigation.

“In general, global equities performance for the year to date has been fairly mixed,” he said. “Returns for the start of the year were relatively healthy but since then there have been a number of aftershocks in Dubai and also in China.

“Over the last month international equities markets have been very nervous, so there’s a bit of uncertainty out there at the moment.”

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the equation was a tricky one.

“Long term, I’d say that emerging market fundamentals look better,” he said. “They have much lower debt at all levels and generally have much stronger growth.

“Unfortunately, in the short term, if uncertainty continues, investors are likely to become risk averse and stick to the US dollar related stocks,” James added.

“And in turn, that kind of reaction will have an inappropriate impact on the market.

“For January through to April of this year, we’re talking about returns of -4.65 per cent for international equities overall and -1.25 per cent for emerging markets. So while emerging markets are still a little ahead, it certainly hasn’t been so clear cut this last month.”

With a similar take on how international equities markets have shaped up since the beginning of 2010, James Soutter, senior portfolio manager, international equities, for Perennial Investment Partners, said that

performance had been fairly mixed.

“We’ve seen large movements in global equities, which started off in January with quite a steep fall before recovery a couple of months after as better economic and company news came through,” he said. “Corporate news in places like the

US has been incredibly strong and in the last reporting season we’ve seen companies’ reported earnings far outstripping analysts’ predictions.

“There’s also been a bit of an upward trend globally that’s been driven by good cost management through the down cycle,” Soutter

continued. “And we’re now seeing margin expansion and top line growth.”

Unfortunately, Soutter said the global equities picture changed markedly towards the end of May. “Nearly all of those gains have now been given up on a year-to-date basis and I’d say that every major market

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certainty “The strongest performing area has virtually been the US; in only being down 2 to 3 per cent, it’s actually been the most resilient through this, followed closely by Japan.”

Providing a background for recent US market stability, Soutter said the US and Japanese markets often constituted safe havens for investors looking to withdraw capital from risky assets in foreign markets.

“Certainly over the last month, developed markets have held up better, and that’s a risk aversion thing,” he said. “The corporate news coming through from emerging markets has actually been very strong, as it has within developed markets, but as capital gets withdrawn, it finds a natural home back in markets like the US, Japan and the UK. “The only sure thing at the moment seems to be that there are interesting times ahead.”

EMERGING MARKETS

in the world is down, whereas at the beginning of [May], the majority would have been up, with the exception of places like Greece and Spain,” he said.

“Just last night markets closed down 4 per cent but before then, it was basically break even.

“We’re now also seeing a

very different shift in currency, and that’s having a very large impact on returns for Australian dollar investors,” Soutter added. “I’m looking at some bad markets here, with Spain down 22 per cent in local currency terms, Italy down 17 per cent and even Hong Kong down 10.5 per cent.

But while judging emerging and developed markets might have been difficult in recent months, the story was somewhat different 12 months ago. At that time, global equities experts were tipping emerging markets to provide the lead out of the financial crisis downturn, and James believes such predictions proved accurate.

“Largely, emerging markets did provide the lead,” he said. “Year to date, overall international equities have delivered 9.87 per cent

Emerging markets didn’t go into the financial crisis anywhere near as much as developed markets.

as compared with emerging markets, which delivered 24.37 per cent, and that’s in Australian dollar terms.

“There’s no doubt that during 2008, emerging market shares were sold off more heavily,” James continued. “But since March of last year, we’ve seen people recognising the strong fundamentals in emerging markets, to the point where I’d say they’re now trading at a slight premium to developed market shares.”

Taking a slightly longer view, Grant Forster, chief executive officer of Principal Global Investors (Australia), said that in delivering an average return of 6 per cent, emerging market growth rates had been reasonably consistent.

“In Australian dollar terms, emerging market returns have been 24 per cent for the 12 months to April and 12.5 per cent for the five years to April,” he said. “By contrast, the five-year figures for developed markets are 8.7 per cent, so emerging markets have certainly rebounded pretty well on an unhedged basis.

“Emerging markets didn’t go into the financial crisis anywhere near as much as developed markets,” continued Forster. “Commodities held and kept emerging markets afloat, and because of that resilience, what transpired was almost the reverse of what you’d expect.”

Forster said it was also interesting to note that where Continued on page 20

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Uncertainty a global ☞ Continued from page 19 the Australian equities market had delivered returns of 32.5 per cent to the end of April, investors had received 36.2 per cent from global equities, provided they had hedged their currency exposure. He added that the less flattering unhedged global equities return was 7.4 per cent.

“So because developed markets tanked so badly, they’ve actually done pretty well over the last 12 months,” Forster said. “So whether we’re talking about emerging markets or developed, there are lessons to be learned here in looking very carefully at both currency risk and hedging.

“Investors need to acknowledge that risk and adopt a considered strategy.”

Looking at emerging markets and their performance through the financial crisis more broadly, Soutter pointed out that some of the stronger markets were found well away from the more familiar Asian regions.

“Some of the stronger markets were actually in places like Brazil,” he said.

“Asia actually kicked off very early in that piece and, in the case of China, has been moving in a negative fashion since about June/July last year.

“So they ran very hard very early and have really come off since then,” Soutter continued. “The stronger markets have actually been in places like Brazil, where you’ve had strong internal SUPERREVIEW

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demand, good mining projects and also a very agriculturally driven economy as well.

“If anything, the real reacted marginally stronger than the Australian dollar at that point, so you’ve had a market and currency that’s been marginally stronger than Australia’s, and I think returns reflected that.”

Soutter said one of the things that had often pulled back emerging markets, particularly those found in Asia, were their links to the US dollar.

“So you’ve had the currency headwind but very strong underlying markets, which I think have definitely led the world through the last 12 months.”

DOMESTIC VS GLOBAL But while a number of fund managers were able to predict the steadier performance of emerging markets through the GFC, the reality for many investors was that there was little to pick and choose between domestic equities and their international counterparts. As a consequence, the argument from a number of super fund executives was that equities portfolios could be viewed less distinctly, but according to Soutter, the composition and risk inherent in global equities dictated an independent approach.

“From my point of view, domestic and global equities have to be seen as two very distinct allocations,” Soutter said. “Equities may be similar across the board,

but the composition and risk inherent in global equities versus domestic is very different.

“In terms of composition, the Australian market is based on two sectors in banking and resources, and they form its two drivers,” Soutter continued. “One is purely domestic, being the banking sector, and the other is very much overseas driven, being resources, but global equities give you far more scope in composition.”

The reality, according to

Soutter, is that by investing globally, investors can access industries, sectors and companies the likes of which are simply not available within Australia.

“The next consideration from an institutional standpoint has to be the diversification of risk in terms of hedging,” Soutter said. “So despite recent underperformance due to a strong Australian dollar, by having an unhedged portfolio you’re actually diversifying risk further by taking on the risk of

different economies around the world.

“For example, you’ve actually got global equities giving a positive return in unhedged currency for the month to date,” he continued. “So while we’re looking at our portfolios and seeing them going up, the underlying investment is going down, and you’re getting what is essentially lower volatility in returns.

“In my mind, there are different risk and diversification elements inherent in

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certainty

global versus domestic equities, and I think that from a super fund standpoint, that has to be taken into consideration.”

Stacking up medium-term global equities performance against that of the local market, James said that in Australian dollar terms, the disappointing performance of global equities had perhaps altered peoples’ view of the investment.

“Looking at the figures, we’ve got domestic markets delivering 8 per cent per

annum over the last five years compared to global markets, which delivered about 0.6 per cent per annum,” he said.

“And on that kind of performance, there will have been a number of investors who have shied away.

“The recent strength of the Australian dollar has really hurt local investors looking to go offshore,” James continued. “But people also have to be conscious of what happens in the resources sector.

“And in the long run, people do need to keep a diversified portfolio.”

For James, the very different opportunity sets available in global equities demanded that they be viewed separately.

“Domestic equities investment may have the advantages of better franking credits and no currency risk, but the market is also quite narrow,” he said. “In international shares there are different markets and different cycles to play in both emerging and developed markets.

“It’s an altogether different game.”

Of course, the advantages of domestic equities investment mentioned by James were those most often cited by institutional investors as well. Why wouldn’t they have a strong local bias on the back of a tax advantage and what have also been better returns?

And at the moment, it’s a question that James sees being answered far too easily.

“For that local bias to

So you’re often trying to weigh poor corporate governance against what look like good companies.

change, what we’d need to see first of all is strong international equities returns,” he said. “Like it or not, people are going to look at past performance, and at the moment, all the bad news seems to be flowing from offshore, where things locally have been faring much better.

“The main risk in the Australian market is an overdependence on the resources sector and some of the question marks out there on Chinese growth,” James continued. “And for many investors, that could certainly prove the tipping point for reconsideration.”

Seeing similar potential for the Australian resources sector to prove a catalyst over the longer term, Forster said the Government’s response to Australia’s Future Tax System Review had done little to change the local investment environment.

“The tax advantages are still there, so I don’t expect super funds will look to a reduction of Australian equities exposure in favour of global equities any time in the next five years,” he said. “The only other point here is that if commodities come off, it could lead to a drop in the Australian dollar and may mean change in the next few years.

“But even so, it would have to be meaningful change to tip the scales away from the domestic market.”

GOVERNANCE However, beyond the question of what could tip

the balance of superannuation investment in favour of offshore markets is the obvious need for good corporate governance and transparency when investing globally.

These considerations were highlighted among the lessons learned post-GFC, and for Soutter, the experience has shown that there remains reason for both caution and vigilance.

“I actually sit on an ESG [environmental, social and governance issues] committee and when looking at global equities, the landscape of corporate governance changes tremendously from markets such as the UK, with good corporate governance, to markets such as Indonesia which, though very attractive, have very poor corporate governance and a lot of family ownership,” he said.

“So you’re often trying to weigh poor corporate governance against what look like good companies.

“As a fund manager, we actually go out and see companies and question them about corporate governance, and the issues that come up are in board structure, the independence of the board and so on,” Soutter continued. “But I think fund managers have a job to ensure they’re putting pressure on companies to make sure appropriate governance and transparency is there.”

Adding to his comments, Soutter pointed out that Australia had not been immune to corporate governance Continued on page 22

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Uncertainty a global certainty ☞ Continued from page 21 problems and regulation breaches during the GFC. “You only have to look at ABC Learning to see an example of what was systemic across the globe in there being just too much easy money allowing leverage,” he said. “Regulation and corporate governance is something that is vitally important, and perhaps more of an issue in international equities because you’re looking at a far greater landscape.

“In the domestic market you have the level playing field of dealing with one regulator, one government and one set of accounting rules, but in global equities the challenge is to marry them all up.”

In line with Soutter’s comments, Forster said there was certainly room for tighter regulation around global equities corporate governance and that there was no reason why fund managers themselves could not influence improvement.

“People in the old days worried about governance and transparency in emerging markets but I think we’ve seen in the last few years that the issues can come from the US and developed markets just as easily,” he said. “Enron, for instance, is probably proof that problems can occur anywhere.

“Personally, I know we’d welcome increased regulation as a result of the incidents we’ve seen through the GFC.” SUPERREVIEW

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According to Forster, one of the facts many people did not realise was that within the US market, less than 30 per cent of trades actually went through the New York Stock Exchange.

“So as a consequence, a number of trading issues have developed that have fundamentally changed the way the US market trades and functions,” he said. “And I don’t think the regulators have been able to keep up.

“In the case of super funds, they should be looking to their managers to

Stuart James

makes these calls, but we’ve also been pushing for these sorts of changes to even the playing field.”

For his part, James admitted that the GFC had brought home the importance of good corporate governance and transparency for most, if not all, investors.

“When markets are going up, people don’t focus on these things,” he said. “And it’s only when the tides go out that you realise people have been swimming naked.

“Corporate governance

has definitely improved for emerging markets, but there really isn’t any other way to handle the situation than to have fund managers who go over everything with a fine-tooth comb,” James continued. “Because the reality is that disasters can still happen.”

James said that in a number of cases, the events of the last 18 months hadn’t really been countered.

“The solutions thus far have really been about accounting, about moving debt,” he said. “People are trying to repair balance sheets, but the reality is that it’s going to take time and honestly, I don’t think we’re out of the woods yet.

“In this kind of environment, investors should be seeking those companies that have good management teams, good balance sheets, low gearing and a good track record,” James continued.

“Also look out for revenue mismatches where companies have their revenue in local currency but have their debt in foreign currency or vice versa.

“At this point in time, investors don’t need to be taking unnecessary risks.”

TIMES HAVE CHANGED But while the bumpy ride for global equities seems set to continue, the one certainty seems to be that the days of vanilla investment into the United States and United Kingdom are well and truly over. Opportunities in offshore markets are everywhere and, according

Just because a stock is classified as emerging, that doesn’t necessarily mean it’s going to be riskier.

to Soutter, that is a fact well recognised by fund managers.

“We tend to think that the MSCI benchmark, so the one used most often in Australia, has become totally outdated,” he said. “Where it is still 50 to 55 per cent North American stocks, globalisation has made countries that were ignored 10 years ago vitally important.

“The world is a different place, with companies in emerging markets delivering far higher returns, and we don’t think the MSCI reflects that,” continued Soutter. “Places like Korea and Taiwan, for instance, are still considered developing, but they’re seeing a great deal of growth and have much lower debt.

“They’re markets we should all be investing in and I think it’s surprising that they haven’t seen greater allocations.”

Offering similar advice, James said that investors needed to think about removing global equities labels entirely.

“Just because a stock is classified as emerging, that doesn’t necessarily mean it’s going to be riskier,” he said.

“Australia has done very well, but it’s a very small part of the global economy and I’d advise investors to look beyond the vanilla and beyond the traditional.

“There are different investment themes and opportunity sets everywhere, and in a diversified portfolio it makes a certain amount of sense to embrace them.” SR

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Events Calendar

GESB recruits investment team GESB appoints Kate Budiselik and Edwin Schultz as investment strategists.

Super Review’s monthly diary of superannuation industry events around Australia and abroad.

JUNE AUSTRALIAN CAPITAL TERRITORY 1 – ASFA Luncheon. The lessons I have learnt… Speaker: Dr Don Stammer. Venue: Boathouse by the Lake, Grevillea Park. Menindee Drive, Barton. Enquiries: ASFA Member Services Unit.

Ph: (02) 9264 9300 or 1800 812 798.

VICTORIA 9 – ASFA Luncheon. The future of group insurance – can we make it easier? Speaker: Damien Mu, chief distribution and marketing officer, AIA Australia. Venue: Park Hyatt Melbourne. 1 Parliament Square off Parliament Place, Melbourne.

NEW SOUTH WALES 17 – ASFA Luncheon. Why financial literacy must be part of the national curriculum. Speaker: Paul Clitheroe AM, executive director, ipac Securities. Venue: The Westin Hotel. Ballroom, Lower Ground Floor. No. 1 Martin Place, Sydney. Enquiries: ASFA Member Services Unit.

Ph: (02) 9264 9300 or 1800 812 798.

24 – IFSA Deloitte Leadership Series Lunch. Speaker: John Brogden, chief executive officer, IFSA. Venue: Four Seasons Hotel, Grand Ballroom.

199 George Street, Sydney.

QUEENSLAND 21 – ASFA Luncheon. The evolving super fund member. Speaker: Mark McCrindle, principal, McCrindle Research. Venue: Stamford Plaza Brisbane.

Corner of Edward and Margaret Streets, Brisbane. Enquiries: ASFA Member Services Unit.

Ph: (02) 9264 9300 or 1800 812 798.

Fax details of conferences, seminars and courses to Super Review on (02) 9422 2822

Kate Budiselik

G

ESB has appointed Kate Budiselik and Edwin Schultz as investment strategists.

Budiselik worked most recently as

BT Financial Group has appointed former ING Investment Management (INGIM) senior portfolio manager Ron Mehmet as portfolio manager, fixed interest.

Mehmet was with INGIM for 12 years, where he worked as a portfolio manager for Australian and global bonds and real estate investment trusts in the firm’s multi-manager group. He will leave the firm on 25 June.

In his new role, Mehmet will be responsible for managing Advance’s interest in multi-manager funds.

Mehmet’s appointment will allow current portfolio manager, fixed interest/economist, Andrew Dowie to concentrate on his economist role on a full-time basis.

AMP Capital Investors has grown its Future Directions Funds team in response to market growth, with the appointment of senior portfolio manager Van Athukorala. His focus will be on large and small cap Australian equities and international equities portfolios.

Athukorala’s previous role was senior investment manager within ipac’s investment management division from 2001. He has also worked with CSR Australian Superannuation Fund and GIO Asset Management.

portfolio manager for MGPA in Hong Kong and will be responsible for formulating and managing the fund’s real estate and infrastructure asset class strategies and multi manager line-ups.

She has extensive real estate investment experience, having previously had roles as associate and assistant vice president for Citigroup Property Investors.

Schultz has responsibility for asset allocation and currency. He joins GESB from Coronation in South Africa, where he spent 10 years as a portfolio manager and joint head of the absolute return unit. He was also the chief strategist and a founding member of Capital Alliance Asset Managers. SR

Future Directions Funds portfolio manager Tanya Debakhapouve has relocated to AMP Capital’s Singapore office where she will focus on global emerging equities and Asia (exJapan) equities.

The Investment and Financial Services Association has appointed Pauline Blight-Johnston and Bradley Cooper to its board.

Bradley Cooper

Blight-Johnston is the managing director of RGA Reinsurance Company of Australia, while Cooper is chief executive officer of BT Financial Group. They replace former director Alan Griffiths and Geoff Lloyd, who have both resigned. SR JUNE 2010

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ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

Everything old is new again ROLLOVER believes that, like many other sections of society, the superannuation industry is subject to fashion fads.

Why, a mere four or five years’ ago outsourcing was all the rage – if it wasn’t core it was outsourced. You looked damned uncomfortable not to say decidedly unfashionable if you were still taking a DIY approach to things such as superannuation administration.

But fashions change – something Russell Investments proved last month when it decided to insource the Australian Member Administration Centre functions it had once seen fit to

outsource to IBM. Indeed, if Rollover’s memory is not playing tricks on him, it was Russell’s decision to outsource to IBM that prompted speculation about IBM becoming the next big superannuation administration player in Australia.

Perhaps thankfully, ‘big blue’ has never really gained serious traction as a standalone player in the superannuation administration space, and perhaps now it never will.

Despite the trillions of dollars some suppliers can see flowing through the superannuation industry, administration remains a high intensity, thin margin endeavour. SR

‘Battleship’ Ron sets sail ROLLOVER wishes to offer his hearty congratulations to ‘battleship’ Ron O’Hanley on being headhunted out of BNY Mellon to head up Fidelity.

O’Hanley who, until early May, was the vice-chairman of BNY Mellon based in Boston, found himself lured away to head up Fidelity Investments, leaving some of his former colleagues feeling a tad disoriented, not to say disappointed.

Super Review nicknamed O’Hanley ‘bat-

tleship’ because our only locally produced photograph of the great man was taken at the National Maritime Museum with the guns of a retired destroyer as a backdrop.

Somewhat coincidentally, Rollover later learned that O’Hanley had decorated his Boston office with maritime art.

While Rollover knows O’Hanley will be missed at BNY Mellon, he is delighted that someone in their 50s can still be headhunted. SR

The height of tempting fate

Ashleigh McIntyre and Lucinda Beaman hanging out.

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AGE and rank hath their privileges.

One such privilege is being able to say ‘no’ without feeling any undue guilt or embarrassment.

And such was the case when Rollover politely declined an invitation from AMP Capital Investors to abseil down the (in Rollover’s view extremely tall) AMP building overlooking Sydney’s Circular Quay.

Having once in his youth jumped out of a perfectly serviceable aeroplane, Rollover believes he has used up a large slice of his luck and should not push the issue.

Rollover is not averse to sitting atop tall buildings fronting Circular Quay, however, he likes to do so from the relative safety of a table at Café Sydney.

He is pleased to report, however, that two of his young female colleagues volunteered to take up AMP Capital Investors’ invitation, arguing they were extremely well qualified and desired some excitement in their lives.

And here was Rollover thinking that working with him was excitement enough. SR

Working for a living ROLLOVER late last month found himself researching the history of the industry superannuation funds movement with a view to writing a story about the pattern of consolidation that had occurred.

As part of that research he came across a story published in Melbourne’s The Age newspaper in 2005 reporting that industry funds stalwart Garry Weaven was talking about entering retirement the following year.

Now, to be fair, Weaven indicated in the interview that he was looking to an active retirement with continuing involvement in superannuation, but there would be plenty of people involved in running retail master trusts who would be prepared to believe he never retired at all.

Some say it’s not work if you’re enjoying yourself. SR

Got a funny story? about people in the superannuation industry?

Send it to Super Review and you could be raising a glass or two.

Super Review is giving away a bottle of bubbly for the funniest story published in our next issue.

Email editor@superreview.com.au or send a fax to (02) 9422 2822.