Super Review (December 2011, January 2012)

2 PAGE TWO

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MANDATES Received by Babson Capital BlackRock Investment Management Loomis Sayle Alleron Investment Management MLC Implemented Consulting AMP Capital Alphinity Investment Management

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DECEMBER/JANUARY 2012

Type of mandate Custody Custody Custody Custody Advice Custody Custody

Issued by TWUSuper VicSuper TWUSuper AustralianSuper nib health funds WA Local Government Super AustralianSuper

Amount $25 million $3.8 billion $25 million $400 million $450 million $30 million $400 million

NEWS 3

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Care/Asset merger unlikely without CGT loss relief

By Tim Stewart

THE merger of Care Super and Asset Super is unlikely to go ahead if the Government does not provide the merged entity with capital gains tax (CGT) loss relief, according to Care chief executive Julie Lander.

The two funds are currently reviewing the business case and beginning due diligence, with the merger on track to take place in September 2012 – but ideally

it would take place by 1 July, 2012, Lander said.

However, without CGT loss relief in place it would be hard to justify the reduction in members’ accounts created by the merged entity’s loss of deferred tax assets (DTAs), Lander said.

The Government’s CGT loss relief for merging superannuation funds was extended for three months until September 2011, but industry bodies such as the Australian Institute of Superan-

nuation Trustees are lobbying the Government to make the relief permanent. The industry is keenly awaiting Treasury’s advice to Minister for Superannuation Bill Shorten on the subject, added Lander.

“The merger is for the good of members, and it would be very hard to mount a case [whereby] the fund would strip members of any percentage [of their accounts]. Most funds have quite significant DTAs at the

moment,” she said.

“If you lose the DTA and it disappears, then that has an effect on funds available to pay members, so you basically have to reduce their accounts,” Lander added.

Since the primary purpose of a merger was to benefit members, Lander said it would be very hard to mount the case to members without the CGT relief – “not only for Care Super and Asset Super, but for any two funds”. SR

Govt removes super guarantee age limit

TWUSuper adds $50 million to credit mandates TWUSUPER has allocated an additional $50 million to credit, with two $25 million allocations going to the super fund’s existing credit mandates with Loomis Sayles and Babson Capital.

The move into credit comes at the expense of global listed infrastructure and global real estate investment trusts (REITs), and represents a 2 per cent change to the fund’s asset allocation.

TWUSuper chief investment officer Andrew Killen revealed that the fund’s $25 million mandate with Lazard Global Listed Infrastructure had been terminated, and the Russell Investments global REIT mandate had been reduced by $25 million.

“The view [at the November investment meeting] was that with all the volatility around, credit spreads have widened quite a lot in recent months. [Investing in credit is] a reasonable way to get re-

turns with lower risk than equities or equity-like things like listed infrastructure or REITs,” Killen said.

TWUSuper is still 2.5 per cent overweight infrastructure, with its strategic allocation targeted at 8 per cent. Its current allocation is now at 10.5 per cent –

down from 11.5 per cent after the cancellation of the Lazard mandate.

But Killen said he was happy to be overweight infrastructure since it had been the fund’s best performing asset class over the last two years, returning more than 13 per cent.

The other change to come out of the November investment meeting was a 2 per cent reduction in the fund’s Australian equities exposure, and a corresponding 2 per cent increase in TWUSuper’s global equities exposure.

The reduction in the super fund’s ‘home bias’ came at the recommendation of TWUSuper’s asset consultant JANA, and was the prudent thing to do, Killen said.

“We’re not going to actually switch the physical assets. We’ve got an overlay manager, TGM, and we’re going to get them to manage the change in exposures by overlay through futures,” Killen said. SR

Industry funds neglecting ethical issues WHEN it comes to environmental, social and governance (ESG) issues, industry funds tend to focus on the ‘G’ rather than the ‘E’ and ‘S’, according to Australian Ethical general manager, strategy and communications, Paul Smith.

While some industry fund trustees have expressed a desire to focus on environmental and social issues, governance is the “low-hanging fruit” that receives the most attention, Smith said.

“It’s a different philosophy [to Australian Ethical’s approach]

– industry funds want to invest in BHP, but they want to work from within the system to make BHP more sustainable,” he said.

Australian Ethical, on the other hand, is moving away from fossil fuels and mining, Smith said.

“We’re screening out sectors – we’re not screening out certain stocks. Some of our competitors in the funds management space, like BT and Perpetual in their sustainability funds, use a ‘best of sector’ approach,” Smith said.

Despite Australian Ethical’s

strict screening process (which includes both positive and negative screening) its funds still manage to outperform with strong returns.

Smith pointed to the Australian Ethical Smaller Companies Trust, which recently received a ‘recommended’ rating from ratings house Lonsec, as evidence.

“Over a three-year period to 31 July, 2011, the Smaller Companies Trust outperformed the S&P/ASX Small Industrials index by 5.2 per cent (after fees), also outperforming the

Julie Lander

Paul Smith

Lonsec Responsible Investment peer group average by 3 per cent,” said Smith. SR

By Chris Kennedy THE Government has amended its recent superannuation guarantee amendment bill to completely abolish the age limit for compulsory contributions.

Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten said that from 1 July, 2013, eligible employees aged 70 and over will receive the superannuation guarantee for the first time.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer,” Shorten said.

The recently announced Superannuation Guarantee (Administration) Amendment Bill 2011 raised the age limit for SG contributions from 65 to 70, but shortly after this Shorten told Parliament the Government would be abolishing the age limit altogether.

The changes will also ensure employers will be able to claim income tax deductions for superannuation guarantee contributions made to employees aged 70 and over from 1 July 2013, according to a Treasury statement.

It ensures employers will not bear a higher cost in employing workers 70 and over compared with other workers, the statement said. SR

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4 NEWS

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Vision brand announced for Equipsuper/Vision Super

By Tim Stewart

THE $10 billion merged entity resulting from the union of Equipsuper and Vision Super will be launched under the Vision brand.

Vision chairman Rob Spence said the visual branding of the

combined super fund would coincide with the completion of the merger. “[The brand Vision] makes a clear statement about our confidence, optimism and determination to be a significant provider of superannuation and retirement benefits long into the

future,” Spence said.

Vision chief executive Danielle Press said the new branding and communications program would re-energise the merged entity.

“While we respect the 80-year heritage brought to our new fund, this merger is a call to action to set a new dynamic for

the future,” Press said.

Vision would embody a culture of “leaders not followers” and would deliver “outstanding results for members and employers in everything we do,” Press said.

Teams from Equipsuper and Vision Super have already started to co-locate within the two

premises. The integration of the two teams is expected to be completed by 1 March 2012, with successor fund transfer and the public brand launch taking place by June 2012.

Vision will have around $9.6 billion in assets and will service over 170,000 members. SR

AGEST merger process slated for mid-2012

By Mike Taylor PUBLIC sector fund AGEST has signalled it may take until the middle of next year before it knows whether it has found a suitable fund with which to merge.

AGEST chief executive Cath Bowtell has written to members saying the process of identifying a potential partner was underway and that the fund had received a number of positive responses from potential merger partners.

However she said the fund's board would not proceed with any merger unless it was confident, after

a comprehensive cost/benefit analysis, that the benefits arising from such a merger were in the best interests of AGEST members.

The fund announced in September that it would be exploring merger opportunities.

Bowtell’s letter to members said the fund board would be guided solely by the objective of delivering increased value to members and that any decision "will require the support of AGEST's shareholders".

AGEST has 130,000 members and assets of $4.3 billion. SR

BlackRock picks up Drawdown relief extended to 2012-2013 VicSuper mandates By Chris Kennedy VICSUPER has awarded $3.8 billion in index investment mandates to BlackRock Investment Management.

BlackRock will manage Australian equity, fixed income, cash and global fixed income indexes for the superannuation fund.

BlackRock Australia chief executive Damien Frawley said VicSuper’s decision to outsource its investment management at a time when other funds were insourcing was a testament to BlackRock’s organisational culture.

“The relationship between BlackRock and VicSuper has grown out of important shared values. We are both signatories to the United Nations-backed Principles for Responsible Investment and act on the belief that excellent corporate governance is essential for sustainable value-creation,” Frawley said.

The announcement of the first BlackRock mandates for VicSuper coincided with 40th anniversary of BlackRock’s invention of the first index fund in 1971, said Frawley. SR SUPERREVIEW

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DECEMBER/JANUARY 2012

THE 25 per cent drawdown relief for account-based pensions has been extended to the 2012-2013 financial year, in a move the Government says will benefit around 125,000 self-funded retirees.

The move continues the 25 per cent reduction that was put in place for the 20112012 financial year, and acknowledges the impact of share market volatility on retirement savings. This was scaled back from the 50 per cent reduction that was in place for the previous three years.

“The provision of drawdown relief for the past four years has assisted accountbased pension holders by reducing the need for them to sell assets at a loss in order to meet the minimum payment requirement,” said Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten in a statement.

“The Government had indicated previously the minimum payment amounts would return to normal in 2012-2013. However, equity markets continue to be volatile and prices remain significantly below the levels reached prior to the GFC,” he said.

“Continuing the current limited drawdown relief for a further year will assist retirees to recoup capital losses

Jeremy Cooper

on their pension portfolios as equity markets recover over time.”

The move was broadly welcomed by the Small Independent Superannuation Funds Association (SISFA), although SISFA chair Michael Lorimer said the association would have preferred the Government retain the original 50 per cent reduction.

However, Challenger’s chairman of retirement incomes Jeremy Cooper said the move highlighted a shortcoming in the nation’s retirement system through its overreliance on equities, which could not be relied upon to provide bedrock or lifetime retirement income. SR

RAC Insurance appoints NAB Asset Servicing NATIONAL Australia Bank (NAB) Asset Servicing has been appointed to provide custodial services to RAC Insurance.

Custodial services for the Western Australia-based insurer were previously provided by Suncorp as part of a joint venture that ended in 2008.

The arrangement with NAB Asset Servicing followed a three-month tender process, and was effective from 1 December 2011.

NAB Asset Servicing general manager for sales, relationships and financial market services Brian Keogh said the NAB’s ability to transition RAC’s assets in a short time-frame was a major factor in the custody win, along with NAB’s track record in insurance.

“The depth of expertise within our relationship team and partnering approach to servicing proved to be a winning combination,” Keogh said.

RAC Insurance chief financial officer Mary Anne Stephens said the appointment followed a competitive threemonth tender process which involved detailed discussions with NAB and other custodians.

“NAB’s understanding of our industry, its detailed response to the submission process and its ability to start the transition process quickly were key aspects of our decision,” Stephens said.

The appointment follows the recent announcement of NAB Asset Servicing’s strategic alliance with MMc Limited. SR

7 EDITORIAL

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SG rise guaranteed – but not the Government With the passage of the Mineral Resources Rent Tax, the Government has locked in its promised increases to the superannuation guarantee, but it may never reap the electoral dividend.

Mike Taylor

ith the passage of the Government’s Mineral Resources Rent Tax (MRRT) through the Parliament last month, the wheels were put in motion for the very gradual lifting of the superannuation guarantee from 9 per cent to 12 per cent.

The good news to emerge from November’s Association of Superannuation Funds of Australia (ASFA) national conference in Brisbane is that while the Federal Opposition has opposed the lifting of the superannuation guarantee as an unreasonable additional impost on small business, it will not be in the business of rescinding the initiative in the event that it gains office.

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It will, according to Opposition leader Tony Abbott, be in the business of rescinding the MRRT. And, ironic though it may seem, there will be many in the superannuation sector who will not lament the breaking of the link between the MRRT and a higher superannuation guarantee.

This is not because they do not accept the good sense of Australia extracting an economic premium for a finite natural resource in the middle of a commodities boom. Rather, it is because they have never been entirely comfortable with the Government having linked the superannuation guarantee to a tax.

Over the past two years, SuperReview has conducted a succession of roundtables at which the question of linking the superannuation guarantee to a tax has been canvassed. Almost without exception, participants have acknowledged that it is undesirable but nonetheless a price that has had to be paid

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to lift it beyond the 9 per cent which marked the end of the Hawke/Keating period in office.

Given the attitude of the Howard Government towards the superannuation guarantee and that espoused by the Coalition under the leadership of Tony Abbott, there has been a realisation that linking the Gillard Government’s promise, with or without a tax, represented a last chance for lifting the superannuation guarantee.

ASFA chief executive Pauline Vamos evidenced the degree to which this was the case on the eve of the Parliamentary vote, when she issued a statement urging the support of all politicians for the higher superannuation guarantee.

“It is imperative that federal politicians support legislation to increase the superannuation guarantee to 12 per cent,” Vamos said. “Nine per cent will not be sufficient to deliver dignity in retirement for the majority of Australians.

“This reform is important for individuals and good for

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the economy. The more people save today for tomorrow, the more self-reliant they become in retirement,” her statement said.

“The recent turmoil in Europe and the US, where there have already been cuts in state pension benefits, demonstrates the importance of self-reliance,” Vamos said.

The ASFA chief executive might have gone on to say that her organisation’s research had also suggested that a lifting of the superannuation guarantee from 9 to 12 per cent was economically sustainable and valid, with or without it being tied to the MRRT. However she did reference that element of the research, conducted by the Allen Consulting Group, which suggested boosting superannuation would boost the Australian economy “by increasing the nation’s GDP, creating jobs and providing much-needed private and public infrastructure investment”.

“An increase in the superannuation guarantee to 12 per cent would lead to a 0.33 per cent increase in [real] GDP by 2025 compared to the no-reform scenario,” the research found. “This will equal about $195 extra in the hands of every Australian in 2025, or an extra $520 for every household.

“The Allen research provides strong support that a move from nine to 12 per cent would be not only good for the retirement futures of current workers but would also have no adverse effect on employers,” Vamos said.

She pointed to the report’s conclusion that while employer costs could be increased in the short-term, the impact in any given year would be, at most, 0.25 or 0.5 per cent of wages.

“That’s $250 to $500 for a small employer with a wages bill of $100,000,” Vamos said.

Little wonder, then, that the Federal Opposition sees no particular political advantage in removing the higher superannuation guarantee once it is actually in place.

While the Government was late last month celebrating the significance of navigating the passage of its MRRT legislation and the consequent gradual increase in the superannuation guarantee, there was a realisation that the initiative will deliver little immediate electoral advantage.

The timetable for lifting the superannuation guarantee is so extended that the Government will be facing the polls before the electorate ever notices the changes on their pay slips. SR

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Average Net Distribution Period ending Sept ‘11 2,300

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Standard Life Investments’ Global Absolute Return Strategies (GARS) – stability using a dynamic approach to investment risk management

S

uperannuation funds have traditionally relied on strategic asset allocation, with a large proportion of the fund allocated to equities, to provide their members with cash-plus returns. In Australia this has worked relatively well until recently.

The Australian equity market has just experienced its first negative 5-year rolling return. While this is a relatively new experience for Australian investors, UK and US investors have had to contend with it for some time. Ten years of volatile investment returns have left some UK pension schemes in deficit and looking to reduce portfolio risk without sacrificing returns. Like Australian investors, they are looking for positive returns, regardless of economic conditions.

THE SOLUTION — TAKING AN ABSOLUTE APPROACH While some alternative investments offer diversification, they can fail to provide adequate liquidity or transparency at a reasonable cost.

Absolute return investing, however, offers liquidity, transparency and the potential for consistent, positive returns, as it gives investment managers more scope to diversify and deliver returns from a variety of strategies. A cash rate, or inflation rate, is normally set as the benchmark, with the target return set above the benchmark. This means the investment manager has the freedom to invest in different geographies and markets, investing wherever they see the best prospects.

The investment manager has a clear mandate to deliver positive returns and not just beat a market index. Few things have infuriated investors more in recent times than investment managers being pleased when they have outperformed their benchmark but still lost the client money.

With an absolute return mandate, the investment manager cannot use equity bear markets or credit crunches as reasons for not delivering positive returns.

STANDARD LIFE INVESTMENTS AT THE FOREFRONT Standard Life Investments has been at the forefront of developing absolute return solutions. In 2005 they created an absolute return portfolio as part of a ‘liabilities plus’ strategy for Standard Life’s £1 billion pension scheme. It helped achieve a lower-

risk framework in which the pension scheme could meet its performance objectives, significantly reducing the pension scheme’s accounting deficit during some of the most turbulent markets in financial history. The effectiveness of this multi-asset strategy led to the launch of a stand-alone absolute return investment vehicle — the Standard Life Investments Global Absolute Return Strategies Fund (“UK GARS Fund”) in 2006. The daily priced and traded Standard Life Investments

takes on the extra challenge of ensuring that all of the GARS investment strategies are highly liquid. They use a combination of physical investments in large equity and bond markets alongside conventional derivative contracts to implement their range of themes as efficiently and with as much liquidity as possible.

The time horizon for each GARS strategy is important too. Standard Life Investments has a long legacy of multi-asset investment management and managing

“Incorporating a strategy that delivers consistent returns in a variety of market conditions makes for much greater certainty for members, whatever the future. …GARS can be a liquid and transparent core within a balanced portfolio, or a slice of the balanced fund pie...”

Global Absolute Return Strategies Trust ARSN 125 897 261 (“Australian GARS Trust”) is now available to Australian investors, providing an effective strategy to meet current investment challenges.

WIDE RANGING AND LIQUID STRATEGIES – RISK DIVERSE RATHER THAN RISK AVERSE GARS utilises a multi-asset, multistrategy approach with an investment objective of cash+5% p.a. (gross of fees) over a rolling 3-year period. This return objective is a broad proxy for the longterm returns available from investing in equity markets. Importantly GARS aims to meet this target rate of return with less than half of the volatility associated with equity markets. To achieve this, GARS employs 25-35 diverse and liquid investment strategies to gain the benefit of diversification.

These strategies cover traditional asset allocations and those that seek return in the interest rate, inflation, currency and volatility markets. These are typically conventional derivative contracts such as bond futures, inflation swaps, currency forwards and variance swaps.

Additionally, Standard Life Investments

large pools of money. Their expertise is in understanding longer-term macro changes and each of their strategies is assessed with regards to delivering a positive return on a 2 to 3 year timeframe. While constantly monitoring markets, they add value by placing monies prudently rather than participating in the highly-competitive world of high-frequency trading.

Standard Life Investments adds market returns from traditional asset classes, including equities, bonds and listed property. They actively manage weightings among these asset classes depending on the macro-economic outlook. They can seek to enhance returns from these asset allocations through their in-house security selection capabilities — in investment parlance, they are seeking alpha.

Taken together, traditional exposures combined with investment manager alpha gives a quite traditional multi-asset fund, and these two sources should be enough to produce a positive return in a number of economic scenarios. However, during extreme economic conditions, such as 2008 when the markets sought safety, a number of these traditional strategies fail, and diversification benefits are significantly reduced.

Therefore, to achieve true diversification and the potential for positive returns in all economic conditions, Standard Life Investments adds more advanced strategies.

They call them directional strategies and relative value strategies.

Directional strategies are based on cyclical market opportunities relating to Standard Life Investments’ views on asset classes such as foreign exchange, interest rates and inflation. For example, they are currently positioned against the euro, which they believe will weaken as the European economy continues to struggle with the fiscal strains of numerous Euro-zone members. So they hold a short position in the euro versus the US dollar. This type of strategy is often unavailable to traditional funds as these asset classes do not offer a long-term reward for holding them continuously. However, Standard Life Investments expects this strategy to deliver a profit over a 2 to 3 year time horizon, and to provide diversification against other strategies they are running in GARS. Relative value strategies allow Standard Life Investments to exploit differences in behaviour between two normally similar markets. For example, they currently hold a position preferring large-cap companies in the US to their small-cap counterparts.

Their rationale is that since 2003 US smallcap stocks have broadly outperformed larger companies. As a result, they are now significantly more expensive, which Standard Life Investments believes is unsustainable and should start to unwind.

This strategy will be profitable as long as large-caps outperform, regardless of whether equities are going up or down.

Consequently, relative value strategies can provide further levels of diversification as they are not directly exposed to the underlying market.

SHOCK ABSORBERS FITTED AS STANDARD The breadth of strategies available to GARS ensures that diversification can be achieved even in the most demanding investment conditions. There is no doubt that markets have entered a period of low growth and investment uncertainty. GARS has a track record of performing well in both good and bad markets. In addition, by constructing a portfolio of liquid, diversified investment opportunities, GARS aims to deliver

Standard Life Investments Limited (ABN 36 142 665 227) is incorporated in Scotland (No. SC123321) and is exempt from the requirement to hold an Australian financial services licence under paragraph 911A(2)(l) of the Corporations Act 2001 (Cth) (the Act) in respect of the provision of financial services as defined in Schedule A of the relief instrument no.10/0264 dated 9 April 2010 issued to Standard Life Investments Limited by the Australian Securities and Investments Commission. These financial services are provided only to wholesale clients as defined in subsection 761G(7) of the Act. Standard Life Investments Limited is regulated in the United Kingdom by the Financial Services Authority under the laws of the United Kingdom, which differ from Australian laws.

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positive returns for relatively low risk in all investment conditions. This is because, given the breadth of strategies employed, if one strategy fails to perform at any given time then that failure can be offset by positive performance from other strategies held.

Since launch in June 2006, Standard Life Investments’ UK GARS Fund has delivered an 8.2%* annualised return. While this is an impressive return in its own right, it is even more so given it was achieved with much greater stability than investing in equities. During this period, the UK GARS Fund experienced annualised volatility of just 6.2%** compared to 16.7%** for global equities. The Australian GARS Trust has delivered a 9.6%*** annualised return since inception in December 2009. This means GARS has helped to stabilise portfolios and enhance investor wealth through arguably the most significant global financial crisis since the Great Depression. However, past performance is not necessarily indicative of future performance. *Source: Standard Life Investments, gross performance of UK GARS Fund in £ from inception 12/6/2006 to 31/08/2011. ** Source: Standard Life Investments, annualised

figure, using monthly returns from 01/07/2006 to 31/08/2011. *** Source: Standard Life Investments, gross returns of Australian GARS Trust from inception 01/12/2009 to 31/08/2011.

(The longest running vehicle is UK GARS Fund, the performance of which is shown below. All GARS vehicles operate in the same way and are managed by the same team. The Australian GARS Trust invests in the Standard Life Investments Global SICAV Global Absolute Return Strategies Fund (domiciled in Luxembourg), previously the Standard Life Investments Global Absolute Return Strategies Master Fund Ltd (domiciled in the Cayman Islands). Standard Life Investments uses currency hedges to help bring the returns of the Australian GARS Trust into line with its local cash rate benchmarks.)

“Because GARS capability is built up of a wide variety of liquid strategies, it can behave very differently to equity and other risk asset markets over the shorter term. It has shown great stability during the upheaval of the past two years.”

LONG-TERM VIEWS RATHER THAN SHORT-TERM ‘NOISE’ Standard Life Investments believes that GARS’ stable performance profile has been made possible by the broad set of long-term views that they take to rise above short-term market ‘noise’ and achieve genuine diversification.

For example, owning both high-

STABILITY IN AN UNCERTAIN WORLD

Source: Standard Life Investments, gross £ performance UK GARS Fund vs. MSCI £ from 01 January 2010 to 28 October 2011. Past performance is not necessarily indicative of future performance.

yielding corporate bonds and Australian government bonds recently has rarely been simultaneously rewarding in any single day, week, or even quarter.

However, on a multi-year view GARS has been well rewarded for both these positions as the market has come to appreciate the value of assets with reliable yield in a low interest rate world, and the wisdom of lending to solvent governments or corporate entities with strong balance sheets.

AN ENTICING INVESTMENT FOR SUPERANNUATION FUNDS WITHIN A BALANCED PORTFOLIO OR AS A SLICE OF THE BALANCED FUND PIE As a result of its multi-strategy, multi-asset approach, GARS offers a genuinely diversified investment portfolio with attractive risk/ return characteristics. While its approach means GARS is unlikely to reach the same peaks as equities when markets are strong, it also means that GARS falls less in times of market stress, protecting investors’ wealth and resulting in a more stable investment journey.

This stability has made GARS an enticing investment for many investors, with over $15bn invested by clients globally. In the current environment, with continuing swings in market sentiment likely to cause more unrest for investors, an absolute return fund offers more certainty over future return outcomes while still achieving long-term investment objectives.

Incorporating a strategy that delivers consistent returns in a variety of market conditions can make for much greater certainty for superannuation fund members, whatever the future holds. Australian superannuation funds may invest in the Australian GARS Trust as a liquid and transparent core alternative investment within a balanced portfolio, or as a slice of the balanced fund pie, providing a stable yet dynamic approach to investment risk management.

The Australian GARS Trust is currently offered only to wholesale clients (as defined in Chapter 7 of the Corporations Act).

If you would like to find out more about GARS, please contact Simone Bouch at simone_bouch@standardlife.com.

Equity Trustees Limited (EQT), ABN 46 004 031 298 and Australian Financial Services Licence Number 240975, is the responsible entity of the Australian GARS Trust (ARSN 125 897 261). This material has been prepared for information purposes only. It does not contain investment recommendations nor provide investment advice. Neither Standard Life Investments or Equity Trustees Limited nor their related entities,directors or officers guarantees the performance of, or the repayment of capital or income invested in the Australian GARS Trust. Past performance is not necessarily indicative of future performance. Professional investment advice can help you determine your tolerance to risk as well as your need to attain a particular return on your investment. You should not act in reliance on the information contained in this material. EQT strongly encourages you to obtain detailed professional advice and to read the relevant product disclosure statement in full before making an investment decision. Applications for an investment can only be made on an application form accompanying a current product disclosure statement (PDS) which can be obtained by contacting Standard Life Investments.

10 2011 AND BEYOND

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When the only thing Stronger Super may have commanded centre stage in 2011, but as Damon Taylor writes, the industry was just as focused on maintaining member engagement and driving efficiencies beyond the Government's immediate agendas. s ever, 2011 proved a busy year for Australia’s superannuation industry. Legislative reform again took centre stage – and yet the difference this year seems to lie in increasing momentum.

Discussion and industry consultation has turned to initial but noticeable action, and for David Lees, general manager - super & investments for the BT Financial Group, it is that action that has provided this year’s highlights.

“The biggest things we’ve seen coming through have been around the reforms from Government,” he said. “So putting it in context, the size of the superannuation market is at $1.5 trillion today. It's almost the equivalent of the market capitalisation of the stock exchange and the same as the national gross domestic product; we’re talking about a huge system in and of itself.

“It’s the fourth biggest pool of investment funds in the world, but we’ve also looked at the other side of it, which is that with that size of market comes a large obligation on both us as an industry and

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then Government in making sure that the size of the market matches with the strength of what the system actually looks like,” Lees continued.

“So, from our perspective, I think where the Government’s gone on policy has been very good.

“Its going to make the system more transparent, make it simpler with MySuper especially, far more efficient and effective following Stronger Super – but also more accessible and easier for the average consumer out there to be able to deal with this industry.”

Sharing many of Lees’ sentiments, Paul Schroder, general manager - growth & new opportunities for AustralianSuper, said the industry’s 2011 focus had clearly been efficiency and adequacy.

“So if you think about what’s been going on – whether its Cooper or Stronger Super or MySuper, all the different consultations that have been going on, all the working groups, the things that Treasury’s been convening, all the peak councils that have been involved – they really get down to two

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constant is change core things; the efficiency of the system and the adequacy of people’s balances,” he said.

“So whether you’re happy with one or other detail, or whether your group’s been a supporter or in opposition to one or other thing, the single strongest theme from 2011 has been efficiency and adequacy. But it’s coincided with some extraordinary volatility as well.

“There’s really been an unprecedented amount of public speculation about financial markets, about the economic situation in Europe and so on,” Schroder continued. “It’s quite incredible that the performance of stock markets around the globe, and even the fiscal policies of European nations, seem to be almost as interesting as sport reports on the television.

“So I’d say that this year’s highlight is the focus on adequacy and efficiency. And the lowlight, especially for members approaching retirement, has been the exhaustive volatility that is just bouncing around in ways that many people may have seen but nobody can predict.”

Indeed, with so much going on in both legislative reform and financial markets, there seems little doubt that many fund executives will be reaching year-end exhausted. Years filled with change take their toll, but according to Fiona Reynolds, chief executive officer of the Australian Institute of Superannuation Trustees (AIST), funds are also getting used to financial market uncertainty and therefore making appropriate preparations.

“It has been an uncertain

year but, to a certain extent volatility is becoming more and more normal for this industry,” she said. “Funds and members are getting more used to the ups and downs of the market, but I think one thing this period has shown is that we really need to get people to look at their super pre-retirement.

“It’s just about being adaptive and remaining nimble and being able to navigate through this.”

- David Lees

“Funds are already starting to talk about asset allocation and what is a balanced fund, but these sorts of discussions, and really looking at your fund's asset allocation, have to be done rationally,” Reynolds continued. “They need to be done deliberately and not just in reaction to short-term movements on the market.”

For Lees, there is no question that this year’s market volatility has shaken investor confidence.

“And I think we see that best when we look at how we’re actually doing in our platform businesses,” he said.

“The discretionary flows that normally come through the platform business have really struggled, and what we’re seeing in that sort of space are

probably the worst flows we’ve seen since 1997.

“That said, superannuation is a long-term investment and I think the key challenge that the industry is facing is that it does need to navigate through this short-term volatility, but it also needs to look at the broader, longer-term market,” Lees added. “It’s not necessarily about getting used to the volatility that’s in the market.

I think it’s just about being adaptive and remaining nimble and being able to navigate through this.”

According to Schroder, it would be understandable if fund members were to look at their three-year return and ask what sort of value they were getting out of their superannuation.

“And I think therein lies the test,” he said. “Some funds, in a relative sense, have done well. So you can be ahead of the median and you can be performing better than your peers, and we’ve been fortunate most of the time to be in that category, but really members say ‘what’s the absolute return, what do I have in my account today that I didn’t have last year?’

“So if the question is ‘how well has the industry dealt with another year of market volatility?’, the answer is that we are all subject to market forces,” Schroder continued.

“We all function in, invest in and operate in the global market, and there’s no escaping that fact.”

But the one guarantee Schroder said that he could make was that all funds were working feverishly to do anything and everything possible to improve member returns.

“We have to remind people all the way along that superannuation is a long-term investment,” he said. “Dairy farmers don’t sell their cows just because the value of them drops; they are, after all, still making the milk.

“So I think we have to take the view that these are assets that over time will deliver significant benefits to members and benefits to the economy, and so you’ve got to stay the course.”

Yet while 2011 has been a year characterised by global market turmoil, the clear consensus for Australia’s super industry is that financial markets were only half the story.

For Lees, legislative reform has played just as large a role and, importantly, has also been well received.

“From BT’s perspective, the important piece is that we have a credible and trustworthy [retirement savings] system that people believe is being looked after in the best interests of investors,” he said.

“So anything we see which is improving the robustness of that financial services system and is taking out anything that could be deemed to be practices or payments that are causing a conflict of interest, we see that as a real positive.

“We see items like improvement in the quality of advice and better transparency of what’s happening in that part of the system as fundamentally important as well,” Lees added. “Generally, anything we see as being able to improve or lift consumer confidence and get people Continued on page 12

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12 2011 AND BEYOND

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When the only thing ☞ Continued from page 11 back into that part of the industry is really important.”

Lees said that based on the reforms, legislation and information that the Government had to date made available, he believed the Government’s proposed changes would strengthen the system and make it far more transparent and accessible for consumers.

“So in the broadest sense, we’re very supportive and we think it will do both what we want it do and what the Government wants it to do,” he said. “That is, add credibility back to the system where some people may have perceived that was lacking.”

Alternatively, Reynolds said that while she felt the industry was largely supportive of the majority of reforms proposed under Stronger Super and SuperStream, she continued to harbour concerns over how far MySuper had deviated from the Super System Review’s original intent.

“If the original intent of MySuper was to have a simple product for members who really want to leave it to their trustees to manage their money, I think that through the process of everybody having their five cents worth, it’s become something else entirely,” she said. “It seems to have become an overly complex product now, something that the Government's tried to get some consensus on but that has now become an effort to let everybody have what they wanted.

“What we have now is not a simple product and that does SUPERREVIEW

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concern me,” Reynolds continued. “And while there's not final legislation on it, it certainly looks like it’s heading down that path and, for me, that is a real concern.”

Yet the reality, according to Schroder, is that superannuation is a mandated system within Australia and so reforms of this nature are inevitable.

“It’s a function of statutes of Parliament and one designed to deliver a social benefit to individuals in their retirement savings,” he said.

“So at AustralianSuper we come at this from the point of view that this whole sector is the creation of legislation to deliver a sound outcome for members and for the economy’s savings levels more broadly.

“That being the case, I don’t think there’s any choice about how people will respond,” Schroder continued. “People will respond accordingly because these are the constraints under which we operate.

“So as the operating legislative framework shifts, people will be required to respond; it’s that simple.”

Irrespective of the industry’s response to these reforms, Lees said that he was firmly of the view that they were not so much gamechanging as a tightening up of the existing system.

“What these reforms are looking to do is take what is one of the best retirement systems in the world and really tighten it up,” he said. “It’s twofold though. Firstly, there’s a lot more engagement and there’s a lot more drive by the Government to get engagement from investors into what

DECEMBER/JANUARY 2012

“Eighty per cent of the population is not engaged with their super.”

- David Lees

is one of their largest assets.

“But the Government’s also balanced that with knowing that about 80 per cent of the population today is not engaged with their super,” Lees added. “So I think they’ve done a good job with balancing that by putting in enough protection for those con-

sumers who are not engaged.

“And that’s a tough balance to achieve but I think they’ve done a really good job in trying to get that balance right.”

But while MySuper and SuperStream may have been at the forefront of 2011 change, the passing of the Government’s Superannua-

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constant is change

tion Guarantee bill through the House of Representatives has undoubtedly been an early Christmas present for Australia’s super industry.

And for Lees, though such a move represents a significant first step, the industry’s work on retirement savings adequacy and longevity has

“Today, male fund members are retiring on about $155,000 and females on about $75,000.”

- David Lees

only just begun.

“Australia has a great retirement savings system but I’d say that the part of that retirement savings system which is really good is accumulation,” he said. “I think we’ve focused very heavily on that as an industry, but the next big area for the indus-

try to focus on, the next big area for Government to focus on, is fundamentally around the retirement part of that retirement savings system.”

In agreement, Reynolds said that the global financial crisis had shown a number of people that a lesser, but guaranteed, return was sometimes preferable to uncertainty.

“Most people, let's face it, they live on a salary and if you can learn to live within your means as we all do throughout our lives, that’s what they want in retirement as well,” she said. “People don't want to stress about the markets so I think, going forward, there'll be further interest in annuities, deferred annuities and a whole range of products because they expect their super fund will take them through their whole life, not just up until retirement.”

Lees said that current growth projections for the industry were also a factor.

“Today, male fund members are retiring on about $155,000 and females on about $75,000 but, in the next decade, that number moves up to more like $450,000,” he said. “So we’re talking about just a totally different amount of money, a totally different game, and the industry’s seeing the size and shape of that change, from $300 billion today to something more like $1 trillion, and realising that it needs to prepare accordingly.

“So we’ve been out there and done a lot of work talking to customers and found that people want something in their retirement that will be almost like an overlay, if not a full layer, on top of the aged pension to actually make their

retirement something that’s far more acceptable to their standard of living,” Lees continued. “You’re seeing people call out for things like annuities and deferred annuities, but we’re also bringing out and coming up with other product sets that we think can go into this part, all to meet that customer need.

“And that core customer need is, ‘what is it that I perceive is the right standard of living for me in retirement?’ and ‘how do I best go about guaranteeing that I can actually get that?’”

In saying that longevity risk was the single largest problem facing the super industry, Schroder said that his only concern was the number of people pointing to annuities as the clean and simple answer.

“In my view, there’s never a simple answer to complex questions,” he said. “For instance, we think there’s three risks that people on the brink of retirement face.

“One is longevity risk, whether the money will run out because that’s something that people worry very deeply about,” Schroder continued.

“And it’s not just about whether they themselves will have enough money, it’s also about what happens to the money should they die prematurely.”

The next risk, according to Schroder, was volatility risk.

“Because people do worry about markets bouncing around, especially if they think they’ve got less time to live through it,” he said. “But the last risk is inflation risk and the reality is that longevity risk and Continued on page 14

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14 2011 AND BEYOND

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When the only thing constant is change Continued from page 13

inflation risk both require sufficient investment growth to keep pace.

“So to me the flippant response, that the answer to post-retirement is annuity, is flawed,” Schroder pointed out. “It doesn’t take into account each of those risks and it also doesn’t think about this issue of what happens to this money if the person dies prematurely.”

Also, because he sees the answer to retirement savings longevity and adequacy as going well beyond annuities, Lees said that there was undoubtedly a lot for both Government and industry to work on.

“This is not an industryalone piece,” he said. “The Government does need to be working with industry on this and industry with Government.

“So [in regard to] deferred annuities, for example, there’s quite a bit of change that would need to take place in some of the tax structures and systems there for those to be a viable proposition,” Lees continued.

“But that’s just one product.

“There are any number of different products that can go into this space and give retirees the options they need.”

As ever, the one constant within Australia’s super industry seems to be change.

Along with that change comes an obligation for superannuation executives to remain busy and, for Reynolds, the area for funds to be busy on in 2012 is advice.

“More and more funds are looking at the advice issue as a way of engaging with memSUPERREVIEW

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bers and keeping them engaged,” she said. “So I think more and more funds will start to offer this single issue advice as this develops out of the FOFA (Future of Financial Advice) reforms.”

Similarly, Schroder said that he would also add engagement to the mix.

“I think we’re already seeing a rising trend of increased engagement and increased activity by members and I think it marks a significant shift in what was previously a fairly dormant sector,” he said.

“So in the past, where people really just did what their employer said, where they ignored their super, that kind of attitude is a thing of the past.

“So I think in the future there’ll be a whole lot less inertia and that’s going to represent some significant challenges to a whole lot of people,” Schroder continued.

“And what that means is that if anybody’s sleeping, they’re going to be left behind.”

Looking to the year ahead, Reynolds said that if super funds thought they had been busy in the last couple of years, she expected them to be even busier in 2012.

“And then 2013 is the start point for all the Stronger Super reforms, so that’s going to be busy as well,” she said. “There's going to need to be a lot of good communication to members about the changes as well, about what a MySuper product is, whether they are in fact being put in one, do they not want to be in one, do they want to make active choice? “It may well be a messy time.”

For Schroder, there is no doubt that the intensity and

DECEMBER/JANUARY 2012

pressure within the industry is rising.

“But I think we’ll have a much clearer legislative framework in 2012,” he said.

“I think we’ve been forced to think about adequacy and ef-

ficiency, and I think they’ll be the things that drive the funds who are plugged in.

“So I think if we keep our minds on adequacy and efficiency and are constantly aware of the competitive

threats that exist, if we focus on the outcome for the member and then our position, relative to others, then that will be the way forward, not just for individual funds but for the industry at large.” SR

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16 ASFA Roundtable

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Policy certainty – the On the eve of ASFA’s national conference and amid the introduction of the Government’s Mineral Resources Rent Tax, a Super Review roundtable has revealed the industry’s continuing desire for policy certainty.

Present: MT: Mike Taylor

– Managing Editor, Super Review.

JQ: John Quessy – Trustee, NGS Super.

PB: Peter Beck

– CEO, Pillar Administration.

DG: David Graus

– GM Policy, ASFA.

RM: Russell Mason – Partner, Deloitte.

DM: Damien Mu

– Chief Distribution and Marketing Officer, AIA.

MT: Well today was significant for one thing probably over any other, and that is that the Government has introduced the superannuation guarantee enabling legislation. So I’m going to ask a question that I asked a little while ago, which is, is it appropriate to have the superannuation guarantee which started life as a non wage benefit tied to a tax, the Mineral Resources Rent Tax or its successor? And given that this is the day it was introduced, I’m just going to throw that open. I’m going to throw to Mr Quessy, who is never short of an opinion.

JQ: Well the simple answer is no it’s not. Superannuation should be treated as superSUPERREVIEW

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annuation and nothing else.

If it’s going to be tied to something it shouldn’t be tied to that particular tax. If it was dealt with by some form of other levy or whatever that might – and I’ve no idea what that might be.

That might be one way of doing it, but I think to make retirement savings dependant on some tax that is well popular with the Government at the moment, but perhaps not as popular with other people and that could easily be re versed, just gives any subsequent government of whatever political persuasion the opportunity of killing the tax and therefore killing the additional superannuation.

And really, if you’re serious about superannuation that’s what it is – it’s not part of a tax,

DECEMBER/JANUARY 2012

it’s not part of anything else, it’s part of superannuation.

PB: I agree with that. I think they’re two separate issues. One issue is whether we should increase the superannuation guarantee levy, and we’re in the industry where we believe it should be increased to make sure people have got decent retirement incomes.

The Government’s problem is they have to fund it, so they’ve got to find a way to fund this, and so to some extent you can understand why they’ve linked it to some sort of funding. But as an industry, I don’t think we need to express an opinion as to where they should get the funding from. It’s over to the Government to figure out where they

get the funding from, and they have to do these trade-offs all the time. So I think we should just push very hard for the fact that the SG contribution should be increased and we should push the Government hard to find the funding for it, whichever way they choose to do it.

DG: We totally agree that it shouldn’t be linked. We think that the increase in the SG is there’s enough justification on its own that you don’t need to tie it, and obviously the funding has to be found. But the ASFA research has also shown an increase in SG from 9 per cent to 12 per cent would have such beneficial flow on to the economy and we presented that research to Treasury. We think that on a

standalone basis this reform should go ahead.

RM: We should remember, however, that 9 to 12 won’t be the universal panacea. That for most people, when they retire it’s going to take a long time for that extra 3 per cent to kick in to be a meaningful amount and that for the next research we’ve done at Deloitte, that says for the next 20 years the overwhelming majority of Australians will still rely wholly or partially on social security to supplement their super.

So I think it’s a great thing that we’re taking it forward to 12, and maybe the next debate will be where do we take it from there? People like the Institute of Actuaries have said 15 per cent and others, I think

ASFA Roundtable 17

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super ingredient guarantee and how it was introduced. If the Keating model had had its way, we would by now be sitting around 18 per cent. Do you think any forward looking government should be saying that 12 per cent this year, 16 per cent by say 2015 and therefore set a timetable till we reach a level where we know that retirement incomes will be sufficient to take the pressure off the aged pension?

ASFA has as well David, but we should be mindful of the fact that 12 per cent isn’t going to be the answer to all the problems when it comes to people’s retirement. That a great majority of people are still going to fall short in the amount that they’ll have saved, and we’ve got to look to other means to allow them to accumulate enough for retirement.

DM: Look, I agree with what the gentlemen are saying. I think Russell’s point right there demonstrates why we should not link these two.

9 per cent is not enough, 12 per cent is not enough, so let’s just focus on getting the SG levy up and making positive movements towards that, so that Australians will have sufficient retirement

savings in the future. And the need to link them, I think you’ve articulated why this is a separate issue and should stay such.

GOING BEYOND 12 PER CENT MT: Let me throw something to you, because looking around the table we’re all old enough to have remembered the original super

JQ: There’s probably an issue about exactly what the percentage is that is universally needed, because I remember the beginnings of the debate about moving from nine to 12 and I don’t think it was Nick Sherry alone, but certainly there was a view and I guess it was a ministerial view, so probably a government view, that not everyone would be universally better off really with a move to 12 per cent.

There was, in fact, a theoretical group of people who would have more money in retirement than they had during their working life. And whilst at one level that sounds like a very good thing, at another level during your working life when you’re trying to

pay bills and mortgages and things like that is when you need a greater cashflow. Now if that’s right, then a move to 15 or 18 universally is probably neither desirable nor necessary. I don’t know what that particular point is that is universally what people need.

I guess that’s what actuaries are for. But even if you do move beyond 12 to something else, there’s got to be a capacity somehow for some group of people to get a greater benefit during their working life. I don’t know what that is, but there’s some clever people around and they ought to be able to work it out.

PB: I agree with that. We’ve got to be careful of pushing the compulsory contribution too high for the whole of the person’s life, because there are different funding requirements. And the Government too, has to decide that because superannuation is a tax-preferred status, it’s got to decide where best to put its money. And there is an argument for people to play a bit of catch up later in life when their responsibility or financial responsibilities are less.

So there is an argument to Continued on page 18

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18 ASFA Roundtable

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Policy certainty – the super ingredient Continued from page 17

push the limits or the caps on voluntary contributions higher, so that those people who haven’t put adequately throughout their life can actually play a bit of catch up when they’ve got the financial capacity to do that.

So I think there is a tipping point where it would be better for us to push for higher voluntary contributions to subsidise the system, if you like, or to play catch up.

DG: I was going to say, I completely agree with Peter. I think 9 to 12 now is essential and figures show it. We’d need more research to show what a further increase universally would be a good idea. But the issue at the moment really is the contribution caps, and I think that’s what has to be addressed more immediately.

RM: Yes I think the idea of allowing perhaps an averaging over your lifetime to allow the catch up, the very things that John and Peter have hinted at, so that people once they have the kids’ school fees paid for, the mortgage paid for, can put additional amounts in. Now I know under $500,000 they can salary sacrifice up to $50,000.

The ASFA research still sees that as falling something short for an individual of a comfortable lifestyle. It will give them a certain lifestyle, but if people want to maintain the lifestyle they were used to while they were working, $500,000 – while it sounds like a lot of money with the way longevity is going – won’t necessarily buy you a very affluent lifestyle.

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Now I understand the Government has issues as to how you keep track of that averaging, but I think the industry needs to work with Government to see how we could put systems in place to allow people to do catch up, and together with the compulsory contributions, do top up that allows them to have an adequate amount at retirement.

And we’ve got to acknowledge that it’s not just the ultra wealthy that do the catch up – ordinary working Australians do it and want to do it, and there’s plenty of evidence of that. So I think it’s a bit of an urban myth to say the high contribution caps are only the domain of the very wealthy, because they’re not. Ordinary Australians, once they can afford it, later on in life they’re using those caps and hitting them.

PB: And females in particular who haven’t worked, taken time out to have children and they have bigger catch-ups to do, and to some extent, putting some caps is prejudicial to females.

DG: And to low income earners who really are strapped paying school fees and the house off, and really they can only really do this once they reach that point in life.

DM: I don’t think it’s actually just saying in isolation the SG levy should increase and just hand a timetable around. I think what we’re actually talking about around Stronger Super is a review of the whole system. So if you’re going to increase the levy,

DECEMBER/JANUARY 2012

Russell Mason

then the whole system needs to support that, and that’s looking at the efficiency – that’s also looking at the tax impacts around that to encourage people when to increase their own contributions. And then, at the tail end of it, actually making it – from a tax perspective – attractive for people to retain that savings and derive an income from that as opposed to spending it on other things and then relying on social security to supplement the income. So I think it’s about having a timetable that looks at the whole system in review, and SG levy is part of that.

WHERE NOW WITH CONTRIBUTION CAPS? MT: I guess listening to you guys and particularly talk-

ing about the contribution cap – that was one of the first things that the Labor Government did coming in, was change the contribution cap. I think it changed a whole lot of things. I think it would be interesting to hear what you have to say and what your views are – whether with 20/20 hindsight that was actually a mistake of significant proportions, given where the economy is and given where the debate with super now is. I’m just wondering was it a big mistake?

JQ: Well certainly the timing was appalling. You’ve basically come off the GFC, you’ve come off some pretty bad couple of years of either poor or negative superannu-

ation returns. You had probably not the world’s greatest confidence in superannuation; at the same time, the Government then introduced legislation and a policy that discouraged people from putting a significant amount of money into superannuation.

And I understand why they did it and we can have a view as to whether that’s good or bad public policy, but the timing was just appalling. And my personal view is really to do this, that effectively punished a significant number of people to try and stop a few uber rich salting money away at the tax payer’s expense was a bit foolish. I mean, they’ll only find another way of doing it, they’re not going to pay tax on Continued on page 20

20 ASFA Roundtable

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Policy certainty – the

Mike Taylor Continued from page 18

it. So they’re rich enough and smart enough to avoid it; it doesn’t really matter whether it goes into superannuation or not. I bet they didn’t pay an extra penny of tax. Poor public policy.

RM: I think no matter what the Government does, what people want is some degree of certainty, and I’ve got sympathy from where the Government has come from with contribution caps. As John said, the timing may not have been good, but in my time we’ve had two or three variations of the reasonable benefit limits, then we had aged based contribution caps. We’ve had these new contribution caps, which allowed over age 50 to contribute more, now we’ve got contribution caps in part based about the amount of accumulation you have in your SUPERREVIEW

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superannuation.

I think people want some degree of certainty so that they can plan in advance, and I think one of the mistakes we’ve made is we’ve changed the system too many times.

And if I was an ordinary Australian out there without a detailed knowledge of superannuation, I wouldn’t necessarily have a lot of confidence in what was happening. Would I want to put my money in superannuation? I don’t know, because the rules have changed so many times.

JQ: And will certainly change again by the time you actually retire.

RM: Yes, so hopefully we can move towards a bipartisan approach; that would be a wonderful thing to see both sides of politics agreeing, and I think they’re not necessarily that far apart in many

DECEMBER/JANUARY 2012

John Quessy

ways. They both see the importance of superannuation; I think this is one area where a bipartisan approach would just help so much and give the public confidence in the system. They’ve been knocked about by the GFC, they’ve seen their accumulations, so there mainly are accumulations go backwards. What can we do to engage them and give them confidence in the system? I think that’s really important.

PB: I agree with Russell and I’ll in fact go one step further. All the change that comes about also costs a lot of money. I’m an administrator so I’ve got to speak as an administrator. It costs us a fortune every time the rules change to update and change the rules. And we just get one change in and the next lot of changes, and that puts a lot of financial pressure on the sys-

tem, to some extent. Part of the issue with our technology and our systems not being as sophisticated as the bank, for example, is that we spend so much time just changing the system to comply, rather than advancing it to give better service, more efficient service and cheaper service to our clients. And so I think the unintended consequence is it’s a costly exercise, and it’s the security for the member knowing what they do, but also the costs of all those changes is just horrendous.

DM: I agree, I’ve got my group insurance hat on today, but I do remember my times on the administration side.

And I think it’s about going back to intent and even what we’re looking at today around Stronger Super, the intent is to make it more efficient and more cost-effective. But there is that unknown cost or cost

that’s not spoken about, which is the cost of change, continual change, which Peter refers to. And that adds cost back into the system, lots of cost that ultimately is borne by the end customer or a member of a superannuation fund. So I think we need to be cognisant of the fact that every time we introduce change, someone is bearing that cost. So getting it right, and that certainty point that Russell made is probably a really important one going forward.

DG: We’d say that this capping, change to contribution caps really does send mixed messages. On the one hand, we’re increasing the mandatory from 9 to 12, on the other hand we’re reducing the voluntary. So that is not a good message – especially in the time where there’s confidence issues and the GFC. There needs to be more

ASFA Roundtable 21

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super ingredient of bipartisanship. But looking at it as a journalist from the outside looking in, the Government and the opposition certainly have areas of difference on a lot of what Stronger Super is about. So I’m just wondering how far we are from creating that kind of bipartisanship that would give the sort of certainty and it says Stronger Super is it for argument sake the next decade. We’re not going to significantly alter the dynamic in the next decade. I just wonder whether that’s possible as a concept and would it help?

David Graus

certainty around super, so people can live with the longterm nature of the benefits.

PB: I guess the other thing too, is this creates a huge industry for advisers just to get people up-to-date with what the current legislation is, never mind improve their retirement outcomes. The same argument as an administrator, would be far better if our advice industry was putting effort into actually explain-

ing to people how they could have better retirement incomes than explaining to them how the rules have changed again and how you’ve got to readjust what you’re doing. I just think there’s a flow-on cost and effect on members that’s much deeper. I think the member confidence is the first one, but it flows right in to the cost and efficiency of the system which is a compulsory system and should be efficient.

GETTING THE MAJOR PARTIES TO AGREE MT: I guess this roundtable is about Stronger Super; that’s the underlying debate issue and you’ve raised the question of certainty. We have legislation around Stronger Super and the various elements that have come forward from the Cooper review and the other bits and pieces. And I guess the only way you get certainty in legislation is a high element

PB: I’ll have a go at this one. I think you’ve got to separate out the MySuper from all efficiency measures. My understanding is there probably is bipartisan agreement to most of the efficiency measures. All the electronic contributions, electronic rollovers, all efficiency measures. I don’t think there’s any debate or argument about it. There might; auto-consolidation or I guess I prefer it call it, opt-out consolidation, because it’s not automatic. People get nervous when you call it auto-consolidation – it’s actually opt-out consolidation. I think there’s

agreement, it’s just the levels to which you go and how fast the industry can cope with the level of change that I think is being debated. So it’s more being debated at the margin.

I think MySuper is a very interesting dynamic – that most funds will now probably move to have I guess what I would call a with and without advice product, because the industry funds traditionally you just had without advice products, and retail has traditionally had with advice products. I think the dynamic that’s going to be created is that retail and industry funds are going to have a with and without advice product.

So there actually is going to be more competition at both levels – at a product level, at MySuper level, and at an advice level. I think I can see the industry funds getting much more into advice, and I can see the retail funds getting much more into just providing basic products. And I think there is a political difference as to how open the defaults are going to be allowed to be under the current Productivity Commission. And so these are the debates or Continued on page 22

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22 ASFA Roundtable

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Policy certainty – the super ingredient Continued from page 21

differences of opinion as to how narrow that default option is going to be or how wide it can be cast. So I think there still are political differences about the magnitude and size of the competition that’s going to be allowed. My feeling is that the bipartisan agreement has got to be an efficient system, so I don’t think anyone can argue with the principles of where they’re going. How it’s going to be implemented, I think, is going to cause political differences.

DM: Look I’m just taking one view here, which is only a small component of the overall superannuation system which is looking at it from an insurance perspective, but even if you look at it from a group insurance perspective, you talk about complexity and efficiency, consolidation in itself creates complexity, and potential costs that we’re not factoring in. So for me it’s one, Stronger Super represents a positive message when it comes to insurance inside superannuation, when superannuation funds as we all know afford millions of Australians some level of cover, which is a good thing. And it supports insurance continuing to be inside superannuation. But when we do look at things like consolidation, while that might create some efficiencies in regards to the number of accounts, we do have some legacy there in terms of insurance arrangements that exist.

So we talk about opt-out as opposed to auto-consolidation, but we know that there SUPERREVIEW

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is a high level of apathy when it comes to engagement among superannuation funds.

Will people actually recognise and understand what they’re potentially opting out of, or will they even respond and then further down the track go “ok, well this has happened now and I’ve lost certain levels of cover or types of cover from a different fund that I have”.

You also change the dynamics of risk pools. If you change the auto consolidation from say $1000 balance to $10,000 balance, all of a sudden you potentially have large pools of memberships moving from funds which change the dynamics of risk pools and also just population size of the general pool itself, which then impacts administration fees and other things. So I think it’s the detail that we need to get down to, and understand and make sure there’s clarity before it gets passed – and we all then have to go away and implement it.

PB: So I’ll just clarify what I’m saying – that we’ve chosen a low starting base, because there’s not a lot of conflict. I think most people understand that when you get a very small account like $1,000, I don’t think there’s too much debate about whether that should be consolidated or not – on both sides of politics. If you stepped that up to $10,000 there is definitely disagreement as to whether that should be done or not.

RM: I think one of our big problems, it all gets back to fundamental member en-

DECEMBER/JANUARY 2012

Damien Mu

gagement, how engaged the members are. And what we as an industry need to do – and I think we produce some of the greatest efficiencies – is just to get members interested in superannuation. Then you won’t have the 25 year-old with six accounts and some people have got multiple accounts for very good reasons and will want to keep them.

I’ve got a person in my family with big balances with two funds from multiple insurances and it makes good sense. What we’ve got to do is get people interested in super and engaged in super at a young age.

JQ: People who have done that are already engaged, they’ve done it, because they’ve looked at their account and they’ve said “well I’ll keep a low balance in this account, because I get fantastic insurance, but the bulk of my money is going over here, because that’s a really good performing fund, that’s where I’m going”. “That’s going to make for my retirement and this is going to insure my life or my income or whatever over there.”

Probably not exactly what funds want, but when you’ve

got those vast differences that still exist in terms of insurability, in terms of default amounts and the like, then there’s going to be the engaged group of people who say “that’s where I want my insurance. I don’t need it over there, I can get it here, it’s good, it’s cheap, I can get as much as I need”.

I think one of the real dangers is not so much there will be a with and without advice product – which is probably true – but there’s going to be a staggering amount of pressure from some funds to upsell. That is, “I’m forced to put you all into this product, now I’m going to try and get you into that product, because that product is either better for me, because I get more fees or better for you, because in fact it is going to provide you with a better retirement income”.

I read Shorten’s comments that a default low cost MySuper product was going to make the average 37 year-old $40,000 better off at retirement, and that’s just a nonsense. I reckon that anyone could demonstrate that by not being in a low cost low return fund, you would be $80,000 better off if you didn’t do that. I mean these are just silly figures. The reality is that it’s about low fees – it’s not about high returns.

That would presuppose that every basis point you lose in fees is returned 10 times in returns – it just isn’t the case. I know he was after the 10-second sound bite, but that’s just a ludicrous figure.

How you can get a lower annual return and be better off? Beats me.

SR

INSURANCE 23

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Give ‘em life!

Super funds face a number of challenges when seeking to increase uptake of insurance for their members. However, with life underinsurance costing the Government $140 million each year and many Australians having only default life insurance in place, this is a social issue that must be addressed. CLAIRE ROBERTS, CommInsure’s general manager, explains.

I

t’s a particularly interesting time to be providing insurance to super fund members. Over the past 12 months there has been considerable consultation in this arena, based on the Cooper Review recommendations, and we expect legislation to follow soon implementing the Government’s Stronger Super proposals.

The Government has shown that it understands the value of insurance. Under the Stronger Super reforms it will require trustees to have an insurance strategy in place whereby they consider the insurance needs of their members as part of their overall offer. In most cases, death and TPD will be required to be offered on an opt-out basis, which means a member receives this insurance cover automatically unless they make an active choice to optout. For income protection, the trustee can choose whether or not to offer this insurance to their members.

This is a welcome decision as it allows members to choose whether their income protection insurance is inside or outside of the superannuation environment. From a tax point of view, the member is no better or worse off if they have insurance inside or outside of

super, though for employers who fund income protection outside of super, no payroll tax is applied.

Measures to help address Australia’s underinsurance issue can only be a positive.

The good news is that according to the latest research from Rice Warner Actuaries, there has been a significant increase in the amount of life insurance cover held by the Australian working-age population over the past six years, particularly for low-income earners. It’s also worth noting, however, that in this time we have also seen increased levels of household debt.

In its 2011 Underinsurance Report, Rice Warner found that the rise in insurance uptake has stemmed from increased levels of default cover within superannuation; an increased focus on risk insurance by financial advisers and superannuation trustees; and the growing direct life insurance market – that is, increases in cover taken outside of superannuation, through channels other than financial advisers.

However, there is a lot more work to do to help Australians achieve adequate levels of cover, should the unforeseeable occur.

For term life, Rice Warner

found that Australia is underinsured to the tune of $669 billion at a purely subsistence level (83 per cent of needs) and $3,073 billion at an income replacement level (51 per cent of needs). Critically, this is only half the amount of cover required to ensure family members and dependents can maintain their standard of living after the death of a parent or partner. And with the current median level of death cover estimated at $190,000 at age 35, it seems that for many people, default life insurance within their super fund is the only insurance they have.

Looking at TPD insurance, Rice Warner identified the level of underinsurance as $7,182 billion – meaning Australians only have around 22 per cent of cover required. And for income protection, the average level of cover is only 24 per cent of needs, with the median level estimated at just 13 per cent of needs. This is due to a number of large super funds’ member bases that have very low levels of cover. Relatively few superannuation funds even have default income protection, and those that do often provide just $1,000 to $1,500 per month.

Many funds are actually starting to look more closely

at the levels of insurance cover across their member base; in particular, they are seeking to identify pockets of underinsurance and over-insurance. For example, there is a growing trend by funds to develop lifestyle insurance designs. This allows members to have appropriate levels of cover at certain ages. It also addresses members’ particular needs at that time, without being a major detriment to super account balances, which are there to support the member in retirement. Funds need to have the flexibility in their insurance design to allow older members to adjust their levels of insurance cover as personal circumstances may change. Younger members, on the other hand, generally require higher levels of TPD cover (rather than death cover) due to generally lower levels of debts and a lack of dependants.

Funds face a number of hurdles when seeking to increase the uptake of insurance for their members. Communicating why insurance should be increased at different ages can prove challenging, and there are certainly barriers involved in changing existing administration processes.

However, there are ways to overcome these challenges:

for example, through general awareness and education. To this end, funds can look to engage members via a number of new channels, such as social media, smart phones, tablets and SMS. Markets such as the UK have been particularly successful in this regard. Letters and paper statements are fast becoming a thing of the past.

There are also incentives for increasing cover that can be promoted to members, such as the economies of scale on offer, and therefore cost savings on insurance premiums, by increasing default cover levels. Insurers will also often look to give existing members an opportunity to increase cover types within a three to four month period after joining.

The significant issue yet to be successfully addressed by the industry is how to educate members regarding the adequacy of their life insurance.

With this in mind, insurance providers and trustees must work together to provide easily accessible and understood resources and education allowing members to calculate suitable levels to meet their individual needs. The Government, through its work on financial literacy, can aid such work. SR

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ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

A very Shorten(ed) Christmas God rest ye merry super trustees Let nothing you dismay Remember, Stronger Super was born one Canberra day To save you all from APRA’s power When you were gone astray

From Shorten our Assistant Treasurer A Government bill came And unto certain fund execs Brought tidings of the same: How that in Canberra was born The Son of Jeremy by Name

The fund execs at those tidings Rejoiced much in mind And left their members a-bleeding In tempest, storm and wind And went to Canberra straightway The minister to find

Now to the Minister sing praises All you within this place And with true funds and motherlode Each other now embrace This holy tide of Super strengths All other doth deface

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

On Capital Hill, in ACT This blessed policy was born And laid within legislation Upon this blessed morn The which its father, Jeremy Did nothing take in scorn

“Fear not then,” said the minister, “Let nothing you affright This day is born legislation Of a pure Virgin bright To free all those who trust in super From APRA’s power and might.”

And when they came to Canberra Where the Assistant Treasurer played They found Him in his office Where factional chiefs make hay The industry funds kneeling down Unto their mate did pray

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

O tidings of comfort and joy Comfort and joy, O tidings of comfort and joy.

Sydney just not super enough

ROLLOVER does not wish to be churlish about such things, but he notes that the Association of Superannuation Funds of Australia (ASFA) intends holding its 2012 national conference in Rollover’s hometown – Sydney.

Now, while Rollover loves living in the Emerald City, he has always strongly cautioned organisations such as ASFA against holding their annual conferences in places such as Sydney and Melbourne because, quite simply, such venues are just a little too close to home for many people working in superannuation.

Rollover well remembers how many delegates kept disappearing back to their desks the last time the SUPERREVIEW

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DECEMBER/JANUARY 2012

ASFA conference was held in Melbourne and he suspects the same thing will happen at the Sydney venue.

The great thing about holding conferences such as ASFA in places like the Gold Coast is that delegates are not unduly distracted by their work commitments.

Rollover does note, however, that the ASFA conference is scheduled for the final three days of November, 2012 – so perhaps delegates will by then have adopted at least some festive spirit.

Then, too, there is the question of where ASFA will choose to hold its conference golf day in circumstances where the Australian Open circus will only just have left town. SR

Climate changers

ON the subject of conference venues, Rollover appreciates that the Australian Institute of Superannuation Trustees (AIST) has chosen Queensland as the venue for its key 2012 conferences – the Conference of Major Superannuation Funds in Brisbane in mid-March and the Australian Super Investment conference on the Gold Coast in mid-September.

The AIST this year decided to hold its ASI conference in Tasmania and Rollover understands that while it was well attended, a number of delegates found the climate just a little bit daunting.

Given the political calendar in Queensland for 2012, the AIST delegates may well find themselves talking to Queensland Labor ministers in March and then Liberal-National Party ministers in September.

Of course, if the selection of conference venues is influenced by which party holds Government in a particular state or territory, then 2013 might prove to be a big year for Tasmania. SR