Super Review (October 2011)

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 2011

Volume 25 - Issue 9

3 FUND MEMBERSHIP Slowing member growth now driving consolidation

Retail fees under scrutiny The competitive fees being quoted by some major retail funds may not be as generous as they at first seem, according to a Super Review roundtable.

By Mike Taylor

J

11 RETIREMENT What happens when the savings stop?

14 SMSFs SMSFs grow in the face of adversity

Print Post Approved PP255003/01111

16 ROUNDTABLE Stronger Super: what does the future hold?

For the latest news, visit superreview.com.au COMPANY INDEX

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much money that particular body is taking out for the purposes of the trustee, and how much they’re taking out for related parties,” he said.

“And if you get to fee disclosure which gives you those numbers, then fine. But I was speaking to someone about this issue, and they said there’s all sorts of ways that you could effectively quote a zero fee and still make a bucketload of money out of the whole system,” Hartley said.

“And they’re talking about volume discounts on spot contracts; they’re talking about a whole bunch of different things that I’d never even thought of,” he said. “And until you can get to the bottom of how much you’re taking – how much you’re ripping out of the system – then you don’t really have a fair comparison.”

Hartley told the roundtable that he suspected “there’s a whole lot of people who are just – their job is ‘How do I hide these fees? How do I make this thing profitable without looking as if I’m taking a lot of money out?’.

“So if you can get to the bottom of that and find out exactly how much the trustee

NEWS

ust weeks before the Australian Prudential Regulation Authority (APRA) released draft prudential standards covering superannuation funds, a Super Review roundtable was told how easy it was for trustees to obscure fees and costs.

In a discussion around whether there should be more competition with respect to default funds under modern awards, Sunsuper chief investment officer David Hartley said if retail fund were to be allowed to participate, they should be required to offer greater transparency.

“If commercial operators are willing to operate on the same profit margin as industry funds, then it’s probably fair enough,” he said.

However, in response to a suggestion by former Investment and Financial Services Association chief executive Richard Gilbert that retail funds could offer competitive default funds, Hartley suggested the quoted fee might not reflect total reality.

“That’s the quoted fee – there’s no requirement for a trustee of a superannuation fund in Australia to say how

3

EDITORIAL

6

SMSFs

14

David Hartley

“There’s no requirement for a trustee of a superannuation fund in Australia to say how much money that particular body is taking out for the purposes of the trustee.”

- David Hartley

ROUNDTABLE

16

APPOINTMENTS

is taking out, the responsible entity is taking out for themselves, and for the related entities, then I think you’ve got a fair comparison, then you’ve got a basis for which those commercial guys can operate as a default fund,” he said.

Asked whether what he was saying that was Product Disclosure Statements could not be accepted as reflecting reality, Hartley said it was possible to arrange investments in a fund to enable the quoting of a negative fee.

“I could arrange our investments in our particular fund ... so that I could quote a negative fee and have exactly the same investments as I’ve got now, under the current rules,” he said. “It’s ridiculous.”

Extended roundtable coverage starts on page 16. SR

23

ROLLOVER

24

2 PAGE TWO

www.superreview.com.au

MANDATES Received by

Type of mandate

Issued by

Amount

Fidelity

Custody

AustralianSuper

$525 million

Hanover Life Re

Insurance

Cbus

N/A

Aubrey Capital Management

Custody

Investor Solutions

N/A

MLC Business Super

Custody

Clark Equipment Australia Group

$15 million

Mercer

Asset consulting

Sunsuper

N/A

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NEWS 3

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Slowing member growth driving consolidation

Damian Hill

THE maturity of the superannuation system when it comes to membership is the driving factor behind the consolidation in the industry, according to REST chief executive Damian Hill.

Considering there are just over two accounts for every person, the industry is almost “overripe” in terms of membership, he said.

However, he added the system was immature in terms of assets, because Australians had only been contributing 9 per

cent of their income to their superannuation for the past 10 years. He stressed the need to increase the superannuation guarantee to 12 per cent to ensure Australians had enough for their retirement.

“Asset growth and contributions should grow going forward, but membership is not going to grow at anywhere near the rate it has. Indeed, many funds have zero or negative member growth,” Hill said.

The decrease in member growth is putting pressure on

costs and revenues, which explains the consolidation the industry has seen in recent years, he said.

“When account balances rise, you have a huge increase in engagement. And what do engaged members want? More service.

So the whole revenue/cost model is coming under strain – regardless of the regulatory challenge,” Hill said.

The industry was effectively dealing with the challenge of maturing membership by looking to mergers and economies of scale,

he said. Most of the mergers at the moment were between smaller funds looking to become ‘medium’ funds, he added.

When it came to mergers for REST, Hill said it was not a top priority for the fund – but he was open to the idea if it could add capabilities.

“That’s not to say we couldn’t get more scale. We can be more selective in our process. We keep an open mind to mergers and acquisitions out there, but we want to be fairly strategic about what we do,” he said. SR

APRA releases proposed prudential standards

By Tim Stewart THE Australian Prudential Regulation Authority (APRA) has released a discussion paper detailing its proposed prudential standards for the superannuation industry.

Currently, APRA can only give superannuation trustees guidance on how to comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The new powers granted to APRA will allow the regulator to issue its own prudential standards for the superannuation industry – something it already does for the banking and insurance industries.

Minter Ellison principal Maged Girgis said the proposals in the discussion paper weren’t terribly onerous in their current form. He said they were not prescriptive, and mostly reflected the SIS Act. However, he added that it was the potential for

APRA to change the standards around in the future without the usual checks and balances that concerned him most.

“It’s the potential of the APRA standards that is probably scarier than what they actually are on day one. During periods of economic crisis, you could have short-term standards that will apply without APRA having to go through the parliament,” Girgis said.

The discussion paper includes a requirement for funds to put a transition plan into place for transferring members to MySuper funds. Additionally, the definition of an ‘independent director’ will be tightened, and Board audit committees will require a different chair than the chair of the Board. There will be no set maximum and minimum operational risk reserves under the APRA standards – instead, operational risk reserves will be based on the operational exposure

Fiona Reynolds

of each fund and its individual risks.

Super funds will also have to report once a year on the adequacy of their scale.

Australian Institute of Superannuation Trustees Fiona Reynolds welcomed the APRA standards, calling them “significant and wide ranging”. The industry would need to further consult with

APRA to hammer out the finer details of the standards, but on the whole, the standards filled in the gaps left by Stronger Super, she said.

“Whilst many funds have high levels of governance, the reforms proposed in the discussion paper will leave funds in no doubt about where the bar is being set in terms of running the super funds of the future in MySuper,” Reynolds said.

APRA deputy chairman Ross Jones said the APRA standards would strengthen the superannuation system and provide clear benefits to members.

“The establishment of prudential standards in superannuation will not change the fact that the primary responsibility for prudent management of superannuation funds rests with the trustees,” Jones said.

Submissions to APRA on the discussion paper will be open until 23 December 2011. SR

Managed futures play diversifying role SELECTING investments on the basis of fundamental forecasting can lead to high levels of correlation in a portfolio – something that exposure to managed futures can mitigate, according to FRM Australia managing director Richard Keary.

Because fundamental forecasting is based upon consensus numbers, it tends to lead to a “herding” mentality and doesn’t leave the investor with much scope to diversify, Keary said.

Managers who trade in futures contracts (also known as commodity trading advisors, or CTAs) use technical analysis to identify trends and benefit from market volatility, he added.

“The literature has lots of examples showing that when markets fall, owning some CTA exposure helps mitigate the losses,” Keary said.

The offshore FRM Sigma Fund has been in operation since 2005, and has been available to whole-

sale investors in Australia and New Zealand as a unit trust for just over a year. The offshore fund returned 40 per cent during 2008, during a period when markets were down 40 per cent, Keary said. The Australian unit trust generated a return of 12.89 per cent over the past year, net of all fees and expenses.

“Adding trend following or momentum-based decisionmaking is a simple way to diversify the risks associated with

selecting investments using forecasting alone,” he said.

“Instead of trying to forecast trends using fundamental forecasting, CTAs identify and follow trends using proprietary computer modelling to maximise exposure to the trends,” Keary added.

The FRM Sigma Fund differed from many of the unit trusts that were frozen during the global financial crisis because it allowed weekly re-

Richard Keary

demptions, which reflected the liquidity of the underlying offshore fund, Keary said. SR OCTOBER 2011 * SUPERREVIEW

4 NEWS

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AustralianSuper doubles Fidelity mandate

By Tim Stewart THE big industry fund AustralianSuper has added $525 million to Fidelity’s Australian equities mandate, bringing it to around $1 billion.

AustralianSuper chief investment officer Mark Delaney said Fidelity had demonstrated solid

and consistent stock selection skills, making the fund manager a good fit for the super fund’s portfolio configuration.

“We have recently added another $500 million to Fidelity, to take their mandate to about $1 billion – which is roughly the same size as the other three large caps Aus-

tralian equities managers in the portfolio,” Delaney said.

AustralianSuper has a disciplined investment process, and the fund monitors and changes key variables in its portfolios as required, he added.

“Many factors are taken into account when selecting investment

managers, including the strength of the company, its management structure, ownership and the experience of its investment team, the process they use, their track records and whether the manager complements AustralianSuper’s other investment managers,” Delaney said. SR

Mark Delaney

SG charge survives High Court THE Government’s super guarantee charge (SGC) has held up to the scrutiny of the High Court, with the failure of a case launched by Roy Morgan Research.

The SGC is effectively the Government’s only method of enforcing the super guarantee. It gives the Australian Taxation Office (ATO) the power to collect late employer contributions – along with interest calculated at 10 per cent, which is paid to the employee.

Roy Morgan Research argued that the ATO did not have the constitutional power to collect a levy for the “private and direct benefit” of employees, as opposed to the collection of money for “public purposes”.

But the High Court judges ruled unanimously that the SGC was a tax, and threw the case out.

Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten said he was pleased the SGC would remain in place to ensure employees were compensated appropriately if their employer was late paying their contributions.

“The SGC plays an important role in the integrity of our superannuation system, and I am pleased to see it will be maintained under this High Court decision,” Shorten said. SR SUPERREVIEW

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NEWS 5

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Proposed carbon tax relief will help pre-retirees

By Tim Stewart THE relief measures contained in the Government’s proposed carbon tax legislation could save pension investors hundreds of dollars, according to analysis by MLC Technical Services.

Under the current rules, people in the 55-59 age group can receive pension payments of up to $48,158 before they have to

pay income tax. If the Clean Energy (Income Tax Rates Amendments) Bill 2011 is introduced, that threshold will rise to $49,753 from 1 July 2012 and then $50,189 from 1 July 2015.

As a result, pension investors aged between 55 and 59 look set to receive an additional $1,500 in taxable pension income, tax-free, from 1 July 2012 – a tax saving of around $280 after taking the 15 per

cent pension tax offset into account, according to MLC. And from 1 July 2015, they are likely to be eligible for an extra $2,000 in tax-free income as compared the current year, saving them approximately $360.

MLC Technical Services head Gemma Dale said the finding was great news for pension investors in the 55-59 age bracket, including those who had started a

transition to retirement pension.

“This means they can draw more income, if required, from their pension investment without paying any tax,” said Dale.

“This makes using super money to start a pension investment even more attractive, given you can also receive unlimited tax-free income payments at age 60 or over, as well as possible Centrelink income test concessions,” she added. SR

QIC property fund raises $1.72 billion QIC Global Real Estate (QIC GRE) has announced the completion of a $1.72 billion capital raising for its QIC Property Fund (QPF).

QIC GRE managing director Robert Carter said the 18-month-long effort was one of the largest capital raisings by an Australian unlisted property fund.

“The recapitalisation has increased the number of investors in the QPF, which now comprises a mix of domestic and international investors representing superannuation, insurance and sovereign funds,” Carter said.

QPF is an open-ended wholesale property fund, and as of 30 June 2011 it had $5.5 billion in funds under management. The fund currently owns 10 regional shopping centres and four central business district buildings.

The capital raising was partly a move by existing investors to reposition their portfolios, Carter said.

“QIC Global Real Estate closely aligns our core strategic functions with our clients’ investment objectives, enabling our business model to respond quickly and effectively to new opportunities,” he said.

QIC GRE has a “significant development pipeline” which could see future capital raisings in the short to medium term, Carter added. SR OCTOBER 2011 * SUPERREVIEW

6 EDITORIAL

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Stronger Super or a work in progress?

There is much to recommend the core contents of the Government’s Stronger Super policy initiative, but it falls far short of delivering the certainty many fund members have been seeking.

Mike Taylor

T

he Federal Government last month finally delivered the final iteration of its Stronger Super policy proposal, but it did not succeed in delivering the certainty craved by so many of the Australians relying on superannuation to provide the underpinning of a comfortable retirement.

It is a measure of Stronger Super as a policy that none of the major stakeholders have sufficiently embraced its contents such that they have stopped their bickering or called a halt to their political lobbying.

It was obvious even before Assistant Treasurer Bill Shorten had pre-briefed the key stakeholders on the ultimate shape of his Stronger Super

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pronouncements that for them, the devil would be in the detail of the legislation and then its ultimate regulatory delivery.

For this reason, the only certainty to emerge from Stronger Super is the uncertainty that has been borne of how quickly the legislation actually moves through the House of Representatives and Senate, and is then rolled out into the industry.

The reality for members of superannuation funds and selfmanaged superannuation fund trustees is that they are looking at implementation dates extending over three years, with the only certainty being that a federal election will intervene.

And if the implementation timetable of Stronger Super is not of itself an issue, then there exists the Government’s promise to refer the vexed issue of default funds under modern awards to the Productivity Commission.

The degree to which Shorten’s Stronger Super announcement in mid-September did not represent the last word on the final shape of superannuation

EDITORIAL Managing Editor – Mike Taylor Ph: (02) 9422 2712 Fax: (02) 9422 2822 email: mike.taylor@reedbusiness.com.au Features Editor – Milana Pokrajac Ph: (02) 9422 2080 Fax: (02) 9422 2822 email: milana.pokrajac@reedbusiness.com.au Reporter - Tim Stewart Ph: (02) 9422 2210 email: tim.stewart@reedbusiness.com.au Contributing Reporter – Damon Taylor email: damon.taylor@c-e-a.com.au Ph: 0433 178 250

policy and legislation was evidenced by the degree to which stakeholders signalled their intention to keep lobbying around the detail.

For its part, the Industry Super Network indicated it was less than happy with key elements of the package, saying it would be encouraging the Government and regulators to remove the proposed $10,000 threshold for the consolidation of account balances when it is due to increase in 2014.

As well, it said the Government needed to determine the final policy parameters for multi-pricing arrangements and to address employees’ savings being flipped into more expensive products.

Irrespective of the approaches being pursued by the major stakeholders, there is much in the Stronger Super policy which deserves to be implemented and to carry bipartisan support when the legislation is ultimately debated in the Parliament.

Foremost among the policy positives is SuperStream – something that has already

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earned the backing of almost all the major players, including the Opposition spokesman on Financial Services, Senator Mathias Cormann.

The provision of more definitive superannuation performance data by the Australian Prudential Regulation Authority has also earned the support of a cross-section of the industry, notwithstanding the regulator’s less than stellar performance to meet a similar request from the Government more than two years ago.

However, MySuper is less certain of bipartisan support in the House of Representatives in circumstances where the Opposition has persistently referred to the Government’s failure to refer default funds under modern awards to the Productivity Commission.

The Opposition has indicated it believes considerable inconsistency exists with respect to MySuper being implemented in the absence of the Productivity Commission addressing a perceived industry fund monopoly in relation to default funds under modern awards.

As well, Cormann has signalled that the Coalition may yet try to impose amendments on the underlying Stronger Super legislation to impose stronger corporate governance requirements on superannuation funds, particularly with

respect to the holding of multiple trustee-directorships.

As the roundtable published in this edition of Super Review has underlined, there exists a growing body of support for superannuation fund trustee boards to be held to the same standards of corporate governance as the boards of publicly-listed companies. Further, a majority of the roundtable participants agreed with the contention that superannuation fund members should be granted the right to vote on major issues such as fund amalgamations, and possibly the election of trustee boards.

It is clear that whatever elements of Stronger Super make their way through the current Parliament, they will not encompass the questions of fund governance raised by the Cooper Review and embraced by the Opposition.

There will be those who argue that the Coalition’s support for a higher standard of corporate governance is owed to its belief that some significant personalities within the industry fund movement hold multiple directorships on trustee boards. However, if the superannuation guarantee is to be lifted to 12 per cent, it is incumbent on the Government to impose a commensurate increase in standards of governance. SR

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8 EDUCATION

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Educate to accumulate: Metlife With many superannuation funds and financial institutions adding retirement incomes products to their offerings, MIKE TAYLOR writes that new Metlife research urges a need to close the knowledge gap.

M

aking the transition from the accumulation phase of superannuation to the de-accumulation phase is a challenge that needs to be met with more than just Government regulation, according to Metlife senior vice-president and behavioural economics expert Joseph Jordan.

Jordan, who addressed last August’s Financial Services Council annual conference on the Gold Coast, told

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Super Review that the financial services industry could not rely on governments to make things happen, but they had to engage more appropriately with clients.

“People have to become more selfeducated and need to learn how to manage an income stream,” he said.

Jordan’s views are expressed in a position paper developed in association with other Metlife experts, Dan Weinberger (Retirement Incomes

Strategies) and Joel Franks (Behavioural Finance Strategies).

The position paper said that for years investors had based most of their financial decisions on asset accumulation models, with savings and investments being based largely on an analytical process driven by historical performance and fund holding analysis in the form of some basic investing principles – dollar cost averaging, diversification and rebalancing.

“This set of tools and experiences did little to help clients understand that some day it will all have to be converted into a lifestyle sustaining retirement income that needs to last as long as their retirement may last,” it said.

“Armed with a wealth of knowledge and experience on how to save money, retirees stand on the precipice of the rest of their lives with incomplete financial knowledge to weather the new challenges they will face during retirement,” the paper said.

For his part, Jordan said clients tended to spend too much time utilising the more rational left side of the brain when making financial decisions rather than the more emotive right hand side of the brain, and it was the role of advisers to help clients use both sides of the brain and to manage behaviour.

He said that understanding the need to help clients engage both sides of the brain and become more self-directed could help shape product design.

Jordan and the other position paper authors claim “implementing behavioural approaches that accommodate the emotional elements in client decision-making opens up new ways to serve clients more fully”.

They point to the fact that financial institutions have to accept that as they enter retirement, retirees become less an investor and more their own income provider.

“Before they can make educated

“People have to become more self-educated and need to learn how to manage an income stream.”

- Joseph Jordan

decisions about retirement income, they need to comprehend the scope and consequences represented by the problem as reflected in the way we frame the information we provide,” the position paper said.

The position paper pointed to research conducted in the US which showed that, given the choice, retirees would rather have predictable and secure incomes in retirement even it meant accepting a slightly reduced lifestyle.

It concluded on the note that lasting client relationships would rely on engaging clients about the new retirement risk and help them participate in the decision-making process that made them feel better about the retirement income options they choose.

“You cannot wait for your clients to ask questions about concepts they were not taught to think about,” it said.

Referring to studies conducted in both the US and the United Kingdom, the Metlife paper said that while people could understand the difference between growing assets and generating income, they might not understand how much income they would actually need or the impact of the new retirement risks. SR

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RETIREMENT 11

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What happens when the savings stop?

The focus of the Australian superannuation industry over the past two decades has been mostly on accumulation but, as DAMON TAYLOR reports, super funds are increasingly examining their role in the retirement phase.

T

hough Australia may have had the superannuation guarantee in some form since 1992, the acknowledged reality is that it is only now seeing the first wave of retirees to have benefited from that savings regime.

Within what is yet an immature system, the super industry’s focus has been accumulation, but according to Tony Hildyard, country head, New Zealand for PIMCO, that focus must take the next step and turn to supporting superannuants during retirement.

“As things stand we’ve had 20 years of compulsory savings, and over that period you really saw corporate and other super funds really not want to deal with the retiree,” he said.

“They moved everything to member choice and I think they were quite happy to see people take their money when they retired so that they could just focus on the accumulation role.

“What’s happening now, of course, is that you’re getting this big demographic bubble that’s getting close to retirement and there’s been a realisation that the focus has, to this point, been just on accumulation,” Hildyard continued. “That same realisation’s occurring for retirees as well and they’re seeing that staying in a super fund with the current offerings is not ideal.

“Retirees are risk averse, they want some income certainty, they want control of their assets and they’re very frightened of running out of money and therein lies the challenge.”

Commenting on the current offerings alluded to by Hildyard

and what makes them less than ideal, Andrew Boal, convenor of the Superannuation and Employee Benefits Practice Committee at the Institute of Actuaries of Australia, says there are approximately 5.5 million Australians aged between 45 and 64 who will be reaching 65 in the next 20 years.

“So that’s a massive tidal wave of baby boomers about to reach that critical point in their life,” he says. “Now as to what’s happening out there at the moment, we had a look at 60 funds not long ago and the average asset allocation for their accumulation assets, was about 73 per cent in growth assets but of those, only 43 funds

David Knox

had a default option for post-retirement.

“The rest either didn’t offer anything or at least required the members to make an active decision to do something,” Boal continued. “And of those 43 that had a default post-retirement option, two of them defaulted to cash and four of them defaulted to something more conservative but the rest basically didn’t make any change.

“Predominantly, most funds that have a default option in retirement are still using the same default asset allocation as prior to retirement, and while that may or may not be the right thing, it’s a statement of where things are at the moment.”

Looking at not just the super industry but also at what is being offered by a number of large financial services institutions, Dr David Knox, senior partner at Mercer, said that the most popular product out there was probably the account-based or allocated pension.

“So that’s a very flexible product for the retiree. It has a lot of advantages to it but the major disadvantage is that it leaves all the risk with the retired person or household, both longevity risk and investment risk,” he said. “So we’re starting to see the development of some other products where the provider

picks up some of those risks.

“The most obvious one is the term annuity type product, which Challenger is selling quite a lot of,” Dr Knox continued. “And that’s really a fixed interest product where you offer an income for a period of three years, five years, 10 years or whatever but there’s no longevity protection.

“It’s an annuity but it’s only for a fixed term and what Challenger and the other providers would be doing is trying to match that liability by investing in bonds and other types of fixed interest products, thereby reducing their risk.”

Dr Knox said that the third type of product available, and one which was gradually developing, was the variable annuity.

“Again, it can be a flexible product where the provider offers some investment protection but also some longevity risk

protection to the investor,” he said. “By and large, these products haven’t yet been very successful in the Australian market but I think there are a couple of reasons for that.

“One, they’re fairly complicated. Most retirees don’t understand how these risks are protected and that’s understandable because realistically, I can’t protect your investments without a fairly complex set of hedges and other assets in the background,” Dr Knox continued. “And the other reason is that longevity protection is not yet well understood in the Australian market.

“So when you put those two things together in the one product, for reasons that are understandable it appears expensive and individuals are saying as much.”

Yet according to Pauline Vamos, CEO of the Association of Superannuation Funds of Australia (ASFA), the retirement income options currently available have issues that go well beyond price. For Vamos, the Superannuation Industry Supervision (SIS) Act and the Taxation Act, in their current forms, are the most significant hurdles – and hurdles that must be overcome before any retirement income products are likely to gain traction.

“At the moment, because of restrictions in SIS, you can only really have allocated pensions or annuities,” she said. “And then you’ve got issues with capital requirements and you’ve got issues with the taxation treatment of annuities.

“So the first step is to remove some of these and then you’ll start to get some innovation in the area,” continued Vamos.

“That’s number one.”

☞ Continued on page 12 OCTOBER 2011 * SUPERREVIEW

12 RETIREMENT

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What happens when the savings stop?

Continued from page 11 ☞

Giving specific examples of those hurdles, Boal said that current SIS regulations really only took into account two types of income products in retirement.

“One is an account-based pension, like an allocated pension, and the other is an annuity or an immediate life income stream that starts paying tomorrow,” he said. “But if you’ve got a product that doesn’t actually pay anything for maybe 20 years, like a deferred annuity, that doesn’t really fit any of the current definitions.

“And the other thing is that in the Tax Act, because [the product] is not drawing an income immediately, it’s treated as though it’s still in accumulation mode, and as a result the investment income on the investments supporting the annuity are taxed at 15 per cent, rather than tax-free like any other post-retirement product,” Boal added.

According to Boal, there is definite room for the Government to provide both the super industry and wider financial services industry with impetus for developing more attractive retirement income products.

“But the SIS and Tax Acts are just the start,” he said. “On top of that, when product providers are trying to develop new products, and we’ve seen new products being developed by companies like OnePath and Macquarie and Challenger, they’ve all had a go at innovating product design in this area.

“But in coming up with new products, you actually have to deal with the Tax Office, you’ve got to deal with APRA (the Australian Prudential Regulation Authority), you’ve got to deal with ASIC (the Australian Securities and Investments Commission), you’ve got to deal with SUPERREVIEW

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and to look after these retirees because otherwise people aren’t going to have the money that they needed in retirement and they’re going to be falling back on the pension and various other things.

“We do need a solution though, so while the industry might welcome leadership from the Government, in the interim I don’t think we can sit here and wait for it.”

Clearly, whether the impetus is to be provided by government or the wider superannuation marketplace, the development of retirement income products will be interesting to watch. And according to Vamos, all necessary stakeholders are on board and initial development is underway, so from here it should just be a matter of time.

“I think the conversations have been had and we’re all pretty much of the same view,” she said. “When you look at the tax forum, when you look at some of the Henry submissions, when you look at our pre-budget and other submissions, we know what to do.

Centrelink because different products in retirement are treated in different ways for aged care and social security rules,” Boal continued.

“So you’ve got to work out the design of your product and negotiate with each of those four regulators about how the product will be treated and what the tax implications will be.

“It’s a very complex and difficult area for product innovation, so if we could simplify the process for new product development in this space, it will only be to the benefit of the industry as a whole.”

Alternatively, Hildyard said that while government intervention and legislative change

would certainly assist the development of retirement income products, there was a tendency for people to look to the government and simply hope for something.

“I know some of the insurance companies, for instance, are sitting there saying ‘should we or shouldn’t we get into this?’” he said. “They’re asking themselves whether there’s a real demand there and saying that if the government makes it compulsory, then they’ll jump into it.

“And that sort of mentality comes back to cost – but it’s all a bit chicken and egg,” Hildyard added. “At the end of the day, its incredibly important for Australia to continue its prosperity

Pauline Vamos

“The bottom line is that there’s been so much on the legislative agenda that the government hasn’t turned its mind to this because it just hasn’t been pressing,” Vamos continued. “But now that they’ve done Stronger Super and the Future

of Financial Advice Reforms, now they’re starting to turn their minds to it and that’s why we’ve seen it being a topic of discussion on the superannuation advisory council and a topic of discussion on the tax forum.”

Also looking to the future and to what products would be brought to the table, Hildyard predicted that different funds and providers would come up with different solutions.

“So the funds with very high average age are going to have a lot more focus on this than the funds with much more broadly spread demographics,” he said. “And the solutions for funds with savers with very high balances are likely to be different too.

“So if you’ve got a fairly old demographic in your fund with high balances, you’re probably going to lean towards some income solutions and not worry too much about a guarantee,” Hildyard continued. “On the other hand, if you’ve got a very broad membership with a lot of young ones and lower balances, you’re probably going to continue what you’re doing at the moment.”

Hildyard added that he expected the Australian market would evolve to the same sort of solutions that were already in evidence overseas.

“We are, however, in a unique position where we’ve got these big super funds and they’re not individual savings schemes like you see in the United States with the 401(k)s and such, and as a consequence you’re in a position where you can build some of these products,” he said. “And I think long term we will evolve to some kind of income product with an option to guarantee your income via some kind of life policy or longevity policy.

“We just need someone to make that first move.” SR

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14 SMSFs

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SMSFs grow amid adversity The rise and rise of self-managed superannuation funds in Australia has often been fuelled by periods of market adversity and, as DAMON TAYLOR reports, there is no sign of that trend changing any time soon.

W

hether you’re a participant in the self-managed super fund (SMSF)sector of superannuation or merely an observer, it has become abundantly clear that this is a segment of the super industry to be reckoned with.

The growth of SMSFs both in terms of funds under management and total number of funds has been beyond impressive and for Andrea Slattery, Chief Executive Officer of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), it has been for three reasons.

“One – and every survey has supported this – is that people who have control over other aspects of their lives want to have control over their savings and retirement plans as well,” she said. “And this is true no matter what age you are.

“The second aspect is investment flexibility,” Slattery continued. “So the ability for SMSFs to be able to tailor to your needs, your interests, your ability to get information and advice and make your own decisions is all a very important part of what an SMSF is all about.”

And the final reason, according to Slattery, requires a bit of a history lesson.

“So when SMSFs first started, they were really for people who had small businesses or for primary producers so that they could have the capacity to save for their own retirement as well,” she said. “But 10 years ago, there were half a million small businesses in Australia whereas now there’s nearly 1.8 million.

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“That’s a lot of growth in people who are servicing the financial services industry and who are familiar and cognisant with what an SMSF is all about,” Slattery added. “So I think SMSF growth has been a result of an increase in understanding, an increase in education and an increase in specialised advice to the point where people fully understand that this is a viable and attractive option.”

Adding her own perspective to the super industry developments which have placed selfmanaged super funds in the position they now find themselves in, Pauline Vamos, CEO of the Association of Superannuation Funds of Australia (ASFA), said

Andrea Slattery

that the role of accountants could not be underestimated.

“The ability of a person’s accountant to setup a self-managed fund for them when they’re delivering tax advice has been something that’s allowed selfmanaged funds to be set up both easily and quickly,” she said.

“Then with an ageing population

and growing account balances, that again has meant that people have wanted more control.

“And unfortunately, I think it’s also become a trendy thing to have.”

But trendy or not, one of the biggest indications of the growing weight and momentum of the SMSF sector is the fact that a number of large financial services institutions are showing an interest in getting their own piece of the SMSF pie.

And for Slattery, it is evidence that the SMSF record is slowly being set straight.

“In the past, I think there was a lot of anecdotal information about the SMSF sector which simply wasn’t correct,” she said.

“But through the Cooper Review, this sector is now acknowledged as being well functioning and well performing.

“So I think what’s happened is that with the advent of people like SPAA, [and with] specialists in the market and increased education, more and more people are aware that this is a sector of the super industry which invests back into the market.”

According to Slattery, institutions have also started to realise that SMSF trustees, whether across the board or in specific aspects of their service offering, represent a significant portion of their existing client base.

“But beyond that, Australia’s superannuation market is growing exponentially,” she said.

“The super industry’s funds under management are at $1.3 trillion or thereabouts at the

moment and they’ve grown to that point from about $350 billion eight to 10 years ago.

“At that time, SMSFs represented a 14 to 15 per cent market share whereas they’re now 32 per cent,” Slattery continued. “Industry funds were around about 7 or 8 per cent and now they’re 18 per cent. Retail funds were at about 48 per cent where they’re now approximately 28 per cent.”

But for Slattery, the pertinent point is that even where market share has dropped, 28 per cent of $1.3 trillion is still a great deal more than 48 per cent of $350 billion.

“All sectors have experienced growth and yet nobody really looks at it that way,” she said.

“They look at who’s got their piece of the pie when, in actual fact, we should be all working together because thanks to compulsion, everybody’s going to benefit.”

Providing a counterpoint to Slattery’s position, Graeme Colley, superannuation strategy

manager for OnePath, said that while he agreed that self-managed super funds had undoubtedly become an integral part of the superannuation market, he was less convinced that the sector would or could be seen as anything but a threat to industry or retail funds.

“The reason I say that is that we continue to see products come up which are in straight competition with self-managed funds,” he said. “I know, for instance, that at one of the recent master funds conferences, Aussie Super was talking about the fact that they were building a fairly cheap platform in which clients would get access to a whole range of managed funds and direct share investment and cash.

“And you have to see that as being in direct competition with self-managed funds,” Colley continued. “So how that gets promoted and how people accept that as an alternative to self-managed funds will be interesting,

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but I can’t see the bigger funds seeing self-managed funds as anything but a threat for some time yet.”

Of course, despite the strong position the SMSF sector finds itself in, the Super System Review has indicated that there is yet a bit of tweaking at the edges to take place.

First on the list is service provider professionalism and competency and, according to Vamos, such initiatives are a timely and significant step forward.

“The ASFA position has always been that this is an important sector, we recognise that,” she said. “But the governance around it must reflect the new scale of that sector and so we support the measures that have been suggested in the Government’s response to the Cooper Review.

“We think the standards of auditors should be raised, that the accountants’ exemption should go, that transactions involving related parties should

be on-market and that valuations should be real-time market valuations.”

Also indicating her approval of the Super System Review’s recommendations, Slattery said that SPAA fully supported raising SMSF service provider competency, accrediting people to at least an undergraduate level of experience and having specialists in the market that consumers could seek out to get the right kind of advice.

“It’s vital that people conducting business in this sector understand it, and have the knowledge and competency to provide that advice,” she said.

“And I believe that those same people should endeavour to get their own personal recognition in their knowledge in this area and should seek accreditation.

“It’s as simple as becoming more competent, getting recognition and providing clients with a very professional service.”

Yet while Slattery and Vamos were largely in agreement as to

the improvements that could be derived from increased service provider professionalism, those opinions divided when it came to such an initiative’s flow-on effects to SMSF trustees.

This was, after all, a hope expressed within the Super System Review’s findings and also one Slattery believed would eventuate.

“I do believe it [increased service provider professionalism and competency] will increase the education and competency of trustees,” she said.

“If you’ve got people who work in this area, have challenged themselves in this area and pass on to you that knowledge and skill to help you to make a decision about your future options, then I think everybody’s going to be better educated.”

However, according to Vamos, that link, that transfer of knowledge, is not one that the industry can rely on being made.

“The issue for me is always the relationship and that holds true for any relationship,” she said.

“Certainly, there should be better regulation of anybody advising on whatever financial product it is and so the standards for self-managed funds should be the same as for any other advisor on financial products.

“But you always have to remember that you have information and experience asymmetry,” Vamos continued. “You’ll have the advisor who is always in the privileged position of knowledge and though many, many self-managed fund trustees do know what they’re doing, many do not and, realistically, an adviser’s role may not necessarily be to educate their clients.”

Vamos said that ASFA had been strong advocates of putting into place minimum levels of education for self-managed super fund trustees for this very reason.

“A lot of people understand

they’re in a self-managed fund because they are able to manage their tax, which is great, but do they know the risks?” asked Vamos. “Have they, for instance, taken into account what happens in divorce?

“We’ve seen many women now who have been disenfranchised because there’s no consumer protection there, no free dispute resolution procedures and that’s just one issue,” Vamos continued. “There’s also been a lot of discussion around what happens when trustees age and the fact that gains and losses are crystallised when they move back into the pool sectors.

“There are a lot of discussions that have to be had; it doesn’t mean the sector isn’t good but just like the APRA-regulated sector, you’ve got to be on a path of continuous improvement because we’re talking about peoples’ money here.”

Graeme Colley

Yet irrespective of what discussions must yet be had and what improvements must yet be made, the undeniable reality is that the self-managed super fund sector is maturing. And with the weight of growth and momentum behind it, the question is what precisely will take it to the next level.

For Colley, however, the answer to that question is already clear.

“I think improvement in the competency of all professionals

that are associated with this sector is the first step,” he said.

“And I think that will certainly come out of the reform agenda because you’re already seeing that financial planners will have to know a little bit more about taxation and that accountants are going to be required to have more detailed SMSF knowledge if they’re going to be competent to meet this sector’s challenges.

“Over and above that, you’ve got the registration of auditors which may mean there’s a change in that market where you’ll have SMSF auditors who are absolutely competent in the undertaking of audits,” Colley continued. “So I don’t think there’s any doubt that the combination of those things is going to move self-managed super funds to the next step where they’ll be considered as an objective alternative to the bigger superannuation funds.”

Adding weight to Colley’s sentiments, Slattery said that the implementation of the Super System Review’s proposals would allow for increased efficiency and certainly increased benefits for the consumer.

“For the SMSF sector, opportunities for growth are likely to continue simply because to be able to tailor and to be able to flexibly manage your retirement savings to fit your circumstances, that’s something that will always be very attractive,” she said. “And you can add to that increases in compliance, increases in regulatory surveillance and guidance, increases in competency, the introduction of codes of conduct and the ability for people to be able to access new products and new advice pieces.

“So with the weight of all of that improvement in the pipeline, I think that the future for SMSFs looks very very bright.” SR OCTOBER 2011

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www.superreview.com.au

Stronger Super: Just days ahead of the Government releasing its Stronger Super package, a group of industry leaders discussed its impact and implications.

Present: MT: Mike Taylor (Chair) – Managing Editor, Super Review.

RM: Russell Mason – Partner, Deloitte.

PJ: Pierre Jond – CEO, BNP Paribas.

ER: Eric Riesenwitz – Chief Marketing and Distribution Officer, MetLife.

DG: David Graus – GM Policy, ASFA. DH: David Hartley – CIO, Sunsuper.

RG: Richard Gilbert – CEO, Rule of Law Institute.

MT: Okay, we’re underway – and the topic is, of course, Stronger Super. I think one of the more controversial questions to arise is can the Government really seriously consider full legislation around Stronger Super while the question of default funds under modern awards is still to be dealt with in terms of the Productivity Commission. So because I always start roundtables with Russell Mason, I’m going to start it with Russell today.

RM: I think the issue of default funds has really been highlighted recently with the concerns over a couple of funds. And I think we’ve had Senator Nick Sherry comment on his concern that funds are automatically becoming default funds. I must admit, I agree with his approach that says a fund must pass certain SUPERREVIEW

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hurdles before it becomes a default fund under a modern award. It should be open. I don’t think it should be limited to any one type of fund – the industry fund – if other funds reach the hurdles they should be included, and it is a major part of Stronger Super. So I just wonder how much the Government can implement before they sort out the default funds status, how it’s going to work?

MT: David, what’s your take on it?

DG: Well my view is that they can certainly implement Stronger Super legislation through, and I don’t think they’ve got the political will to actually drive the award modernisation as fast as the political will to get MySuper through. I mean, that being said, once it does get through,

clearly the award process (and that includes the funds as default) will come – with prominence and importance.

RG: I think the process is being far too slow in evolving.

The Rudd Government was elected in 2007, it’s now four years later and we haven’t even got a referral to the Productivity Commission. It’s totally unsatisfactory, and I speak on behalf of Richard Gilbert, commentator, not on behalf of any industry in regard to that. But it gets worse than that, because Fair Work Australia is now under examination for its disclosure, and in the Senate is a resolution to excuse the President of Fair Work Australia for being accountable in relation to this issue – or not in relation to this issue particularly, but to the Estimates Committee generally. And there’s a motion afoot

in the Senate. I’m not sure that it’s up yet, but that will effectively allow him to exercise his wishes as to whether he turns up or not to be accountable.

And so the problem with the fact that nothing has been done is that we are entrenching a massive monopoly in default superannuation, which is a very large proportion of SG, and that of course means there is no built in – effectively no competition, or little competition – and there’s a couple of insurers here, you guys will be pitching tenders for a very small number of funds in the active part of the SG market.

So I think the Government really has got it wrong in not acting sooner. And this could take the Productivity Commission best estimates – they might start next year, they’ll take a year to look at it, and the Government then takes a year to come in with something. That’s

got 2013 or 2014 written on it. That is an amazing timeframe for something which seemingly is so simple. And the Industrial Relations Club, unions and employers look as though they’ve fairly comprehensively taken over default superannuation. And companies like AMP – and I don’t represent AMP – that have been in the superannuation market since before 1900 are effectively excluded from competing in the occupational superannuation space. And so it’s become a mutual fund show and not a superannuation entity show.

DH: Which is what AMP used to be – a mutual fund, but anyway.

RG: Yeah well.

MT: Well David Hartley, what’s your take on it?

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where to now? would seem to be fair. And if commercial operators are willing to operate on the same profit margin as industry funds then it’s probably fair enough. I don’t know whether they’re going to, but that’s another question.

RG: But markets set that.

And when I gave evidence to that Fair Work Bill I actually showed the committee tenders that the retail, or the corporate market trust made at 60 and 70 basis points.

DH: I think part of the issue looking forward is whether or not you’re getting – you know, you’ve got a compulsory superannuation system, there may actually be a requirement to be a health fund that you have a cap on the amount of profit that you can make from that line of business, and that

DH: Yeah, that’s the quoted fee. That’s the quoted – there’s no requirement for a trustee of a superannuation fund in Australia to say how much money that particular body is taking out for the purposes of the trustee, and how much they’re taking out for related parties.

And if you get to fee disclosure which gives you those numbers, then fine. But I was speaking to someone about this issue and they said there’s all sorts of ways that you could effectively quote a zero fee and still make a bucket load of money out of the whole system.

And they’re talking about volume discounts on spot contracts; they’re talking about a whole bunch of different things that I’d never even thought of.

And until you can get to the bottom of how much you’re taking – how much you’re ripping out of the system, then you

for themselves, and for the related entities, then I think you’ve got a fair comparison, then you’ve got a basis for which those commercial guys can operate as a default fund.

RG: So PDSs aren’t representations of the market?

“There’s plenty of ways you can quote fees, plenty of ways you can extract profit out of compulsory superannuation without the members even knowing.”

- David Hartley don’t really have a fair comparison. And I suspect there’s a whole lot of people who are just – their job is “How do I hide these fees?”, “How do I make this thing profitable without looking as if I’m taking a lot of money out?”. So if you can get to the bottom of that and find out exactly how much the trustee is taking out, the responsible entity is taking out

DH: No. I could arrange – our investments in our particular fund, I could arrange them so that I could quote a negative fee and have exactly the same investments as I’ve got now, under the current rules. It’s ridiculous.

DG: Won’t sort of performance reporting, and you know,

the new APRA disclosure sort out the maintenance on that?

DH: Well it depends on what they ask – as to what questions they ask. But no, I don’t think so. I had a lunch with Wayne Swan last week and he sort of asked if there’s different ways people are quoting fees.

I said “Oh you bet”. Absolutely. There’s plenty of ways you can quote fees, plenty of ways you can extract profit out of compulsory superannuation without the members even knowing about it. So if you can get to the bottom of that and restrict the profit margin that the commercial guys can take out of that, because the profit for members, I mean, you basically can pretty much see what’s going there, but if you can restrict the profit margin on the compulsory side of things from the commercial operators then I don’t see any reason why you would favour one over the other.

RG: Well wouldn’t you restrict the costs that non-comContinued on page 18

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Stronger Super: where to now?

DH: Well actually, you can bury everything if you really wanted. If you really wanted to, you can bury everything.

RM: So that’s not in anybody’s interest. No one’s interest.

Continued from page 17

mercial operators are taking as well? Wouldn’t that be an issue?

Why do you just focus on…?

DH: Yeah, so you’d quote it.

You’d quote how much you take. I can tell you how much we take, five basis points.

PJ: You know your industry markets, at the end of the day your unit holders or pension holders are buying a performance. And in the end, whether it is one basis point, ten basis points, or cents…

DH: Basically, what you’re doing is you’re encouraging people to add an extra layer of fees on to make it look as if you’ve got lower fees, and that’s just a joke.

RM: Well worse still, it’s encouraging, misleading and deceptive behaviour as far as the member’s concerned. If a member cannot tell what the true costs of his fund are. And I need to know; I should be able to tell.

Russell Mason

DH: And industry funds as a whole have outperformed commercial operators for 10, five, 20 years, whatever. So there should be no commercial operators in that sense, but they still exist.

RG: And some industry funds or corporate funds have done very well.

DH: Yeah, absolutely.

RG: I think it’s very difficult to generalise.

DH: Yeah, that’s right. But I mean take the industry as a whole; the industry funds have out performed the commercial operators. Now maybe there’s something to do with that, I don’t know. You know Warren Chant has done a lot of survey, a lot of analysis on that sort of stuff.

RG: So is that the reason why you’d never allow commercial funds to be entering the default competition?

DH:No. I’m just happy for commercial funds to do it on the basis of – you know, as long as there’s absolute clarity on what they’re taking out. And you look at the accounts of the major banks – they’re taking SUPERREVIEW

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Richard Gilbert

David Graus lots of money out of the wealth management industry, and I’ve got no idea, because the quoted fees aren’t all that much in a lot of cases, but they’re still ripping a lot of money out.

RG: Well, so what’s disappointing I think – from the part of the industry – there doesn’t seem to be any competition. When these default funds came in I think the industry was advised by the Government that Fair Work Australia would be talking to APRA to get information about which funds it could put on the list, and I think in the Senate Estimate’s answers there has been no such discussion. So your point might be valid, but the organisation which has the facts has never been in the loop.

RM: In theory, it shouldn’t be hard to do the comparison if there was a requirement across the board that applied equally to not for profits as well as commercial organisations that said rebates – any sort of payment – back from the service provider no matter how that’s structured, admin’ fees on group life contracts, whatever it’s disclosed and subject to audits. Then you could easily have a level playing field.

RG: Isn’t there an Australian accounting standard for presentation of those accounts and what’s in, what’s out?

RM:Well I’m not an accountant, so I’m not sure, but certainly, I know there are certain payments that don’t have to be disclosed as part of the MER. They may be disclosed

near accounts when people quote management expense ratios, certain things are excluded that are payments that somehow just miss the cut, and can add up to quite a sizeable amount of money. So the MER… DH: For example, you can put a spot in place, right? You can put a spot in place so you have all your investments; you sell them to someone, and then enter into a total returns box so you get what you get for return on those assets back to you. Now under the rules, the spot fee and all the underlying stuff does not have to be completed. So you can actually bury all of your fees under the total returns box.

DG: Well all your external fees.

DH: You think about what you’re doing, as a member of a superannuation fund you are asking – you are employing the trustee or the responsible entity, or whatever you call it, you’re asking that particular group of people to act as your fiduciary agent. And you’re saying to them “I want you to access all of these different services, and I want you to do it on a basis that’s in my interest as a member”. That’s what you’re asking them to do. It is fair for you to know how much your fiduciary agent is taking out for their own purposes to provide that service, how much profit they’re making, and how much money they’re making out of related third parties. And that’s a reasonable basis. Now if the trustee is acting – I mean, the opportunity available to industry funds and commercial funds is all the same opportunity. I want to be sure that the trustee of my responsible entity, if they’re putting in passive management I’m quite happy to accept that passive management is a valid way of managing money. But I want Continued on page 20

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20 ROUNDTABLE

www.superreview.com.au

Stronger Super: where Continued from page 18

to be sure, I want to be convinced the main motivation for my responsible entity, my fiduciary agent to put in passive management is because they think that’s going to get me a better net return, not because it’s going to make them look better. So if you’re charging 70 basis points and you’ve got a lot of passive management under there, fine. But are you doing that because you think it’s going to get a better return for me, or are you doing that because it’s going to allow you to compete in the market and get a bigger profit margin for yourself? When you think about AMP – you talked about AMP before, they’ve got their product, but it’s basically all passive management. And the fee level which is similar to industry funds, but they’re basically getting their profit margin at a high level by putting in passive management at the same fee level that you’d have for active management.

RM: David, is this driving the debate in the right direction?

If I’m a member of a fund what is really important to me?

DH: Net return.

RM: What is net returns subject to an acceptable level of risk for me? So as long as I’m happy with the level of risk and the type of investment, in some ways the fees should be irrelevant, it’s the net return.

DH: The fee that should be relevant is the money that’s paid to unrelated third parties.

Because what you want [is] to get to a situation where your fiduciary agent is only putting in things that they think are going to get a better net return. If they go into hedge funds and they pay exorbitant fees for SUPERREVIEW

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it’s isolated, it’s segregated so you can’t actually – I mean, sometimes the responsible entity, even though it’s part of a big group, it’s actually the capital available for that particular trustee.

hedge funds, but they finish up with 150 per cent return for me net, they might get a 200 per cent gross return and a 150 per cent net, okay I’m still 150 per cent better off, thanks very much. So the trustee, the responsible entity, should not be discouraged from putting that sort of stuff in if they think it’s in my interest. Now it’s another question as to whether they think it’s in my interest, but at least you sort of take that part aside and you say “Okay, they’re only going to put this fund in that if they think it’s in my interest,” then that’s something you can test.

RG: Well yeah, but I agree with that, but if you look at the One Life company, it got into trouble on unit pricing, and $70 million went from the shareholder backed entity to compensate those investors, and I think that sort of action does give people some comfort. Now I’m not saying that everyone should have their money in those sorts of funds, but for investors it is a sucker sometimes. Not sucker, but it is a comfort to know that there is an entity standing behind it with capital.

DG: The last thing we want the debate to be driven by is the cheapest possible options or passive – simply because that produces the lowest fees.

David Hartley DH: Yep, absolutely. I mean, you can put in ETFs, you can put in a whole bunch of stuff to make fees look lower, but underlying. Another example I’ve used in the past is Macquarie Bank. Now Macquarie Bank’s salary, its remuneration objective is to pay 55 per cent of operating income to staff in the form of bonuses and salaries. You think about Macquarie Bank, underneath it all, it’s a little bit like a multi-strategy hedge fund. But if they make 20 per cent return, I’m only going to get nine as an investor. But if I go to a multistrategy hedge fund and they make 20 per cent return, well I’ll get 15. It’s a better deal, better economics for me. Despite the fact that hedge funds are seen as being expensive, I’m better off going to hedge funds than going to Macquarie Bank.

DG: But the net return is really going to be 15 per cent?

DH: Yep, absolutely.

“So the point I was making, I guess, was that self-managed funds are actually pretty good, to tell you the truth, for the right person.”

- David Hartley RG: And so if there [are] all fees included, you need to report in the return figures.

RG: But we’re talking about default funds here.

DH: Yep.

DH: What do you mean by all fees though?

RG: All fees. So it’s really only the net return…

DH: After all those fees?

RG: Yeah.

DH: That’s right. That’s the first thing I’m interested in. The second thing I’m interested in is how much my responsible entity is taking out to provide that service. If they’re charging me $100,000 I’d just as soon do it myself. If they’re charging me $100, I’m happy to pay my $100.

RG: I think it’s not the net return, it’s the net risk adjusted rate of return, because some people like their money with a shareholder backed company. And that’s another reason why the default system should be far more pluralistic than it is.

DH: Shareholder backed company…

RG: Well shareholder capital does mean something to some people.

DH: Yeah, but a lot of times

DH: Yeah, and I think that’s a good thing, that’s the reason why Sunsuper has $200 million of free reserves, we think it’s an important thing to have.

PJ: We seem to be focusing the discussion around the pure cost dimension of the superannuation industry, because we’re talking about fees, we’re essentially focusing all the attention on the cost side, isn’t that making the case for selfmanaged super funds? Which is a bit of a paradox?

DH: Sorry, I’ve sort of missed the point. But self-managed funds have certainly grown, and I think – this is another thing I was talking to Wayne Swan about last week, and he said there are some issues there. But anyway, so the point I was making, I guess, was that self-managed funds are actually pretty good, to tell you the truth, for the right person. Because you can structure your self-managed fund so you pay

ROUNDTABLE 21

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to now?

MT: Eric, you’ve been very quiet there, what’s your take on what you’ve heard?

“I get a little nervous that there’s too little attention being paid on the aggregate, and that all the focus on what will be a default or won’t be a default might distract individuals away from thinking about what’s important to them for the financial security of their lives.”

- Eric Riesenwitz

ER: I think the issue that I come back to, and focusing on the insurance side, and when I see the opportunity that could be out there with prospective insurance, using MySuper automatically gets me a little nervous. If I think about it in terms of in today’s world we know – it’s well documented the under insurance issue across Australia, you ask a lot of people who have their

money invested in their choice of super fund – they’ll tell you they’ve got insurance because they are in a fund. We all know from an industry perspective that’s not enough insurance.

When you start moving people into an environment where there is an opportunity for them to go somewhere else, and that somewhere else is labelled a default, it also gives a sense of comfort that I’m

no tax ever on superannuation.

So basically it’s a system that’s become where taxation is optional for the rich people and it’s compulsory for the poor people. And if the Labor Party wants to continue with that system, that’s fine. But that’s what it is at the moment – particularly because they allow negative gearing in those things, so you can wipe out all of your contributions tax, you can wipe out all your income tax all the way through, get the thing pregnant with capital gains, and then at the point of retirement you flip it over to the pension phase, pay no tax on the other side. It’s a great system. It’s perfect for people who want to pay no tax.

their financial security, they don’t want to stop just at “Where should I invest my money?” they want to stop at “What happens if I can’t work anymore?”, “What happens if something happens to my partner, or someone whose income I rely on who is no longer alive?”, “How do I deal with that?”. And I get a little nervous that there’s too little attention being paid on the aggregate, and that all the focus on what will be a default or won’t be a default might distract individuals away from thinking about what’s important to them for the financial security of their lives.

IMPACT OF MYSUPER Eric Riesenwitz being covered, that that’s enough. They almost stop looking at what more they have to do. Beyond the returns, I think you’re always going to have that as the primary reason people pick their choice of what they do with their superannuation funding. At what point will they also start looking at what their insurance options are? Even though the Government is using the right words around

the need for insurance, I see there’s a risk in the more you take away from people in the decision making process, the less they start to think about how much coverage they have, and regardless of whether it’s under a default fund or it’s under their choice, the fact they still probably don’t have enough insurance. At the same point in time when people are asking for education around

MT: With MySuper, and this was the criticism which was raised right from the get-go, which is that we’ve gone through – about a decade of trying to get people to basically engage with their superannuation and make some hard decisions – I think this is what Eric’s getting at. But MySuper is basically tacitly saying, or my view, it’s tacitly saying “You don’t have to be that engaged, we’re going to take care of you”, “We’ve Continued on page 22 ☞

OCTOBER 2011 * SUPERREVIEW

22 ROUNDTABLE

www.superreview.com.au

Stronger Super: where to now? ☞ Continued from page 21

of dollars. And they should be subject to the same governance. I think I agree, it’s a publically listed company. And I think many of them would be happy to be subject to that governance. I’m sure, which David represents, has got nothing to hide, it’s a transparent fund, so with it’s huge size should it be accountable to members in the same way a public company is? Yes, because these members are the shareholders as far as I can see.

got this model that says all things being equal you will earn a fair rate of return without thinking too hard about it”. Really, given how superannuation has developed in Australia, is this appropriate? I mean, I know the Government’s adopted it largely as policy, but is it appropriate? David?

DG: I think in the default space absolutely it’s appropriate. It’s like a heart tick on a product, that if you don’t have people compulsorily looking for these things, and whether it’s a good thing or not, we know that a number of people are not engaged. It’s being taken from their wage without any activity of their own, so there has to be a basic safety net around [the] MySuper product. Absolutely.

DH: Depends how it’s implemented.

RG: Well I think the other thing is MySuper on its own is not good policy, it needs to be accompanied by very substantial governance reforms, which aren’t in the wind, and the Government refuses to look at governance reforms.

And I think MySuper is taking superannuation to a very public space, which should be accompanied by the same sorts of governance requirements that an ASX listed company has. And so it’s critical that funds have detailed conflicts of interest disclosure, that director remuneration and CEO remuneration is there, and I think also it’s time for reform of funds which have stodgy boards. And we need to look at turnover on boards, and representation on boards if we go down that space. And I think doing it on its own is quite dangerous.

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DH: I’m sure the directors will be looking forward to the same remuneration structure as the directors of other companies too. Well so be it.

Pierre Jond

“Not that many Australian superannuation funds got into the same sort of problem as Lehman or Merrill Lynch.”

- David Hartley MT: Russell?

RM: Well just going back to MySuper, I agree with David, it’s an essential basis, but it’s also essential that the trustees remember that their primary duty is to act in the best interest to members, and therefore I think what they should be doing is educating members however they can, as Eric said, about the importance of group insurance, and the death and disability insurance. To David’s point, the investment returns, the risk, so it’s a good starting point, MySuper. I’d hate to think that a member joined MySuper and was then forgotten about, because while it may suit someone in the early initial phase of their membership, it’s highly unlikely to suit them

for their entire length of membership. So I think the executives of funds, the trustees of funds should view it simply as the entry point into the fund, and then the education phase starts, and I think a very successful one would be one that attracts lots of members into the MySuper, but at any one time very few members are actually in it because they’ve made some active decisions and they’ve moved to other investment options. So I think that’s important. I think Richard makes a very good point about governance of these funds. And again, let’s not distinguish – be they corporate, commercial, retail, industry funds, are large financial institutions – they’re massive financial; many, many billions

RG: Yeah, that’s right. Now my main concern about MySuper, if it’s implemented the wrong way there will be very little differentiation between one MySuper product and another MySuper product. And in the public’s mind they won’t differentiate. They’ll say “MySuper, okay, whoever, doesn’t matter, it’s the same thing.”

In that market, if the fees are quoted in the current way, what you’ll find is you will find that those trustees will go more and more passive, and you will lose something which is very important for the economy, which is price discovery.

And if you don’t think this is a real issue, have a look at the price between BHP listed in Australia and BHP listed in the UK and Rio. So there’s something like 20 or 30 per cent difference in the price.

And why is it when you’ve got exactly the same rights, exactly the same title cashflows, why is the Australian BHP trading at 20, 30 per cent higher than the UK BHP? Now one potential reason for this is that you have a lot of superannuation money in Australia, you have a lot of money going to Australian shares – a lot of

that’s enhanced capacity or passive, a lot of it goes into those particular shares. And if that’s a bellwether for what might happen in MySuper and the way it pushes everyone to passive, then it’s a very dangerous system, and you run the risk of having the biggest Ponzi scheme the world has ever seen. Is that controversial enough for you? [laughter] I don’t think we should necessarily rely on the Government, press the Government’s button – APRA has those powers. And APRA did this after the GFC with the banks and made them do even more harsh corporate governance arrangements, but it didn’t do it for super. It does have the power. Helen Coonan put a bill through which clarified that power, showed that clearly, and APRA could be doing something in that space, but it elects not to. I think it’s waiting for Canberra to give it the signal. But APRA is an independent regulator and it has to look at the market and make sure that it’s protecting investors by making sure that they know about their funds, the salient features.

DH: The other argument, or my other question of course, is you look at the GFC and of course lots of things happened, not that many Australian superannuation funds got into the same sort of problem as Lehman or Merrill Lynch, who had very professional executives. So it’s not immediately apparent that the model that we had was severely under what you’d expect to have happen in that sort of environment. So arguably, maybe the banks should have a few more people who are ordinary – sorry, people who have just been, you know, got the best interests of the constituents at heart as opposed to profits, or whatever. SR

APPOINTMENTS 23

www.superreview.com.au

Events Calendar

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

OCTOBER VICTORIA 4 – Finsia Seminar: Superannuation reform – what will super look like in 2015? Speakers: Danielle Press, CEO, Equipsuper; Adeline Hiew, senior associate, Blake Dawson; Paul Murphy, principal consultant, Implications Consulting; Michael Drew, managing director, lifecycle strategies, QIC; Hans Van Daatselaar, head of policy at Superpartners. Venue: Sofitel Melbourne On Collins, 25 Collins Street, Melbourne.

13 – Finsia Seminar: SMSFs – Strategies for implementing Stronger Super Reforms. Venue: CQ Functions, 113 Queen Street, Melbourne.

WESTERN AUSTRALIA 11 – Finsia Seminar: Superannuation reform – what will super look like in 2015? Speakers: Danielle Press, CEO, Equipsuper; Ruth Stringer, partner, Blake Dawson; Dennis Barton, director, Barton Consultancy; Michael Drew, managing director, lifecycle strategies, QIC. Venue: Hyatt Regency, 99 Adelaide Terrace, Perth.

QUEENSLAND 18 – Finsia Seminar: Superannuation reform – what will super look like in 2015? Speakers: Jenni Erbel, CEO, MAP Funds Management; Adeline Hiew, senior associate, Blake Dawson; Anne Fuchs, management consultant, lifestyle strategies, QIC; Michael Drew, managing director, lifecycle strategies, QIC. Venue: Stamford Plaza Brisbane Hotel (Raffles Room), Cnr Edward and Margaret Streets, Brisbane.

NEW SOUTH WALES 11 – Finsia Seminar: SMSFs – Strategies for implementing Stronger Super reforms. Venue: Establishment, George Street, Sydney.

28 – FSC Deloitte Leadership Series Lunch. Speaker: John Symond AM, founder and executive chairman, Aussie. Venue: Four Seasons Hotel, 199 George Street, Sydney.

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

McKeand joins AustralianSuper AustralianSuper has appointed Innes McKeand from UK manager Aegon Asset Management to the newly created role of head of equities, working across both local and international equities as well as developed and emerging markets. cKeand will be responsible for the development and implementation of a comprehensive strategy for the construction and management

M

of AustralianSuper’s equities portfolio and will report to the fund’s chief investment officer, Mark Delaney.

Prior to this role as head of eq-

uities at Aegon, McKeand was chief investment officer at AIB Investment Managers, and before that he was head of investment at the Nestlé UK Pension trust. SR

BNP Paribas Securities Services has appointed Barry Dench as the new head of its New Zealand business, based in Wellington.

Dench will report to the managing director of BNP Paribas Securities Services in Australia and New Zealand, Pierre Jond.

Dench was previously head of Westpac’s custody business, where he has been responsible for client service and relationship management for asset managers in Australia and New Zealand.

the newly-created role of investment officer.

The role will focus on the analysis and monitoring of the firm’s investment portfolio.

Malpass will play a crucial role in responding to increasing member demand for more commentary, information and education about superannuation investment matters in general and AvSuper’s investment portfolio in particular.

As well as holding formal financial management qualifications, Malpass was trained as a cadet in a super administration firm where he worked with both defined benefit and accumulation accounts.

More recently, he worked for Military Super’s investment/operations team dealing with unit pricing, investment compliance, fund operations and alternative investments.

ratings specialist in the corporate ratings area.

CHALLENGER Limited has appointed Aaron Minney to the newly created position of head of retirement income research.

Minney will report directly to Challenger’s chairman, retirement income Jeremy Cooper, and the new role will extend the company’s research and analysis capabilities specific to that sector.

Cooper said Minney’s appointment supported Challenger’s leadership ambitions in the retirement income market, a sector that would become increasingly important as the first wave of baby boomers start moving into retirement this year.

Minney joined the firm from Colonial First State Global Asset Management, where he was head of investment research and development. He had previously held portfolio management roles as head of Australian fixed interest at Macquarie Funds Management, and as a senior portfolio strategist at Insurance Australia Group.

AVSUPER has announced the appointment of Scott Malpass to

DEUTSCHE Asset Management has appointed credit analyst Jennifer Wee to its fixed income team based in Melbourne.

In her new role, Wee will contribute to the management of Deutsche Asset Management’s Australian fixed income portfolios, along with local team members Chris Siniakov, Andrew Canobi and Steve Sutcliffe.

She will be responsible for analysing investment grade corporate bond issuers and join the investment team which numbers over 150 staff.

Wee joined Deutsche Bank with more than six years industry experience, including five years at Standard & Poor’s where she was most recently a

AUSTRALIAN Unity Investments (AUI) has made several senior appointments as part of a restructure of its business operations.

Stephen Alcorn has joined AUI as head of institutional, based in Sydney. He was most recently deputy managing director at BNY Mellon Asset Management and has also held the roles of director, institutional business and head of consultant relations during his time with the firm.

Kara Gilmartin, an internal hire for AUI, has moved to the role of head of joint ventures.

She previously worked as AUI’s executive manager supporting the chief executive officer, David Bryant, in business-wide and joint venture initiatives.

Peter Loosmore has joined as the new chief operating officer (COO), having previously held COO roles at Suncorp Group, St George Bank, Asgard Wealth Solutions and Rothschild Australia Asset Management, as well as management consulting roles with Deloitte. Leonie Pratt, who was previously AUI’s chief operating officer, has moved to the newly-created role of general manager – executive, where she will look after AUI’s corporate governance responsibilities including licences and capital usage.

Pratt has over 20 years financial services industry experience, including eight years at Intech in such roles as head of institutional client services and head of investment operations. SR OCTOBER 2011 * SUPERREVIEW

ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

Solvent spouse sitting pretty LIKE a lot of other people, Rollover received his six-monthly superannuation account balance statement early last month in the knowledge that the rather satisfactory 30 June figure was nothing more than a snapshot in time.

Rollover had watched the weekly gyrations of the equity markets in the sure and certain knowledge that most of the recovery in his super account balance since 2008 had been largely whittled away by what some people have been describing as a the GFC MKII. It is with this in mind that Rollover will be closely observing the impact of the markets on

the superannuation account balance of his lovely spouse, Mrs R, who just happens to be a member of an industry superannuation fund.

With the major superannuation ratings houses suggesting that, once again, higher allocations to non-listed assets will help insulate the industry funds from the current market unpleasantness, Rollover may see fit to direct more funds towards his wife.

On the other hand, he is mindful of suggestions that the Australian Prudential Regulation Authority in 2008 had to remind a couple of industry funds about their liquidity requirements. SR

Stronger Super

-v-

Fool’s gold or wet paper bag paydirt for FPs? ROLLOVER breathed a deep sigh of relief when the Assistant Treasurer and Minister for Financial Services, Bill Shorten, last month finally released the final version of the Government’s Stronger Super policy package.

By Rollover’s reckoning, the Stronger Super package has been the subject of some interesting nips and tucks since the Government received the recommendations of the Cooper Review last year.

In fact, it may be a measure of just how far events have moved along that amid last month’s discussion about the final shape of Stronger Super, few journalists or commentators sought to consult with the former Cooper Review chairman Jeremy Cooper. SR

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INDUSTRY Super Network chief executive David Whiteley has developed a considerable reputation for creating great annoyance among financial planners each and every time he sees fit to criticise their industry and the manner in which they are remunerated. Rollover therefore admires Whiteley’s brave acceptance of an invitation to sit on a panel at the Association of Financial Advisers annual conference on the Gold Coast this month.

The AFA has been one of the most vocal defenders of the financial planning industry and, indeed, one of the harshest critics of the activities of some industry superannuation fund operatives, which may make for some interesting questioning.

Rollover recalls, however, that when financial planning industry chiefs have spoken at industry superannuation fund conferences they have been treated with politeness and respect. SR

A gulf in golfing ROLLOVER can only imagine that after more than 20 years at Mercer, remuneration must have been a factor in luring Russell Mason to accountancy outfit, Deloitte.

Mason took up his new partner role at Deloitte in late September, and as Rollover understands it, the great man has found himself with a schedule so busy that it has virtually precluded his long-standing pursuit of golfing greatness.

Rollover presumes, however, that as someone integral to the Association of Superannuation Funds of Australia conference in Brisbane this year, Mason will make time available in his diary to participate in the traditional pre-conference golf day.

Rollover also hears rumours that Mason may not be the last Mercer staffer to head down the road to Deloitte this year. SR

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