Super Review October 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 October 2010

Volume 24 - Issue 9

SCT fires due diligence broadside 11 WAR WITHOUT END Industry funds campaign set to continue

Superannuation fund trustees are on notice to conduct more thorough due diligence on the payment of death benefits following the overturning of a decision to grant 100 per cent to a deceased member’s mother-in-law.

By Mike Taylor

12 COMMUNICATION Getting your message through to members

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Custodians prepare to take centre stage

20 INVESTMENT Passive investment comes with a price For the latest news, visit superreview.com.au MANDATES

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The trustee did not make any enquiries about the member’s mother despite having been advised of her existence.

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uperannuation fund trustees have been sent a clear message that they need to conduct a full due diligence around the payment of death benefits, after a deceased member’s mother-in-law ended up receiving 100 per cent and a death benefit while his mother received nothing.

A recent determination handed down by a Superannuation Complaints Tribunal panel, chaired by Tribunal chairperson Jocelyn Furlan, saw it amending the decision of the superannuation fund trustee to pay 100 per cent of the death benefit to the mother-in-law and instead ensure that 25 per cent was made to the deceased member’s mother living overseas.

However, the case also revealed the degree to which the handling of death benefits by superannuation fund trustees could be complicated by disputation around deceased estates in circumstances where the member had died in 2003 without leaving a will and his primary beneficiary, his wife, had died less than four years later.

The unusual case arose before the Tribunal because 3

EDITORIAL

Jocelyn Furlan

both the member and his wife had died, and while the mother-in-law had lived with the pair, the member’s mother lived overseas and had benefited from financial support from her son.

The Tribunal made it clear in its determination that superannuation fund trustees have an obligation to seek information about possible recipients of death benefits if they are aware of their existence.

It said that the trustee did not make any enquiries about the member’s mother despite having been advised of her existence and of the fact that she had received financial support from the member and his deceased spouse.

The Tribunal said that the trustee at that time ought to have sought information in relation to the complainant to determine whether she 11

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was a potential beneficiary.

It said that while the trustee had determined the mother in law was a potential beneficiary of the deceased member because she was financially dependent on him, it had not considered whether his mother (the complainant) was a dependent.

“In the view of the Tribunal, it was unfair and unreasonable for the trustee not to have sought information about the complainant, having been alerted to her existence and having been advised that there was a financial arrangement between herself and the deceased member,” it said.

It said that the trustee’s decision not to consider the complainant as a potential beneficiary operated unfairly and unreasonably in relation to the complainant in the circumstances. SR 23

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Mandates Received by UBS GAM HSBC Securities BNP Paribas Securities Services Omega Global Investors

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Type of mandate Aussie equities Custody Custody Global Corporate Bonds

Issued by AMP Ascalon Capital Managers Legalsuper Ibbotson Associates

Amount $200 million NA NA NA

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SuperStream savings estimates unrealistic THE projected cost savings from the implementation of SuperStream are “quite wild”, while a lack of data standards will be the biggest barrier to a fully electronic system, according to Australian Administration Services chief executive John McMurtrie.

“When I look at some of those cost savings, Treasury thought there would be $1.7 billion in annual savings as against APRA’s [the Australian Prudential Regulation Authority’s] estimates of $3.5 billion, so 50 per cent cost reductions – I think somebody’s been dreaming,” McMurtrie said at the Association of Superannuation Funds of Australia

(ASFA) lunch in Sydney.

“I don’t see anywhere near the cost reductions implicit in SuperStream and MySuper.”

In the short term, the costs of SuperStream are actually going to go north, he said.

“There’s a gathering feeling that a combination of SuperStream and MySuper, there are these silly numbers floating round in the ether. There will be a major investment in getting SuperStream to where [the Cooper Review] wants to take it and the administrators are going to have to meet those sorts of costs.”

Although electronic channels have

been gaining traction, cheque volumes have continued to increase, McMurtrie noted.

“Small employers in particular are probably more inclined to write three or four cheques rather than go to three

or four separate websites for electronic contributions,” he said.

The lack of data standards has been the biggest impediment to an improvement in back-office systems, with 60 per cent of employee contributions still being submitted on non standard forms, which require manual data entry, he said. An improvement in data standard requirements would be the single biggest factor in bringing an end to the paper trail of super fund back-offices, he added.

The real step forward lies in the adoption of tax file numbers in super fund administration, particularly in the rollover space, McMurtrie said. SR

MySuper ‘back to the future’ for asset allocation Military Super MYSUPER will represent a move back towards more traditional balanced asset allocation, although the current political climate may lead to the proposal getting hung up on environmental, social and governance (ESG) factors, according to a leading asset consultant.

MySuper won’t lead to a dramatic shift towards index products, said John Coombe, head of consulting – Sydney and executive director of JANA Investment Advisers, at the Association of Superannuation Funds of Australia (ASFA) lunch in Sydney.

“We’re going back to the future, we’re going back to the balanced funds we once had where the trustees took the responsibility for asset allocation [and members were offered] a single default option,” he said.

The focus on reducing costs neglected to take into account that

the focus should still be on net return rather than just costs, he said.

“I still think there will be room for active management; I still think there will be room for alternatives within this space because I think trustees will want to differentiate their product to others, and the only way you can differentiate your product is to invest in things that others aren’t,” he said.

With the Greens holding the balance of power, the MySuper proposal was likely to get hung up on ESG factors, Coombe said.

“ESG’s going to be on the agenda big time to get MySuper through.

If you’ve got to go through the Senate, you’ve got to get the Greens onside and the Greens onside means governance, sustainability and the environment. To get through the Senate you’re going to have to prove your ESG credentials,” he said. SR

Investor confidence down in September GLOBAL institutional investor confidence decreased four points during September from 92.0 to 88.0, according to the latest State Street Investor Confidence Index, which quantifies investor confidence based on their allocation to equities.

The results were driven by a dramatic drop in North America, where confidence plunged 7.3 points to 87.9, while confidence also eased slightly in Europe from 98.4 to 97.2.

The reverse was seen in Asia, where investor confidence increased 4.4 points to 107.9.

The results were somewhat surprising given the rally in risky assets since the previous release, according to index co-developer Ken Froot from Harvard University.

appoints new CEO FORMER AGEST chief executive Michael Seton has been appointed as chief executive of the Military Superannuation and Benefits Scheme, succeeding Paul Watson.

The chairman of Military Super, Tony Hyams, confirmed Seton’s appointment.

Seton has more than 30 years experience in the superannuation and insurance industries and was chief executive of AGEST for eight years. SR

MySuper minimises choice “One underlying driver here is the persistent softness observed in the US economy over the summer, which contrasts with the resilience of markets elsewhere, such as Australia, Canada, New Zealand and Sweden,” he said.

Paul O’Connell from State Street Associates, who also co-developed the index, said that institutional portfolio flows underlying the numbers revealed a rotation out of ‘core’ markets such as the US and Europe (ex-UK) and into ‘peripheral’ or emerging markets.

“Thus this month’s numbers reflect a re-evaluation of relative country prospects by investors, rather than a wholesale reduction in risk appetite,” O’Connell said. SR

COOPER Review panel member David Gruen has outlined some of the thinking behind the review’s MySuper recommendations in a speech to the Australian Conference of Economists, saying that existing economic theory and research underpinned the panel’s beliefs that increased choice can lead people to make poor decisions.

“For most people, whether to save and how much to save can be a difficult cognitive problem because of a combination of limited calculation power, along with framing and anchoring biases,” Gruen said.

The standard theory that more information and choices make people better off has been questioned, he said.

“Large choice sets appear, in some circumstances, to degrade the quality of the decisions people make.”

Research suggests choice overload increases the likelihood that people, particularly those

with low levels of financial education, will choose a default option, leads people to pick simpler options regardless of their suitability or degrades their capacity to make optimal decisions, he said. “[The evidence] highlights the importance of financial literacy, but also the importance of high-quality default options in retirement saving plans. [Evidence] also suggests that people can be made better off if choices are framed to ‘nudge’ them towards making optimal decisions,” he said.

A key principle of MySuper was to mandate a default option that would promote the wellbeing of those who did not want to actively choose an option, but that mandated option would not be imposed on anyone, he said.

People would be able to select MySuper or choose from a range of alternative options, but the idea was not to have a centrally determined option for everybody. SR OCTOBER 2010 * SUPERREVIEW

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Changes to SMSF registration process welcome: SPAA THE Self-Managed Super Fund Professionals’ Association (SPAA) has welcomed further changes to the self-managed super fund (SMSF) registration process, which will enable more time to assess SMSF trustees and prevent fraudulent activity.

SPAA noted that the Australian Taxation Office (ATO) had updated the SMSF registration process, which involves the ATO completing a risk assessment on all new SMSF trustees and the use of a new ‘registered’ status as opposed to a ‘determined’ status in the Super Fund Lookup

register. As such, it will take up to seven days before a SMSF’s details appear on the register, enabling the ATO to complete the risk assessments and identify and prevent illegitimate SMSFs from operating, SPAA stated.

According to SPAA, a number of initiatives being rolled out by the ATO would improve the integrity of the SMSF registration and super rollover process. It welcomed the changes and stated that it looks forward to the implementation of a SMSF member verification service later this year, which it helped the ATO test.

“SPAA takes a very dim view of SMSFs being used as a way to access superannuation illegally so we welcome initiatives that seek to improve the transparency and integrity of the SMSF registration and rollover process,” said SPAA chief executive Andrea Slattery.

“Improvement to the SMSF registration and rollover processes will also provide a more secure process for investors who want to enjoy the flexibility and control that a SMSF offers and maintain confidence in the entire superannuation system.” SR

INGIM bolsters presence in wholesale intermediary market ING Investment Management (INGIM) has bolstered its presence in the wholesale intermediary market with two key appointments.

Natalie Grey has been appointed northern region manager, responsible for building a presence in the financial adviser markets in NSW, the ACT and Queensland. Her previous role was with AMP Capital Investors as state

manager for NSW and the ACT. Lucie Douez joins INGIM from Goldman Sachs JBWere, and will become its Melbourne-based business development manager responsible for the southern region.

INGIM Australia’s head of sales, Jim McKay, said further appointments would enable the organisation to achieve its plans to deliver a new servicing model for

financial advisers.

“The sale of ING Group’s holding in the ING Australia joint venture to ANZ Bank in late 2009 has resulted in INGIM being able to form direct relationships with the advising community for the first time,” McKay said. She added that this segment of the market was a key area of focus for INGIM’s local strategy. SR

Australian Unity establishes unlisted property fund AUSTRALIAN Unity has launched a new institutional retirement village property fund in light of increasing demand and growth in the retirement community sector.

Australian Unity stated that the Australian Unity Retirement Village Property Fund would buy well-established retirement villages that meet strict criteria established by both Australian Unity Investments’ property portfolio managers and Australian Unity Retirement Living, and the fund would seek to provide

returns of 4 per cent over the benchmark of rolling 10-year Australian government bond yields, based on a total investment return after fees.

It stated that typically up to 50 per cent of the return would come from income from the retirement villages, with the remaining 50 per cent generated by long-term capital appreciation of the properties.

The head of Australian Unity Investments, David Bryant, said studies have revealed a growing interest by older Australians in

retirement villages.

“A recent report predicted that by 2016, 6 per cent of Australians over 65 will live in retirement villages, up from 5 per cent in 2009, and increasing to 7.2 per cent by 2026,” he stated, referring to Colliers International’s Market Indicators Report released in 2009.

“Coupled with the rapidly ageing population in Australia, this means that demand for retirement communities will grow significantly over the medium to long term, which will support the

David Bryant

value of our portfolio.”

Australian Unity stated that the fund would be a stapled security made up of two trusts, the Retirement Village Property Trust and the Retirement Village Operating Trust. SR

More Australian entries in global ranking for biggest funds SUPER SA, GESB and Telstra Super have joined 12 other Australian superannuation funds in a global 300 ranking of the world’s biggest funds.

Towers Watson partnered with US investment magazine Pension & Investments to produce the top 300 list, which found Australian funds grew 16 per cent in 2009 in US dollar terms and now account for 3 per cent of the total assets in the top 300 global pension funds. The overall growth rate for funds in the top 300 was 8 per cent.

“The results of the latest survey are not surSUPERREVIEW

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prising given the strong net positive cash flow resulting from our system of compulsory super contributions, as well as the relative strength of growth assets over the past year, with Australian funds tending to favour higher allocations to growth assets than the global average,” said Martin Goss, senior investment consultant at Towers Watson in Australia.

Australian funds hold significant allocations to both equities and growth-biased alternative investments, which saw a strong reversal over the past year after losing significant value during the global financial crisis, Goss said.

The other 12 funds all improved their position with Australia’s leading fund, the Future Fund, climbing from 52nd in 2008 to 37th in 2009.

In order, the 15 Australian funds, with a combined asset size of US$296 billion were the Future Fund (37), AustralianSuper (89), State Super (98), QSuper (110), UniSuper (123), First State Super (170), ARIA (175), REST (181), ESSSuper (194), SunSuper (202), Hesta (206), Cbus (223), Super SA (285), GESB (292), and Telstra Super (295). SR

Andrea Slattery

AMP acquires Sydney office for Sunsuper AMP Capital Investors has expanded its direct property portfolio mandate with Sunsuper by acquiring a Sydney office property on its behalf for $100 million.

AMP Capital Investors’ Property Portfolio Services has a mandate with Sunsuper to manage a diversified, direct property portfolio, and the latest purchase took the number of properties in the portfolio to four.

Portfolio manager at AMP Capital Investors, Damian Fitzpatrick, said the purchase represented a suitable fit for Sunsuper’s requirements in terms of projected total returns.

“We see increasing demand for quality office space in Sydney, and 35 Clarence Street is opportunistically positioned to capture ongoing tenant demand, with a number of leases due to expire over the next few years,” Fitzpatrick said.

“In recent months, there has been a significant improvement in property market sentiment with market values bottoming out but supply has been limited,” he added.

According to the latest Property Council of Australia Office Market Report, tenant demand for office space in the Sydney CBD recorded its strongest growth in the past three years. SR

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Institutional investors cling to developed economies

By Chris Kennedy INSTITUTIONAL investors are continuing to bias their equity portfolios towards developed economies, unnecessarily retaining higher levels of risk and limiting returns, according to Mercer.

Developed economies feature structural disadvantages such as excessive public debt and weak bank lending, while many developing markets benefit from young and expanding populations with strong growth.

Mercer has released a paper, A Blueprint for Improving Equity Portfolios, in

which it calls on institutional investors to carry out a fundamental review of their equity portfolios.

Nick White, principal in Mercer’s Investment Consulting business, said the growth of developing countries was less interrupted by the global financial crisis, while increased regulation and the potential for policy errors were likely to slow growth in the developed world.

“Investors should ensure they have access to broad equity market returns. The problem is that many equity strategies are biased in favour of developed countries and large cap stocks, and this is like-

ly to increase fundamental risk and may compromise returns,” White said.

“Investors need to ensure their equity portfolios are sufficiently diversified with exposure to as many forms of risk premia as possible. This will ensure their portfolio will be more resilient in the face of any unforeseen market dislocation,” he said.

Mercer recommended diversifying away from large cap developed markets in a rational way, with increased exposure to emerging, small cap and low volatility strategies, in order to preserve performance potential and to improve

Nick White

the efficiency of portfolios.

Although Australian clients’ home bias provides an indirect exposure to the emerging markets, it is in clients’ best interests to increase their direct exposure to the emerging markets to ensure they capitalise on the emerging markets story, White said. SR

MySuper to increase underinsurance: Russell Australian investors blasé on corporate governance

MYSUPER could exacerbate the underinsurance problem by increasing the reliance on default insurance cover, while providers are likely to adopt the minimum required levels of cover, according to Russell Investments.

Russell recently announced several upgrades to the technology and insurance options within the Russell SuperSolution Master Trust and to some corporate superannuation schemes, which it said were aimed at addressing this issue.

The upgrades included an online insurance calculator in partnership with TOWER Australia that calculates how much insurance a member will need based on their age, income, dependents and marital status.

Jason Marler, director of business strategy and operations for Russell, said default options within superannuation insurance could be leaving people underinsured.

“Group insurance within super has a number of benefits: it’s tax advantaged, it is generally provided without the need for medical history, it can be met out of superannuation guarantee contributions (a plus for younger people who typically have less immediate cash flow), and the bulk buying power of large funds means individuals often get more competitive premiums,” he said.

Russell also launched an online application and underwriting process, which would approve additional cover on the spot for the majority of applicants, with plans to streamline the claims information collection process.

“Rather than simply relying on the technology, we are expanding our in-house client servicing team in the insurance claims area to provide a better and more personalised experience for our members,” Marler said. SR

AUSTRALIAN investors are becoming dangerously indifferent to the value of good corporate governance.

That is the analysis of an adviser on governance issues to the Australian Institute of Superannuation Trustees (AIST), Dean Paatsch, who said too much money was being directed to “sell side” ratings houses and not enough to “down-side” research.

Addressing an AIST conference, he said that there was not enough resourcing for governance research, which was being undertaken by just a handful of people.

Paatsch cited a number of ex-

amples of recent corporate deals in Australia where he believed not enough attention had been paid to down-side issues.

One of those deals was Seven’s acquisition of WesTrac, which he described as both “weird” and “strange”.

Paatsch said that “sell side” analysts had backed the deal even though, in private, many had expressed their reservations.

He said it was too difficult to find people willing to stand up and get rid of bad boards.

“Too frequently no one stands up for shareholders,” Paatsch said. SR

New Govt likely to implement SuperStream proposal

Philip La Greca SUPERREVIEW

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THE new Labor Government will probably implement Jeremy Cooper’s SuperStream proposal but an increase in the superannuation guarantee (SG) now looks very unlikely, according to Multiport.

The Government’s proposed mid-2011 tax forum would revisit the Henry Tax Review and may also cause holdups in the rollout of Cooper Review changes, Multiport’s technical services director Philip La Greca said.

“Efficiency gains like SuperStream should happen given broad support and the cost

savings for fund members,” La Greca said.

Future of Financial Advice reforms and competency training are also likely to be implemented because they are seen as increasing consumer protection, he said.

La Greca rated MySuper as a line ball proposition because it has a consumer focus but the cost of implementation versus the potential member benefits would be revisited. MySuper has drawn support from some sectors of the industry but was publicly criticised in the lead up to the election

by both Shadow Treasurer Joe Hockey and Financial Services Council chief executive John Brogden.

La Greca said a proposed increase in the SG to 12 per cent and additional tax offsets for low income super contributions were now very unlikely to be accepted in the near term because they would require tax changes to help fund an increased cost to both Government and employers, and also require consensus on the Henry Review tax reform proposals. SR

Look ahead with us.

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ASFA supports Ferguson’s call for action

By Chris Kennedy THE Association of Superannuation Funds of Australia (ASFA) has supported comments from Resources Minister Martin Ferguson that mining companies and unions should immediately increase the superannuation guarantee (SG) to 12 per cent across the sector.

The comments underline the fundamental role of superannuation as a driver of economic and fiscal policy in Australia, according to ASFA chief executive Pauline Vamos.

“Raising minimum contributions will have a significant impact on inflationary pressures,” she said.

ASFA research shows around $10 billion a year is being paid into the superannuation accounts of Australian workers, above the mandated 9 per cent.

“There are employers already paying above the required 9 per cent SG. These employers recognise that the current SG rate will not be enough to enable working Australians to fund the retirement lifestyle that they want and deserve. It also demonstrates that

employees are prepared to forgo wage increases in order to grow their superannuation,” Vamos said.

Australia cannot have a two-tier superannuation policy where only some Australian workers are able to meet their adequacy goals, she added.

Vamos also reiterated her call for bipartisan support on increasing the SG, as well as other superannuation reforms, including raising the concessional caps for individuals over 50 and a super tax contribution rebate for low-income earners. SR

Newly elected Govt urged to implement reforms WITH Labor having formed a minority Government, it is now time for Parliament to push ahead with key aspects of Labor’s previously announced superannuation reform, according to two key industry bodies.

An increase in the superannuation guarantee to 12 per cent and Jeremy Cooper’s Superstream reforms were the most pressing issues, according to the Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC).

“This is the first opportunity we have ever had to have bipartisan support for super.

This will deliver the certainty that Australians want when they put money away for their retirement,” said ASFA chief executive Pauline Vamos. “[Last month’s] decision by the independents to support a minority Labor Government provides an opportunity for it to finish the job.”

FSC chief executive John Brogden said it was too early to say what impact the new Government would have on the financial services industry or how much of the existing reform

Pauline Vamos

SMSF property transfer laws change

John Brogden

agenda would be implemented, with the Gillard Government required to now work out which issues to try to push through a very different parliamentary landscape.

Despite support for many of Labor’s key policies, Brogden said the FSC remained “strongly opposed” to the MySuper proposals outlined in the Cooper Review and supported by Labor, as well as other “small elements” of the Cooper Review and Ripoll Inquiry reform agendas.

Brogden said the FSC remained committed to the “overall reform agenda”, saying it “provides the industry with the opportunity to embrace change that will lead to a higher level of trust between consumers and the financial services sector”. SR

CHANGES to self-managed super fund (SMSF) regulations effective from 1 July, 2010, mean businesses can transfer their business real property (BRP) into a SMSF and attract only $50 in stamp duty, according to chartered accountancy firm Nexia Court.

Transferring a BRP into a SMSF could help free up cash within superannuation so the trustee could use the cash for consideration of the transfer, according to Nexia Court’s financial services partner, Craig Wilford.

“Also, you’ll attract little or no capital gains tax (CGT) if the property falls within the small business CGT concessions. You’ll receive a rental reduction at your tax rate and only pay 15 per cent tax on the rental income within your SMSF,” he said.

It is also possible to legally pay no tax on the rental income and capital gains within the SMSF for those aged over 55, he said.

“In addition, you’ll avoid having to pay premium rent on business premises by buying [the] premises in a SMSF and taking advantage of the high rental yield yourself. Your SMSF can pay for the BRP by cash via members’ contributions or borrowed money,” Wilford said.

Transfers prior to the change in legislation would have attracted existing stamp duty fees, which would equate to $9,000 on a $300,000 property and $40,000 on a $1 million property.

The concession applies only to BRPs being transferred into a SMSF. The transfer must satisfy the requirements of the NSW Duties Act, which stipulates one or more individuals, rather than a company or trust, currently owns the property. SR

ING’s Oasis offers new online share trading facility ING Australia’s wholesale administration wrap platform, Oasis Asset Management, has launched a new online direct share trading facility that ING said offers real-time trading and web-based corporate action election and processing management.

The upgrade will provide superannuation and pension investors with acSUPERREVIEW

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cess to more than 200 ASX securities and exchange traded funds (ETFs), ING said.

ING’s head of superannuation and investment platforms, Mark Pankhurst, said the service was built upon a broad choice of investment solutions, individual control and ease of use.

The cornerstone of the share trading

service is the individual Holder Identification Number (HIN) structure, which means Oasis will maintain a separate HIN for each individual client, allowing advisers to maintain control of their clients’ share holdings, Pankhurst said.

Individual investors will have entitlement to full corporate actions in both

superannuation and investment products on the platform, he added.

Accessed through Oasis’ e-commerce platform MoneyOne Online, trading is actioned through Oasis’ default online broker, Core Equity Services, or by trading off-line with any of six supporting panel brokers, according to ING. SR

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Industry funds persist with anti-commissions campaign THE industry superannuation funds have signalled they will be continuing their long running campaign against financial planning commissions with Industry Funds Management chairman Garry Weaven claiming only the intellectual debate has been won.

Defying suggestions by other spokesmen in the financial services industry that the debate over commissions had been run and won by the industry

funds, Weaven claimed there were those who had an agenda to “win the peace” by retaining commissions in another guise.

Participating in a panel discussion during an Australian Institute of Superannuation Trustees (AIST) conference on the Gold Coast, Weaven said: “Commissions are not dead. We’ve only won the intellectual debate.”

His comments came as other speakers on the panel suggested that if the

Coalition were able to form a minority Government then commissions would continue to exist irrespective of the moves undertaken by the planning industry.

Weaven and the other panellists were also critical of the Cooper Review’s MySuper proposal, warning that it represented a “dumbing down” of the superannuation system.

The chief executive of major industry fund Hostplus, David Elia, said the

Garry Weaven

basic flaw in the MySuper proposal was that it was founded on a fundamental belief in lowest cost, which did not necessarily equate to the best outcome for superannuation fund members. SR

RecruitmentSuper’s new investment Dividends climb approach wins star rating

By Chris Kennedy RECRUITMENTSUPER has attributed an overhaul of its investment approach to the fund receiving a five-star rating in the recently released Canstar Cannex product ratings.

RecruitmentSuper was one of 10 superannuation funds to receive a top rating, and chief executive Megan Bolton said the award was a validation of almost two years work transforming the fund to be more competitive.

“In 2008 we appointed a chief investment officer to drive competitive performance, and changed our investment

objectives, philosophy and principles,” Bolton said.

“Our ranges of investment options were streamlined to maximise the economies of scale of the fund.”

The fund has also recently upgraded its website and member online services, and the fund’s member services arrangements also provide access to Outlook Financial Solutions, she said.

Canstar Cannex compared 70 public offer funds and excluded wraps, platforms, self managed super funds, corporate super funds and other investments that are not open to the general public. SR

Superannuation sentiment soars AUSTRALIANS’ sentiment towards superannuation has seen its first positive move since the onset of the global financial crisis, although there are still ongoing concerns over share market volatility, according to the latest biannual Mercer Superannuation Sentiment Index.

Sentiment towards superannuation has risen by three points to 40 out of 100, according to the study of 1,000 working Australians conducted in June this year.

That rating dropped from a high of 54 in June 2008 to 37 last December.

The percentage of Australians who were worried about the impact of share market volatility on their super balances actually rose from 56 per cent to 61 per cent over the past six months, and the level of trust in superannuaSUPERREVIEW

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tion also climbed, with 49 per cent of respondents believing their main fund is trustworthy, up from 41 per cent in December 2009.

Heather Dawson, partner at Mercer, said the findings underlined the need for the superannuation industry to continue to educate and engage with members, with a strong positive correlation between knowledge of superannuation and a member trusting a super fund.

Improving member knowledge would provide better retirement outcomes for members as well as an opportunity to build trust and loyalty for funds, she said.

Being proactive with members to use personalised online tools and education, and providing a variety of

Heather Dawson

channels for information including telephone and face-to-face consultations, would help to develop that knowledge and trust, she said.

The study found the top concerns about superannuation were low growth and returns, not having enough funds for retirement, loss in value and the state of the economy. SR

AN improvement in the fundamentals of listed Australian companies has led to dividends climbing back towards more normal levels, and improved the appeal of income strategies that could be particularly suitable for self-managed super fund (SMSF) investors.

Australian shares have rebounded while dividends have increased for the first time in 12 months, which will put pressure on companies to pay out their cash reserves, meaning overall yields are competitive against term deposits and the appeal of income based strategies is increasing, according to Scott Bennett, portfolio manager at Russell Investments.

“We are seeing a turning point for dividends.

As a result, we expect a rise in income-based strategies as the market heads into a period of lower growth where a greater proportion of investors’ total returns could be driven by dividend income,” Bennett said.

Income strategies would be particularly useful for SMSF investors as they begin implementing their transition to retirement strategies, Bennett said.

SMSF investors should also consider share buybacks, which are set to increase as companies move away from conservative balance sheets, he said.

Excess cash could have a negative effect on a company’s return on capital, potentially increasing shareholder pressure to put the cash to work through merger and acquisition activity, or return it to shareholders via a special dividend or buyback, Bennett said.

“Woolworths’ recent off-market buyback is an example of an attractive strategy for SMSFs, as the majority of the buyback price was treated as a fully-franked dividend, therefore allowing significant tax benefits for investors,” Bennett said. SR

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Trying to win the peace The industry superannuation funds may not be ready to stop prosecuting their war against commissions but prosecuting their attack will not be easy when confronted by a minority Government with other priorities.

Mike Taylor

T

he financial services industry should expect no let up from the industry superannuation funds with respect to the payment of commissions to financial advisers relating to either advice or the sale of insurance products.

While many people have believed the war over commissions paid to financial planners is over and that the industry funds are the victors, the chairman of the Industry Super Network, Garry Weaven, has signalled that he will not be laying down his arms. Having won the war he is determined that the industry funds should not lose the peace.

Weaven made his position clear at last month’s Australian Institute of Superannuation Trustees (AIST) Australian

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Super Investment conference on the Gold Coast and there would have been many people within the financial planning industry and in the Parliament who duly noted his determined rhetoric to the industry funds faithful.

Weaven, of course, had a point. Because while it is true that large sections of the financial services industry have declared their willingness to abandon commissions and embrace a fee-for-service regime, the terms on which they will do so falls well short of what was being demanded by the industry superannuation funds.

Commissions with respect to the provision of financial advice may well become a thing of the past within the next two years, but commissions tied to the sale of insurance products are likely to continue, and then there is the complex issue of the volume rebates paid by product manufacturers to financial planning dealer groups.

The volume rebates, broken down to their essence, represent a reward paid by investment platforms for the fund flows directed by planners

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The aggressive hostility of the Opposition means that any campaign mounted by the industry funds would carry with it a certain amount of risk.

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through their dealer groups.

It is undeniable that, in many instances, portions of those volume rebates find their way into the coffers of individual financial planners.

Weaven’s determination to fight on is based on his suspicion that while the financial services industry may say it is abandoning commissions, what many will really be doing is changing the facade rather than the underlying architecture.

However, the delicate balance of the Federal Parliament and the aggressive hostility of the Opposition means that any campaign mounted by the industry funds would carry with it a certain amount of risk.

As sympathetic as the new Gillard Labor Government may be to the arguments being prosecuted by the industry funds, its ability to legislate on the issues has been constrained by the absence of a clear-cut majority in either the House of Representatives or the Senate.

Thus, while it is unlikely the Federal Opposition would have much difficulty in supporting something such as the introduction of the Cooper Review’s Superstream, it is unlikely to be so relaxed if it believes the Government is seeking to do the bidding of the industry funds at the expense of the retail financial services industry.

It follows that the bulk of the changes likely to be imposed on

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the financial services will be by way of regulation rather than legislation, and given that initiatives such as Superstream require changes at the margin to issues such as the use of tax file numbers, it is entirely possible that the Parliament will never get to debate the initiative.

By comparison, the implementation of a universal approach to default fund arrangements would require a legislative approach and early indications are that the Coalition would be opposed.

The new Assistant Treasurer and Minister for Financial Services, Bill Shorten, is regarded as a pragmatist who has undoubtedly already developed his own analysis of what is possible in the new Parliament and what is not. Perhaps more importantly, he will have already shortlisted the battles that demand to be fought.

The problem for Garry Weaven in seeking to ensure that the industry funds ‘win the peace’ is that he is likely to find himself dealing with a Government with other priorities.

He is also likely to find himself with an aggressive Federal Opposition only too willing to paint industry funds as subsidiaries of the trade unions and the ‘faceless men’ who run them.

The issues in the superannuation debate may not have changed, but the rules of the debate certainly have. SR

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12 MEMBER COMMUNICATIONS

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Getting the right messages The global financial crisis placed intense pressure on superannuation funds to communicate clearly and concisely with their members and, as DAMON TAYLOR reports, some important lessons have been learned.

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fter having navigated the global financial crisis (GFC) and almost certainly being on the brink of significant legislative change, it is arguable that Australia’s superannuation industry is more in the spotlight now than it has ever been.

On the back of increased member communications that were a necessity during the GFC, Australians are as aware of their super as they have ever been but the challenge, according to Anthony RodwellBall, chief executive officer of NGS Super, lies in maintaining that momentum.

“In our particular case, we’re very conscious of the fact that we have an educated, enquiring and fairly challenging member group,” he said. “So the ramp up that we went through during the GFC, and we deliberately did increase and launch a number of initiatives, we’re going to continue and build on.

“The intent is to make sure that going forward, we don’t lose that momentum.”

Offering an example of a member communications initiative that had its roots in the GFC but that was set to continue, Rodwell-Ball pointed to monthly investment updates.

“During the GFC we had an annual investment update that had been running for a year or two but we took that idea further

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and we now do a monthly investment update for members,” he said. “The annual update is still posted out as normal but the monthly update is put on the website and emailed to those members who we know are interested.

“That’s just one example of an initiative that we’re continuing with but there are many others,” Rodwell-Ball continued.

“And yes, to some extent they were in response to the GFC but they were also about deliberately building our strategic positioning, and that’s something we intend to continue.”

Peter Lewis, head of retirement products for Aon Consulting, said that while he did not anticipate funds and master trusts decreasing their outbound communications, members would have had their expectations set as a result of what they saw during the GFC. “The onus is on us, as the provider of their superannuation solution, to maintain that heightened level of communication, particularly during periods of uncertainty or volatility,” he said. “The worst of the GFC may be behind us but markets are still quite volatile and member communication and member engagement are as important today as they were at the height of the GFC. “Rather than winding back, now is the time to build on the

momentum and make the most of our communications while we have members’ attention,” Lewis continued. “Every member communication, from quarterly newsletters and website topics to special interest and face-to-face presentations, offers us a touch point to reinforce our message.

“Reiteration across different media will help members build their knowledge and understanding over time and that reinforcement mechanism is vital if we want our members to hear the messages we send out.”

Yet while he agreed that increased member communications had been a certain byproduct of the financial crisis, Peter Nicholas, director of customer value for AMP, said that the issue to take note of was less about the frequency of communications and more about members’ understanding of them.

“There was certainly a reaction to the market at that time

in the communications being delivered by funds,” he said.

“And it was based on a real need because their members or customers wanted to know what was going on.

“But the bigger issue here is getting people to understand their superannuation,” Nicholas continued. “So to me, whilst the frequency may no longer be there because you don’t have to react to the movement in the market, the need is about making sure that communication lands.”

“It’s not about the fund needing to communicate, it’s about getting the customer to get that basic understanding and, if you like, literacy around superannuation – the key here is realising that there’s no point in sending out a communication unless it means something to the consumer.”

Naturally, Nicholas’ focus on ensuring that the super industry’s member communications

are understood is one shared by the vast majority of superannuation executives. The key words here are most often targeted and relevant, and for Nicholas the best means of achieving those two things is via personalisation.

“At AMP, what we’ve done is we’ve actually created individual reports that we send out to people, really tailored to the circumstances of the individual,” he said. “But the main thing here is about not only the information, because I think we fall into the trap sometimes of just providing information to customers, it’s about personalising it and giving them context.

“I use a useless analogy to illustrate this and that is that whenever I go to an Australian city, I get lost as I walk around and I struggle to find one of those maps that are on street corners,” Nicholas explained. “But when I find the map, the most valuable thing

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out

on the map to me is the ‘You are here’ location.

“It gives me context, because otherwise I’m looking at something and I’m still struggling to find out where I am.”

Nicholas said that AMP’s effort to send out a personalised report to members not only gave them information on what their current assets are or their investments or their insurances but it also gave them context to say, for example, that in the range of investments, you are here.

“It gives them context and empowers them to make decisions about their own future,” he said. “But when it comes to treating individuals as individuals and communicating with them on that basis, I think the industry has a long way to go.

“In the main, there’s quite a member spectrum in superannuation – you’ve got some people who see it as a tax – that just join the workforce and 9 per

cent goes out and they don’t get their hands on it –but others are far more engaged because they’re close to retirement,” continued Nicholas. “So there’s a need to understand the individual, where they’re at and make it relevant for them because the reality is that the person who has just started work has got time on their side, and the right decisions at the right times can have a big and profound effect.”

Yet with the changes proposed by the Government’s various reviews now a backdrop to all activity within the super industry, the question of how compliance can best be balanced against the understanding advocated by Nicholas is pertinent. Obviously, all communication must be delivered within the industry’s legislative framework, but Rodwell-Ball said that there was also an increasing acknowledgment that information had to be simple, clear and easy to understand.

“Moves towards short-form Product Disclosure Statement (PDS), for example, are excellent,” he said. “But because you’re talking about money, there’s always going to be a tension in this industry. You can’t go to market with an over-simplified, dumbed down or chatty type of contract.

“We have to be very careful not to get into that space but, by the same token, you’ve got to communicate using everyday language that people will understand,” Rodwell-Ball continued. “Fortunately, there seems to be a move and an understanding on the part of the regulators that that’s becoming increasingly necessary, and additions like short form PDS’ reinforce it.

“Realistically, there will always be a tension between compliance and the necessity of clear, simple communication but, given that the industry’s now managing

between $1.2 billion and $1.3 billion, that’s to be expected.”

Nicholas said that while there was little doubt that super funds and master trusts worked in a relatively complex legislative environment, there was still plenty of scope to communicate with members effectively.

“To give you an example, I once saw a letter that was sent out to the members of a superannuation fund at the time they turned 55, which is when they can get their hands on their money,” he said. “The first part of the letter, which was technically correct and signed off by the lawyers and completely compliant, said: ‘Congratulations – you’ve reached your preservation age!’

“Now the rest of the letter was again technically correct in everything that it said but it was meaningless to the consumer,” continued Nicholas. “With that opening line, I think many people felt as if they were going to be put in a jar on the shelf.

“It didn’t engage them around their superannuation, so whilst there are constraints from a regulatory and legislative point of view, there are still ways to say the right things to the consumer and, most importantly, in the right way.”

Providing a sideline to member communications within the super industry is the advent of intra-fund advice. But despite receiving the ability to provide that extra degree of information, education and communication to members in the midst of the financial crisis, it seems very few funds have chosen to leverage that ability.

For Rodwell-Ball, however, it is a question of finding the right method of delivery.

“It’s a question of how do you

deliver it and, in a sense, how do you deliver it efficiently and cost effectively,” he said. “That has to come into the equation as well. You’ve got to look at the individual need – we started providing intra-fund advice via the call centre in November of last year and we’ve probably had a 5 per cent uptake across our members over the last 12 months.

“Now, we’ve communicated its existence in many, many ways, but whether or not people actually understand what it is, that’s another issue again.”

Rodwell-Ball said many funds would still be working out what was the best method of delivery for intra-fund advice.

“We’re in that same boat too.

We’ve got a solution but we don’t have a holistic solution yet,” he said. “So we’re looking at other means of delivering it, maybe via the Internet, and as we speak, we’ve got an extension to our licence to deliver it in that manner.

“But in our case, it has to be cost effective because as a notfor-profit fund, respecting the fact that people don’t always want to pay for it, you’ve got to be a bit wary of how it’s delivered and the cost impact,” Rodwell-Ball continued. “And I suspect that’s probably more of the reason behind the fact that funds haven’t plunged into it yet, that there is a reasonably significant cost attached and there’s an expectation in the member group at large that it should be part of the admin charge that they currently pay.

“Sometimes you can’t always be accommodating to that. At some point it has to be a commercial decision.”

☞ Continued on page 14 OCTOBER 2010 * SUPERREVIEW

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Getting the right messages out ☞ Continued from page 13 Lewis said that it should not be surprising that individual funds and master trusts had chosen different paths on intrafund advice.

“Different funds will have different views on intra-fund,” he said. “For a long time we’ve had an advice model in place for members of the Aon Master Trust but the challenge for any super fund is to ensure that the advice is scalable.”

“The entry point will often be a single issue or a particular area that a member would want assistance with. It may be around making investment choice, making a contribution or choosing the right level of insurance,” Lewis continued.

“That may be the entry point and their only advice-type interaction but they may also come back over time looking for assistance across a whole range of areas related to their superannuation.”

According to Lewis, members typically look for help in five key areas of superannuation.

“One, do I make an investment choice from the range of options that are on offer?” he asked (on behalf of the typical fund member). “Two, do I make additional contributions or what are my options around making additional contributions and what are the advantages and disadvantages of those various options?

“The third one would be about consolidating previous super and the benefits of doing so,” continued Lewis.

“Then there’s insurance cover, both the level of cover and the type of cover that a member may have within the fund.

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they appropriate for my circumstances in terms of death, total and permanent disability, income protection?’

“Finally, there’s the nomination of beneficiaries and, particularly if the fund offers binding or non-binding nominations, the pros and cons of each type.”

From a single-issue perspective, Lewis said that a member could be looking for advice on any one of those five areas or all five simultaneously.

“At that point there is also the question of whether a member wants advice not just around superannuation issues but also wider financial planning assistance outside of super,” he said. “The challenge for super funds is to provide an advice model that is scalable but as to whether that model is intra-fund or traditional, does it really matter to a member? At the end of the day, does the member really care?

“They just want assistance that they believe is accurate, reliable and valuable – they don’t really care whether it’s provided by the super fund trustees or via the more traditional advice avenue.”

So what then is the answer when it comes to member communications? From online tools and calculators to intra-fund advice, the superannuation industry has at its disposal a huge range of ways and means by which it can engage members, but what does the key focuses need to be?

Rodwell-Ball said that the simple answer was that there was no magic pudding solution to member communications.

“You’ve got to try a number of strategies because, in a sense, it’s no different to running any other business – you’ve got to

look at the investment and the potential return on that investment,” he said. “We as a fund have taken a strategic decision to invest a lot in our website and our electronic communication with our members, and that’s been deliberate because with 80,000 members in the education sector, who typically have access to electronic media, they are web enabled.

“Now that may not be appropriate for a Cbus or an Aussie Super with a very different profile of member,” continued Rodwell-Ball. “But you can stretch yourself very thin, and that’s why a lot of funds, ourselves included, are going to far more sophisticated marketing techniques such as segmentation to try to determine what segments of the membership are likely to

Peter Nicholas

respond to what messages, how they should be profiled and what is the best means of communicating with them, whether that be written, electronic, phone or even face-to-face.

“You’ve got to tailor your message according to your own market.”

Similarly, Nicholas said that because funds and master trusts had different customers

in different stages of life, with different financial understandings and different financial histories, not to mention comprehension, there was a need to make sure they were giving them the right access to the right tools at the right time.

“Certainly, online mediums have a big role to play in that but so too does face-to-face interactions and the advice being given itself,” he said.

“But the real challenge is that initial piece of engagement, how do you get someone to take interest in their superannuation when they don’t understand it? How do you build that understanding and financial literacy around it, and then how do you give them the tools to be able to engage?

“For us, it’s a bit of an integrated approach. It’s online for people who want to find that information online or we push out these employer benefit reports in conjunction with the employer that gives them their personal circumstances and refers them online for information, linking in with planners when they need planners,” added Nicholas. “It really is an amalgam.

“I think whilst I was a believer in silver bullets once upon a time, silver bullets still need a gun to be focused and, ultimately, someone to pull the trigger.”

Looking to the future and to what Aon’s member communications strategy would be over the next 12 months, Lewis said that the focus would be on ensuring that the information members wanted was readily accessible through their preferred medium.

“That’s going to be an important area to maintain, making

sure that if their medium of choice changes that we adapt and make sure we have it available,” he said. “It is also vital that we reconcile the need for plain language and concise messages with the need to provide enough information for those members wanting to deep dive for more detail around their particular issue or area of enquiry.

“The aim is to start at a high level and then make sure we have the supporting detail for members with more complex or sophisticated needs,” added Lewis. “It’s an interplay between the two ends of the spectrum – key messages and the complexities or intricacies of the detail.

“But that’s not a recent phenomenon. It’s a balancing act that the super industry has had to deal with for a long time.”

Nicholas said that ultimately, people were going to realise the importance of superannuation, if only because of the size of the asset that would build up over time and how important it would be to their future.

“But if I bring that back to the next 12 months, the key here is continuing to experiment around creating relevant individual communications,” he said. “It’s not about the fund communicating out to many, it’s about what’s the individual’s needs. So can we as an industry give them something that they’re going to engage around because they’re interested? Can we give them a good level of understanding within that?

“Because at the end of the day, what we want is something that gives them some empowerment about making decisions on their own future.” SR

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16 CUSTODY

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Emerging from the shadows Custodians were once seen as the conservative and unglamorous backroom operatives necessary to the execution of investments but, as DAMON TAYLOR writes, super funds are finding that a good custodian can add genuine value.

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s with all service providers to the superannuation industry, custodians have seen their fair share of challenges in recent years. But while financial market activity may have calmed for the moment, activity within Australia’s superannuation environment has not.

With fewer custodians and the prospect of fewer funds, the task of differentiation is as challenging as it has ever been, but one which Bryan Gray, managing director and head of sales and client management for JP Morgan Worldwide Securities Services, said all participants were keen to embrace.

“Custody is increasingly about the ability to leverage scale and being able to bring a broad range of capabilities to your super fund clients,” he said. “So being able to assist them as they invest in numerous markets offshore, being able to assist as they diversify into broader asset classes, in particular alternative assets like private equity and OTC [over-the-counter] derivatives.

“You go back a few years and custody was all about settling your transactions and holding your assets, but these days it’s more about the ability to support a broader range of asset classes, the ability to be able to provide reports that really drill down and give details to superannuation funds on exactly what is happening with those investments and being in a position to be able to value them frequently and independently,” Gray continued. “What we’re seeing, particularly at the larger end of SUPERREVIEW

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the superannuation fund segment, is that they’re looking for our ability to provide data that’s being used increasingly by inhouse investment teams.

“They’re really relying on their custodian as a source of data that provides them with information that they can then use for analysing and making investment decisions – very sophisticated data requirements are now the cornerstone of what custodians are being asked to provide.”

Richard Coia, managing director of sales for National Australia Bank’s (NAB’s) asset servicing division, said that it was important to note that longevity was part and parcel of the custody business.

“When we sign a client on, our relationships sustain great longevity,” he said. “Usually the relationship extends well beyond 10 years, but getting back to the question of differentiators, custody is continuously reported in the press and by consultants as a commoditytype product.

“For us, however, core custody is actually a differentiator.”

Detailing the services he considered coming under the core custody banner, Coia pointed to accounting deliverables, tax deliverables, performance reporting, unit pricing and compliance reporting.

“As far as I’m concerned, they’re all core services,” he said.

“Maybe 15 years ago, people used to refer to them as a valueadd, but they’re fundamental to any operating model for a superannuation fund right now.

“Some might say that everyone can do an accounting and tax report and everyone can go and deliver a performance report but while that’s true, going to deliver is one thing while delivering within a service’s scheduled timeframe is another,” Coia added. “And it extends further beyond that, in terms of speed to market on new products, speed to market in terms of regulatory change, speed to market in terms of legislative change and speed to market in terms of new products.

“Years ago we had super clients that were demanding but relatively unsophisticated but there’s a new world now. The superannuation funds that you’re talking to now are in the same breed as the very sophisticated wealth platforms or investment managers, and the service they’re demanding reflects that.”

Of course, one of the by-products of having been at the pointy end of financial crisis activity, as custodians obviously were, was that the amount of information being sought by super funds dramatically increased. It was inevitable, according to Gray, that trustees and fund executives would pick up the newspaper each day and have concerns about various names in terms of investment exposure.

The question, however, is whether that heightened and more regular level of information and reporting is likely to remain.

“Requests for immediate information, particularly around exposure to various counter parties, the Lehmanns or the

Merrill Lynchs, were a definite feature,” Gray said. “Fortunately, custodians have become pretty good at pulling information together quickly over the years and so we were very well prepared when a client came and asked ‘how much exposure in our bond portfolios do we have to Lehmann debt?’.

“Whatever the case may have been, we were able to pull that information together and give it to them pretty quickly.”

According to Gray, the circumstances of the global financial crisis (GFC) brought with it a much greater focus on risk reporting and understanding exposures for super funds.

“There were a lot of questions being asked at that time around the safety of assets but it wasn’t only about reporting information,” he said. “Those clients were coming back at the same

time and asking ‘how safe are my assets really? I mean, they’re with my custodian but you guys use a range of banks around the world to hold my assets, so how comfortable are we, what happens in the event that you, my custodian, becomes insolvent, what happens then?’.

“So there were a lot of those sorts of questions that we were being asked as well as providing information to them about their own underlying investment portfolios,” Gray continued. “And fortunately, the questions about the insolvency of the custodians have disappeared, they’re fairly comfortable I think with the answers that we’re providing, but the requirement to provide them with counter party exposure reporting and those sorts of things has been maintained.

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“That higher level of information has continued, with respect to reporting, but also with respect to data as well.”

In similar fashion, Pierre Jond, head of Australia and New Zealand for BNP Paribas Securities Services, said that whenever he had met with super fund executives recently, the focus for them had been risk and risk management.

“It’s probably been a consequence of the GFC, where clearly the concept of risk and counter party risk and all of those elements took a particularly high importance on everybody’s agenda,” he said. “But what I think is really interesting for super fund executives is the way custodians assess and measure and communicate risk analytics back to the super fund and, more particularly, the trustees.

“When you look at the relationship between super funds and custodians and at the services that a custodian provides, basically you have the core services, which are the safe custody of assets, trade, unit pricing, and so on,” Jond continued. “So when you buy these services for your fund, you pretty much buy this normal set of reports that allow you to track the true and genuine vision of the accounting activity around your fund.

“But on top of that, performance analytics, capturing risk, capturing risk exposure on a single stock, your volatility – these are all services that were previously available but certainly we have a lot more funds asking for them now.”

Yet while higher levels of information, reporting and analytics may now be a reality for custodians, so too is increas-

ing global investment on the part of Australian super funds.

However, in a custody market in which there are fewer and fewer domestic providers, how vital is that wider global presence and reach?

Jond said that it went without saying that BNP Paribas Securities Services supported the international investments of their client super funds but that, more specifically, they also had an operational presence on the ground in 22 markets around the world.

“So we have a physical presence on the ground in those 22 markets where we can safe keep the assets of our Australian clients directly,” he said. “For example, if you are investing in Brazil, your custody and the custody relationship of the super fund will be with BNP Paribas in Australia but the bank that is ac-

tually on the ground, the local custodian on the ground in Brazil, will be a BNP Paribas Brazil entity.

“And that’s true for Brazil, it’s true for Hong Kong, for Germany, for Turkey, for a whole series of markets where you get not just the global Australian service, you also get the BNP Paribas insight, analysis and safekeeping in the local market.”

For his part, Coia said that the debate over what type of custodian could best service Australian super funds had been taking place since the emergence of master custody about 20 years ago.

“And in general people said ‘well, you’re not a global custodian so you don’t have the brute force of some of these other competitors’,” Coia said. “But I’d question what sort of commitment those global institutions

had to the Australian market.

“In those days our global competitors, unfortunately for them, struggled to get funding to support Australia’s sophisticated tax regime whereas our whole infrastructure and our whole business model was built around servicing the Australian superannuation market,” he continued. “We’re a regional custodian with a global reach.”

Commenting specifically on NAB Asset Servicing’s recent announcement of a potential joint venture with the Bank of New York Mellon (BNYM), Coia said that the direction to deepen the partnership was about building upon an existing relationship and taking the offer to a new level.

“We are seeking to entrench our position and we are publicly Continued on page 18

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Emerging from the shadows ☞ Continued from page 17 stating our long-term intention to lead in the Australian custody market,” he said. “To this point, we’ve had some really good and strong growth and some have said that we’ve gotten to a critical mass.

“But for us, that’s not the case.

It’s more about peaking, as any business would, and figuring out what is going to be the next quantum leap forward to continue to maintain and grow our position and, more importantly, be able to deliver to a more sophisticated and bigger client base,” Coia added. “From our perspective, that’s what can be achieved by the extension of a partnership with the Bank of New York.”

Coia said the reality was that Australia was no longer a $500 billion superannuation industry.

“We’re about $1.1 – $1.2 trillion now and will be over $2 trillion in a very short amount of time,” he pointed out. “So on the back of that, this is our quantum leap, this is our strategy to keep going, to keep moving and to keep progressing.”

Clearly, all services providers to the super industry are seeking to progress as Coia describes, but it should not be forgotten that the super industry itself is set to progress at an equally rapid rate. The recommendations of both Dr Ken Henry and Jeremy Cooper wait in the wings, but according to Gray, that is a fact not lost on custodians.

“It’s about keeping our eye on it really,” he said. “These are reviews that will impact on the custody business by virtue of the fact that they’re going to impact the clients of custodians and we’re already starting to see that in superannuation fund mergers – there’s a lot more merger activity and discussion taking place and that’s what’s likely to have the bigger impact on the custody industry.

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“Our clients are going to be either getting taken over or be taking someone else over and so they’ll be looking to us to assist them as they bring various books of business together,” Gray continued. “And it becomes even more complex in a TOFA [taxation of financial arrangements] type environment where you might have elected to go down the path of doing a certain treatment for TOFA and all of a sudden you’ve just merged with another superannuation fund that has a completely different treatment.

“To me, that’s probably where the biggest impact is going to come from – we, as custodians, are going to be called upon to assist funds with these various challenges. It’s not necessarily going to come from direct regulatory change to the custody business per se.”

Coia also indicated that some of the legislative change set to unfold, and specifically the Cooper Review, had already affected NAB Asset Servicing’s strategy in terms of what its client base would look like.

“As a result of CGT [capital gains tax] rollover relief, we’ve already experienced a number of funds that took advantage of that and merged,” he said. “And the sort of consolidation recommended by Cooper seems set to continue. We’ve seen and we’ve gone through many mergers already such that those funds looking to build will ambitiously look for partners to merge with.

“At the moment we have about 150 or so superannuation clients and I think that with the merger activity that’s going on, that will reduce,” Coia continued. “So my prospect list also reduces. What that means is that those smaller funds are finding it very difficult to sustain themselves in a highly regulated market when they don’t have economies of scale that they can achieve through being in a bigger fund.”

Coia said that, in his view, the

Cooper Review was correct in its assessment of a need for consolidation, and while he wasn’t sure how quickly mergers would happen, he had no doubt that they would happen.

“And what does that mean for the number of custodians in the market?” he asked. “The landscape in 10 years may be each custodian having 20 or 30 clients but the difference is that those 20 or 30 clients will represent

“We saw Northern Trust enter as a brand new player a few years ago and they picked up the largest fund in the country, the Future Fund, so it certainly can be done,” Gray continued. “It’s a very attractive market for custodians. It’s a growing market and a great business for JP Morgan, so I suspect others are sitting there looking at it and saying we should be doing something in Australia.

over a trillion dollars.

“So with the kind of consolidation and merger activity predicted, we’re looking at fewer clients and more retirement savings.”

But while consolidation may be a likely outcome for the super industry, the picture is not nearly so clear within the custody space. For years now custodians have witnessed both acquisitions and new entrants, and according to Gray, both remain equally likely in the future.

“It’s certainly a difficult market to break into,” he said.

“We’ve already seen a few of the local banks decide that it’s all too hard and sell their businesses, and I wouldn’t preclude the fact that new global custody providers might come into the marketplace.

“The question, as always, is how do you enter the market and if you can enter the market by picking up a major piece of business like Northern Trust did, then that’s great but alternatively, if you want to come in and make an acquisition, then the reality is that this market is rapidly running out of local custody providers that you can buy.”

Coia said that by being in the world’s top five countries in terms of retirement savings, Australia would continue to be an attractive market for global custodians.

“Whereas a number of years ago, all the buzz was around the rationalisation of the industry, similar to what happened in Canada with 13 custodians going down to four or five, there are now a lot of global custodians

who see opportunity here,” he said. “That rationalisation did happen to a certain extent when we lost the likes of CBA, Westpac, Macquarie and BT, those guys, but in the last couple of years we’ve seen new entrants like Northern Trust and custodians who had only positioned themselves in the sub-custody market now purporting to have a strategy to get back into superannuation.

“So the jury’s out. There might be consolidation and consolidation means exits because from looking at the marketplace now, there may yet be another to leave.”

Yet whether Australia’s custody space sees new entrants or further acquisitions, Gray said that custodians’ challenge, in supporting their client superannuation funds, remained the same.

“To me, in order to remain relevant to these organisations, it’s all going to be about innovation and product development,” he said. “Over the last few years our focus has been working with our super funds clients to help them identify issues that they’re facing each day, and that has to continue.

“We have to bring them new products and new capabilities, bring them the next iPad of the custody industry, to help them be successful.”

For Coia, the recipe for success is continuing to grow.

“But when I say grow, I mean that we’re growing the business in terms of the capability that’s going to be of benefit to clients because without the clients, there’s no point in having a big business,” he said.

“At the moment, our strategy is really about consistency and continuing to back up our demonstrated history.

“But the big elephant in the room for us is about taking that enormous step forward, and it’s about how much more sophisticated we need to be.” SR

20 OPINION

www.superreview.com.au

Passivity has its price Active versus passive is one of the oldest debates in funds management. However Tyndall’s CRAIG HOBART warns those who have embraced passive strategies in the aftermath of the global financial crisis might find that their strategy could prove entirely counter-productive.

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Chart 1: The rise and fall of credit Percentage change in composition of UBSA Composite Bond Index

SOURCE: UBS

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he reported increase in passive investing in recent years has largely been linked to the protracted market downturn with investors flocking to the perceived safety of the index in the aftermath of the global financial crisis (GFC). But this decision can be precisely the wrong tactic during such periods.

Choosing whether to invest with an active or passive manager really shouldn’t be about trying to time the market. In our view, this is difficult to get right and even if you do, the tax implications of repeatedly changing strategies are likely to outweigh any benefits.

Nor should the decision be based purely on headline performance numbers or fees.

Rather, other considerations such as risk, a fund manager’s adaptability and shareholder activism should be factored into the decision-making process.

There are marked differences in how active and passive investors manage these issues, which can have a direct impact on an investor’s total risk/return outcome. The key really comes down to choosing the right manager

for your needs - and that isn’t necessarily as difficult as you may think.

INDEX INVESTING CAN MEAN HIGHER ‘REAL’ RISK Not surprisingly there has been a focus on the role of fixed income in a portfolio following the GFC, with many mortgage funds experiencing a lack of liquidity and some fixed income products delivering significantly negative or equity-like returns.

Many investors trying to squeeze higher returns from a fixed income allocation learnt the hard way that the trade-off for higher returns does actually mean higher risk. And to add to the pain, unfortunately in the early stages of the de-risking process during the GFC, many investors sought the safety of passive investing, perceiving credit securities to be too risky. The only problem with that, of course, is that at that time many bond indices had high exposures to credit securities (as shown in Chart 1) – so investors weren’t necessarily escaping from the bad credit.

This raises one of the biggest downfalls of passive

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OPINION 21

investing in fixed income.

When a company issues more debt, the index weighting for that company increases. Of course, the more debt a company issues the more questionable its financial security can become, so the real risk of passive fixed income investment changes over time as companies and governments adjust their funding requirements. While an active manager can make an assessment of the credit worthiness of an issuer and therefore choose (or not) to take on additional risk within a portfolio, the passive investor can’t.

As a result of the market fall-out, the focus has moved away from maximising returns from a defensive allocation to a risk-based approach. This raises a problem for passive investors though, as the decision to allocate up and down the risk spectrum is dictated by the issuers, which has a direct impact on the risk profile of the index (as highlighted in Chart 1).

This is not a tactical or short-term issue specific to 2010, rather a longstanding problem with passive fixed interest investments. This begs the question: is any change in the risk profile of the index in line with a change in investor needs? The answer is of course, no.

Continued on page 22 ☞

OCTOBER 2010 * SUPERREVIEW

22 OPINION

www.superreview.com.au

Passivity has its price

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ACTIVE INVESTORS CAN BENEFIT FROM BEING ACTIVIST SHAREHOLDERS Another advantage offered by active managers is their ability to take a larger than index weighting in, which allows them to take positions in stocks that are likely takeover targets. In addition, their indepth research capability means they are better placed to negotiate an optimal price in merger and acquisition deals. Active managers are better equipped to understand the underlying value of a company and are therefore better placed to negotiate a more optimal price outcome - to the benefit of their underlying investors. Equally they can also pressure boards not to proceed with poor acquisitions.

ASX 200 PE Dispersion (Diff/Avg)

Tyndall Australian Share Wholesale Portfolio tracking error

SOURCE: JP Morgan and Tyndall Investment Management Limited

Chart 3: Research house ratings can help with manager selection van Eyk Research Australian Equity All A/AA Rated Managers Growth of $100 – December 1993 to June 2010

$720 $680 $640

Since van Eyk first started publishing manager ratings, its A rated median manager outperformed the stockmarket index and the “Average Manager median” on an after fees basis

$600 $560 $520 $480 $400 $360 $320 $280 $240 $200 $160 $120

INDEX

UNIVERSE MEDIAN

SOURCE: JP Morgan and Tyndall Investment Management Limited

#vERA/AA MANAGERS

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Active management has a lot of merits, and the decision to choose active versus passive is not as straightforward as often perceived. While it is inevitable that some active managers will underperform their respective indices at points in time, it is worth mentioning that a significant proportion also outperform -

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PICKING THE RIGHT MANAGER IS THE KEY

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As mentioned earlier, timing the market between active and passive strategies may not be a wise strategy. It can be a high risk and tax ineffective approach for individual investors. However active managers do have a natural advantage in that they are able to adjust their portfolio in response to the market such that when there is a large dispersion of potential returns from firms (as measured by the P/E ratio), tracking error in active portfolios will be higher as the manager puts the research to work to take advantage of an increased investment opportunity set.

Conversely where there is relatively little to separate stocks from each other, tracking error in active portfolios naturally reduces, as there are fewer opportunities to generate alpha. This seesaw effect is illustrated in Chart 2, which shows that as the P/E dispersion of the S&P/ASX 200 Index has risen, so too has the tracking error of the Tyndall Australian Share Wholesale Portfolio. Similarly, as the market’s P/E has contracted, so

of risk as well as a fund manager’s flexibility and adaptability in different stages of the investment cycle, are extra tools investors can draw on when choosing an appropriate investment style – rather than relying solely on headline performance and fees. SR

Chart 2: Active managers move with the times

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ACTIVE MANAGEMENT CAN WORK IN ALL SEASONS

ate significant outperformance. For example, the van Eyk managers rated A and above in Australian equities have consistently outperformed both the median manager and the index over the last 17 years (see Chart 3).

Using these ratings, along with assessing the true level

highlighting the point that the active/passive debate ultimately comes down to manager selection and personal preference.

Selecting the right active manager is key, but not necessarily difficult. There are examples of where choosing highly rated funds can gener-

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What most investors actually need from a defensive allocation is income and a negative correlation with equities. An active fixed interest manager can offer these - but how can a passive manager commit to offering these when the investments held in a passive portfolio are at the whim of banks and governments rather than investment professionals?

too has the Fund’s tracking error.

Thus in a sense, active portfolios are self-correcting, lying in wait of active opportunities during quiet times and pouncing on them when they arise. The question is: Who is better to decide when is the time to pounce? Is it an investor who has switched to a passive strategy, or the portfolio manager? We would argue the latter.

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☞ Continued from page 21

APPOINTMENTS 23

www.superreview.com.au

MetLife beefs up distribution Events Calendar Super Review’s monthly diary of superannuation industry events around Australia and abroad.

Big insurer MetLife has moved to sharpen its presence with two key opportunities. etLife Insurance has hired Peter Smith as head of institutional distribution in Australia. Smith joins the company from Marsh Employee Benefits, where in his most recent role of national manager he was

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OCTOBER Victoria 13 – FSC Deloitte Leadership Series Luncheon. Speaker: Victorian Liberal MP Andrew Robb. Venue: Park Hyatt Melbourne. 1 Parliament Square off Parliament Place, Melbourne. Enquiries: ASFA Member Services Unit. Ph: (02) 9264 9300 or 1800 812 798.

13 – ASFA Luncheon. Low-cost MySuper: Dream, nightmare or reality?

Panellists: Warren Chant, principal, Chant West; John Coombe, head of consulting – Sydney, executive director, JANA Investment Advisers; John McMurtrie, chief executive officer, Australian Administration Services.

Facilitator: Michael Dwyer, chief executive officer, First State Super.

Venue: Park Hyatt Melbourne. 1 Parliament Square off Parliament Place, Melbourne.

Enquiries: ASFA Member Services Unit.

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

Australian Capital Territory 19 – ASFA Golf Day & Trivia Night.

Venue: Gold Creek Country Club (GCCC), 50 Curran Drive, Nicholls.

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

Craig Lawrenson

CRAIG Lawrenson has been named the new head of Asgard.

Lawrenson was most recently head of product and strategy for BT Wrap, and has been with BT for 14 years.

BT Financial Group’s head of platforms, John Shuttleworth, announced the appointment, saying Lawrenson “knows what advisers and dealer groups want from their platform providers”.

“He has more knowledge than just about anyone on what platforms can deliver to advisers and their clients, he’s deeply engaged in the current regulatory reform agenda and he knows how to motivate a team to consistently deliver high quality projects and product enhancements,” Shuttleworth said.

Lawrenson replaces former Asgard head Wayne Wilson, who left the group in May. AS part of a three-year initiative to make 60 specialist alternatives recruitments to support expected

responsible for group and retail solutions for Marsh nationally.

Chief marketing and distribution officer at MetLife in Australia, Eric Reisenwitz, said Smith would work towards achieving overall group insurance growth. demand for alternative investments in the coming years, Russell Investments has announced three new global hires.

Egidio Robertiello was hired as managing director of alternative strategies focusing on hedge funds, Stephan Breban will perform the role of director of private equity, while Samuel Baughn was appointed as director of operational due diligence.

Based in Russell’s New York office, Robertiello will be responsible for developing and implementing Russell’s hedge fund capabilities on a global scale.

As director of private equity, London-based Breban will head further development of Russell’s private equity advice, while Baughn will lead its operational due diligence function.

PERPETUAL Investments has announced two new appointments to its equity team. Gemma Dooley has been appointed to the role of general manager, institutional business and investment research, while Matthew McKinnon has assumed the broader role of general manager in retail sales.

Dooley has more than 18 years of experience in the industry, having previously worked for BT Financial Group and Russell Investments.

She joined Perpetual in July 2009 and will now be responsible for institutional client service and relationship management, as well as institutional sales.

McKinnon joined the company after performing a number of senior roles at IOOF, Portfolio Partners and Rothschild Australia. His areas of responsibility include development

MetLife Insurance also announced the appointment of Jonathan Kelly, currently business development manager, to head of institutional relationship management. Kelly will be responsible for the general development of customer relationship management capabilities, as well as retention and growth strategies for MetLife’s existing institutional customers. SR and execution of retail sales strategy for equities and the management of the portfolio specialist team.

MLC has appointed Nicky Richards as its new chief investment officer (CIO). She will replace Susan Gosling, head of capital markets research, who has been acting CIO since February 2010.

Richards will officially take up her new role in January 2011 and will be responsible for more than $65 billion in funds under management. With more than 20 years experience in global investment markets, Richards joins the company from Fidelity International based in London, having previously worked in Europe, Asia and the United States.

Richard’s appointment is the third in a series of recent hires of investment professionals to MLC. In July this year, the company appointed Michael Karagianis from UBS as an investment strategist and Stefano Cavaglia as alternatives portfolio manager. SR

Nicky Richards OCTOBER 2010 * SUPERREVIEW

ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

On the run

ABERDEEN Asset Management is no stranger to sporting events and, if Rollover’s dusty old memory serves, the company’s logo has graced the sleeves of quite a number of sportsmen, including the Captain of Europe’s Ryder Cup team, Colin Montgomerie.

Rollover always thought that ‘Monty’ Montgomerie had earned the Aberdeen sponsorship because it was a case of a dour Scots company giving its support to a dour Scot, but over the years he has realised that there are as many sassenachs working for Aberdeen as there are highlanders.

But it turns out that Aberdeen doesn’t just harbour a capacity to sponsor sportsmen, it also develops them inhouse.

On that basis, Rollover offers his warmest congratulations to one of Aberdeen’s institutional client service executives, Andrew Heyden, who has been chosen to represent Australia at the 100km World Running Championships in Gibraltar in November.

Given that the last time Rollover ran anywhere was when someone was chasing him, he is all admiration for Andrew and wishes him every success in competing in Gibraltar, where some of the terrain could best be described as ‘testing’.

In the meantime, Rollover will lie down while the mood for exercise passes. SR

It’s a party and I’ll come if want to ROLLOVER has grown used to the service providers he meets at superannuation conferences – everyone from fund administrators and custodians through to brand artistes.

However, he experienced a first during the gala dinner for the Australian Institute of Superannuation Trustees (AIST) Australian Superannuation Investment Conference on the Gold Coast.

There was Outsider sitting at the dinner table and being introduced to his dining companions when discussion turned to what each person did for a living.

As is the way with these things, there were two union officials/superannuation trustees, one journalist, two fund managers and a financial planner.

But the show stopper was the guy with the pink 1964 Dodge who had experience in the adult party planning business – now that’s what Rollover calls a ‘service provider’. SR

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Not the Apple Isle of his eye THE last time Rollover attended a superannuation conference in Tasmania he left with vivid memories of a certain fund manager declaring that he (the fund manager) would never attend a superannuation conference in Tasmania again.

As Rollover recalls it, the fund manager’s objection had a lot to do with the weather and a lot to do with the layout of the conference venue, which had prompted questions about whether, as an exhibitor, the fund manager had got appropriate value for the money his company outlaid.

In any case, that vow will be put to the test next year because after nearly a decade at venues between Cairns and the Gold Coast, the Australian Superannuation Investment Conference is moving to Hobart.

Rollover thinks the change may be attributed to the Australian Institute of Superannuation Trustees testing whether strong attendances are attributable to the conference agenda or its locale. SR

A cheap shot ON THE subject of Aberdeen, Rollover hears that some of the luminaries who are usually early arrivals at the Association of Superannuation Funds of Australia (ASFA) conference will be arriving a tad late this year.

The reason? They have been invited by Aberdeen to tee-off at a highly respected Melbourne golf course with none other than that dour Scot Colin Montgomerie.

Rollover knows this because one such invitee specifically phoned him to gloat that he would not only be playing the aforementioned better than average golf course but would be accompanied by the European Ryder Cup captain.

Without wishing to display undue sour grapes, Rollover would simply aver that no amount of professional coaching, even from a man of the stature of Mr Montgomerie, will necessarily help this individual’s golf game.

Indeed, it is entirely possible that Monty will see things he has never seen before nor want to see again. 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.