Super Review (February 2012)

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 FEBRUARY 2012

Volume 26 - Issue 1

Pressure for further ECT fix 6 SOCIAL MEDIA How to make social media work for your organisation

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12 INSURANCE

ISSN 1324-5295

MySuper is impacting on trustees’ insurance offerings

17 FINDING A BALANCE

Print Post Approved PP255003/01111

Stronger Super challenges with costs and time frames

21 ROUNDTABLE The global investment outlook for 2012

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

The Government has found itself under pressure to deliver a better excess contributions tax in the May Budget, amid concerns its existing approach denies the ATO enough discretion.

2

NEWS

barrier and disincentive for people to save for their retirement.

“The consequences of the ECT are exacerbated by the lowering of the contributions caps,” SPAA chief executive, Andrea Slattery said.

She said SPAA would be urging the Government to give the Tax Commissioner greater discretion to deal with inadvertent breach scenarios.

At the same time, the Institute of Chartered Accountants in Australia (ICAA) has not only supported greater discretionary powers for the Tax Commissioner around inadvertent ECT breaches, but has questioned the current arrangements with respect to allowing the ATO to access ECT refund amounts.

It said the arrangements flowing from the last Federal Budget could see the ATO allowed to have inappropriate ‘first dibs’ on refund amounts.

The ICAA’s superannuation specialist Liz Westover said she was disturbed by the refund process applying to the $10,000 available with respect to excess contributions, under which the Commissioner will deduct from the refund any tax that the individual might owe following

he Federal Government is being placed under increasing pressure to use the May Budget to provide a better solution to an excess contributions tax (ECT) regime.

Amid widespread industry disappointment at the Government’s efforts to address the ECT regime in the 2011 Budget, key bodies are pointing to administrative shortcomings in the new arrangements, as well as the perceived inequity of limiting excess contribution refunds to just $10,000.

The 2011 Budget fix with respect to the ECT fell well short of broad industry expectations, and has made the issue a focal point for a number of pre-Budget submissions.

A number of industry commentators have also pointed to the fact that the Australian Taxation ofice (ATO) has indicated its own misgivings about the operation of the existing ECT regime and the lack of discretion available to the Tax Commissioner.

The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) early this month pointed to what it described as the continuing “harshness” of the excess contributions regime.

It said it represented a major 3

PRODUCT RATINGS

4

EDITORIAL

8

Andrea Slattery

“The provision of some relief should not include a debt collection medium for the Government.”

- Liz Westover the contribution being reassessed as income to the individual.

She said that while this might seem fair enough, a catch existed.

“The Commissioner can also deduct any other tax liabilities owing to the tax office, and also any other payments owing by the individual to other government agencies,” Westover said.

She said that while current tax laws may permit the Commissioner to do this as the re-

STRESSING TESTS

12

STRONGER SUPER

fund is made by virtue of a tax law, “it doesn’t seem quite fair for the Government to have ‘first dibs’ on any refunded amounts”.

“This approach is inconsistent with the provision of relief,” Westover said.

She said it had to be remembered that the majority of excess contributions were mistakes.

“The provision of some relief should not include a debt collection medium for the Government,” Westover said. SR 17

ROLLOVER

28

2 PAGE TWO

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MANDATES Received by

Type of mandate

Issued by

National Australia Bank

Custody

MTAA Super

Amount n/a

MLC Implemented Consulting

Asset consulting

Teachers Federation Health

$200 million

MLC

Insurance

QantasSuper

n/a

Babson Capital

Custody

Quadrant Super

$15 million

OnePath Life

Insurance

LGsuper

n/a

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NEWS 3

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Accountants question Govt’s excess contributions remedy

By Mike Taylor

Liz Westover

THE Government’s new arrangements around excess contributions could see the Australian Taxation Office (ATO) allowed to have inappropriate ‘first dibs’ on refund amounts, according to the Institute of Chartered Accountants in Australia (ICAA).

The ICAA has raised serious questions about the Government’s approach to excess superannuation contributions and

LGsuper switches

insurer to OnePath Life

By Tim Stewart QUEENSLAND fund LGsuper has changed its insurance arrangement, replacing AIA Australia with OnePath Life, effective 1 July 2012.

The agreement with OnePath comes after a tender process that was put into place in late 2011, following LGsuper’s merger with City Super in July 2011.

OnePath Life has been the insurer for City Super – the fund for Brisbane City Council employees – since July 2007.

LGsuper’s agreement with AIA Australia also went back to 2007, said the fund’s chief executive David Todd.

“Each fund was very happy with the incumbents, but obviously we needed to consolidate that post-merger. So we went to tender, and the board only just signed off to go forward with OnePath,” Todd said.

Since the merged entity knew both insurers very well, it came down to getting the best coverage, design and premiums for members, said Todd.

“All the insurers can satisfy your needs, so it comes down to price, for one thing.

We now have multiple options available to our members to increase their cover without having to go through underwriting – things like lifestyle events.”

Death and total and permanent disability insurance have also been linked to salary, he added.

“It’s an across-the-board improvement in insurance coverage for the membership, and at the end of the day most members will enjoy a lower premium as well, so it’s a great result for members,” said Todd.

LGsuper is a profit-for-members fund for Queensland local government employees and their spouses. It has $6 billion in funds under management and 93,000 members. SR

the role of the Commissioner for Taxation.

The questions have been raised by the ICAA’s superannuation specialist, Liz Westover, who said she was disturbed by the refund process applying to the $10,000 available with respect to excess contributions. Under this process, the Commissioner will deduct from the refund any tax that the individual might owe following the contribution

being reassessed as income to the individual.

She said that while this might seem fair enough, a catch existed.

“The Commissioner can also deduct any other tax liabilities owing to the tax office, and also any other payments owing by the individual to other government agencies,” Westover said.

She said that while current tax laws might permit the Commissioner to do this as the re-

Annuities to help retirement funding

By Milana Pokrajac FACILITATING the development of annuities could help deal with Australia’s retirement funding challenges and should be a Budget priority, according to the Actuaries Institute.

In its pre-budget submission to the Federal Government, the Institute has called for a number of tax and regulatory reforms to give greater access to annuities, which the institute chief executive Melinda Howes believes would help baby boomers to better prepare for retirement.

Howes said annuities were a type of investment which addressed two key risks retirees currently face: longevity and market volatility.

“Australians tend to take their superannuation balances as a lump sum on retirement – which puts pressure on the age pension because it makes it harder to manage retirement savings versus spending,” Howes said.

“But new generation annuities can address key needs in retirement, enabling retirees to better manage their retirement savings and protect against longevity and market risks,” she added.

Melinda Howes

The Institute also called for the introduction of a temporary national insurance pool for high flood-risk properties.

According to the submission, the institute believes greater government involvement in the flood insurance market was necessary due to high risk properties “becoming uninsurable”. SR

Rosario to lead next phase for GESB BIG West Australian Government-related fund GESB has recruited locally for its new chief executive, appointing former Westscheme chief executive Howard Rosario to the role.

Rosario departed Westscheme after it was merged with Australia’s largest industry superannuation fund AustralianSuper in the middle of last year.

Rosario succeeds Michele Dolin at the helm of GESB

after she departed the fund in May last year.

GESB – which had been the subject of an independent review commissioned by the West Australian Government – has been led by acting chief executives Fabian Ross and Larry Rudman since Dolin’s departure.

In announcing Rosario’s appointment, GESB chairman John Langoulant said he would oversee the implementation of choice of superan-

Howard Rosario

nuation fund for public sector employees and the possible move by GESB towards becoming a greater procurer of superannuation services. SR

fund is made by virtue of a tax law, “it doesn’t seem quite fair for the Government to have ‘first dibs’ on any refunded amounts”.

“This approach is inconsistent with the provision of relief,” Westover said.

She said it had to be remembered that the majority of excess contributions were mistakes.

“The provision of some relief should not include a debt collection medium for the Government,” Westover said. SR

ASFA points to MySuper CGT issues THE Association of Superannuation Funds of Australia (ASFA) has renewed its call for the Government to provide capital gains tax (CGT) roll-over relief – this time in the context of the implementation of MySuper.

In its submission to the Parliamentary Joint Committee reviewing the Stronger Super legislation, ASFA has argued that the absence of CGT roll-over relief and the fact that many funds are carrying deferred tax assets may necessitate many trustees expending considerable time and resources creating a MySuper offering which would otherwise not have needed to be created.

“We note that CGT relief may be granted where APRA forces a fund to merge after the MySuper legislation is in place,” the submission said. “In our view this is inadequate, as for this to happen the fund would have to establish its MySuper offering first, which would be a waste of resources.”

ASFA said it strongly urged that if permanent CGT relief was not provided, then as a minimum, it should be provided from now until 1 July 2014.

It said there was a clear precedent for this, as similar relief was provided during the last Australian Prudential Regulation Authority (APRA) licensing transition period.

“It was also a clear recommendation from the Cooper Panel that such relief be provided in recognition of the extent of the transformation of the industry that Stronger Super will drive,” the ASFA submission said.

“The absence of CGT roll-over relief creates a significant barrier to fund mergers,” it said. SR FEBRUARY 2012 * SUPERREVIEW

4 HERON QUALITY RATINGS

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Heron’s heroes When it comes to the broad scope of their product offerings, Sunsuper and Asgard have emerged as the top-rated offerings in the latest Heron Partnership analysis.

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unsuper and Asgard have emerged as the major winners in the Heron Partnership's six-monthly superannuation product assessment.

Sunsuper Solutions was announced as Heron's top-rated personal product, while Asgard Employee Super was named as the company's top-rated personal product.

The Heron Partnership assessment covered 159 superannuation products, including 122 personal products (comprising 61 master trusts and 61 industry funds) and 37 master trusts and industry fund products specifically designed for the corporate superannuation market.

The company said 60 personal products had been awarded the highest rating of 5 Quality Stars, while 28 corporate products had been similarly rated.

Importantly, where personal superannuation products were concerned, the laurels for achieving the top 5 Quality Stars rating were

shared – even between retail master trust products and industry funds – while where corporate superannuation products were concerned, the retail master trusts maintained their dominance.

Commenting on the results of the exercise, Heron Partnership managing director Chris Butler said it was the first time that either Sunsuper Solutions or Asgard had been judged as the top-rated products.

The assessment of personal and corporate superannuation products undertaken by Heron covers about 130 key product features that are grouped under five areas of importance: investment arrangements; insurance; contributions; ancillary benefits; and communications.

Under the Heron methodology, investments and insurance have the greatest impact on a product’s score, with respective weightings of 55 per cent and 30 per cent.

OUTSTANDING PERSONAL SUPERANNUATION PRODUCTS AGEST

Energy Industries Superannuation Scheme Accumulation Scheme

AMP - Flexible Super

Equipsuper - Personal

Aon Master Trust - Personal Division Aon Master Trust - Personal Super Essentials

Equity Super Freedom of Choice - Personal Super First State Super

Asgard Elements Super

netwealth Super Wrap - Employer Sponsored Super netwealth Super Wrap - Personal Super OnePath OneAnswer Frontier Personal Super

FuturePlus Super

Asgard Infinity eWRAP

MLC Wrap Super - Superannuation Service

NGS

FSP Super Fund

Asgard eWRAP Super

MLC Navigator Retirement Plan

OnePath OneAnswer Personal Super

Asset Super

Government Employees Superannuation Board - GESB Super

AustralianSuper Finsuper Division

Health Super

AustralianSuper Personal

HESTA

AustralianSuper Workplace

HOSTPLUS

AXA Summit - Personal Super

HOSTPLUS Executive

BT SuperWrap Personal Super Plan

HOSTPLUS Personal Super Plan

BUSS(Q) Flexible Choice Employer Sponsored

IOOF Portfolio Service Personal Superannuation

Strategy Retirement Fund

BUSS(Q) Premium Choice

Legal Super

Sunsuper Solutions

CareSuper Workplace

Local Government Superannuation Scheme Accumulation Scheme

Tasplan

CareSuper Personal Catholic Superannuation Fund

Macquarie - Super Accumulator

Unisuper Accumulation Super (1)

Colonial First State FirstChoice Personal Super

Media Super - Employer Sponsored Account

WA Local Government Super Solutions – Employer

Colonial First State FirstChoice Wholesale Personal Super

MLC MasterKey Super & Pension

Plum Superannuation Fund - Personal Division Pursuit Select Personal Superannuation REI Super Elite REST Industry Super REST Industry Super Personal

Media Super - Personal Account

Spectrum Super - Personal Division

Telstra Super - Personal Plus

WA Local Government Super Solutions – Personal

MLC MasterKey Super Fundamentals

OUTSTANDING CORPORATE SUPERANNUATION PRODUCTS AMP - Flexible Super - Employer

Colonial First State FirstChoice Employer Super

AMP CustomSuper

Equipsuper - Corporate

AMP SignatureSuper

Mercer SuperTrust MLC Employer Super MLC MasterKey Business Super

ANZ Super Advantage

Equity Super Freedom of Choice - Business Super

OnePath Corporate Super

Aon Master Trust - Standard Solution

REST Acumen

OnePath Integra Super

Asgard Employee Super

Equity Super Freedom of Choice - Corporate Super

Plum Superannuation Fund

IOOF Portfolio Service Corporate Superannuation

Russell SuperSolution Master Trust - Employer Division

BT Lifetime Super - Employer Plan

IOOF Portfolio Service Employer Superannuation

Spectrum Super

CareSuper Corporate

Mercer SmartSuper

AustralianSuper Corporate AustralianSuper Corporate Solutions BT Business Super

REST Acumen

Sunsuper Corporate

Heron’s Top Rated Superannuation Products for 2012 TOP RATED PERSONAL PRODUCT

Sunsuper Solutions

TOP RATED CORPORATE PRODUCT

Asgard Employee

TOP 10 INVESTMENT FEATURES PERSONAL

MLC Navigator Retirement Plan

CORPORATE

Asgard eWRAP Super

MLC Wrap Super

AMP CustomSuper

Asgard Infinity eWRAP

REST Industry Super

AMP SignatureSuper

30

CareSuper Workplace

REST Personal Superannuation

Asgard Employee Super

Ancillary Benefits

5

CareSuper Personal

CareSuper Corporate Super

Communications

5

Mercer Super Trust - Personal Super

The Catholic Superannuation Fund

Contributions

5

Total

100

Area of Importance

Weighting %

Investment Arrangements

55

Insurance

Colonial First State FirstChoice Employer Super

Equity Trustees Freedom of Choice - Business Super Mercer SmartSuper Mercer SuperTrust MLC MasterKey Business Super REST Acumen

TOP 10 INSURANCE FEATURES

Rating +++++ ++++

Outstanding - this is an outstanding product with a great depth of features and hence flexibility Commendable - these products are commendable and offer a good range of options and some flexibility

+++ ++ + SUPERREVIEW

Definition

Good - these funds are basic in their offerings Poor Unacceptable

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FEBRUARY 2012

PERSONAL AMP Flexible Super Asgard Elements Super Asgard eWRAP Super

OnePath OneAnswer Frontier Personal Super and Pension

CORPORATE

MLC Employer Super

Perpetual Select Superannuation Plan

Asgard Employee Super BT Business Super

MLC MasterKey Business Super

Asgard Infinity eWRAP

Smartsave Member's Choice Superannuation Master Plan

BT Lifetime Super - Employer Plan

AustralianSuper Workplace

Sunsuper Solutions

IOOF Spectrum Super

Colonial First State FirstChoice Wholesale Personal Super

Mercer SuperTrust

OnePath Corporate Super OnePath Integra Super Sunsuper Corporate

WE BELIEVE

IN AUSTRALIA’S FUTURE.

THAT’S WHY WE INVEST IN IT.

As a world leading investment manager that invests over $30 billion* globally on behalf of many super funds, ,QGXVWU\ )XQGV 0DQDJHPHQW ÀUPO\ EHOLHYHV LQ LQYHVWLQJ LQ $XVWUDOLD·V IXWXUH WKURXJK LQYHVWPHQW LQ LQIUDVWUXFWXUH 7RGD\ ZH PDQDJH DVVHWV DFURVV D UDQJH RI LQIUDVWUXFWXUH VXE VHFWRUV WKURXJKRXW $XVWUDOLD $GHODLGH $LUSRUW 0HOERXUQH·V 6RXWKHUQ &URVV 6WDWLRQ WKH 2UG 5LYHU K\GUR IDFLOLW\ LQ :HVWHUQ $XVWUDOLD 3RUW RI %ULVEDQH DQG WKH 3RUWODQG :LQG )DUP DUH MXVW VRPH RI WKH QDWLRQ EXLOGLQJ SURMHFWV ZH·YH LQYHVWHG LQ WKURXJK WKH ,)0 $XVWUDOLDQ ,QIUDVWUXFWXUH )XQG $Q LPSUHVVLYH DYHUDJH UHWXUQ RI S D DIWHU WD[ DQG On average IHHV IRU WKH SDVW \HDUV UHLQIRUFHV WKDW LQYHVWLQJ LQ $XVWUDOLDQ LQIUDVWUXFWXUH FDQ QRW RQO\ KHOS EXLOG $XVWUDOLD·V IXWXUH LW FDQ DOVR EH D SRVLWLYH LQYHVWPHQW IRU \RXU VXSHU IXQG ,V \RXU VXSHU IXQG LQYHVWLQJ WKURXJK ,)0" 7R ÀQG RXW PRUH DERXW WKH p.a. ,)0 $XVWUDOLDQ ,QIUDVWUXFWXUH )XQG FRQWDFW (GG\ 6FKLSSHU RQ RU visit our website www.ifm.net.au.

For 16 years. After tax. After fees.

The IFM Australian Infrastructure Fund is not available to retail investors and does not have a PDS. Investment can only be made by eligible superannuation funds and other pooled superannuation trusts.

The 12.24% p.a. return shown does not represent the return to retail investors. It indicates the average return on capital invested by superannuation funds from commencement to 31 December 2011.

3DVW SHUIRUPDQFH LV QRW D UHOLDEOH LQGLFDWRU RI IXWXUH SHUIRUPDQFH &RQVLGHU D VXSHU IXQG·V 3'6 DQG \RXU REMHFWLYHV ÀQDQFLDO VLWXDWLRQ DQG QHHGV ZKLFK DUH QRW DFFRXQWHG IRU LQ WKLV LQIRUPDWLRQ EHIRUH making an investment decision. For more information, visit www.ifm.net.au Industry Funds Management Pty Ltd ABN 67 107 247 727 AFSL 284 404 *as at 31 December 2011.

6 SOCIAL MEDIA

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Making social media work Social media has added a new dimension to member communications, as superannuation funds increasingly embrace the digital age to sell their message. Deloitte’s SETH GODIN shows how to do it.

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ocial networks, tweets, podcasts, Facebook, wikis, forums, RSS, mashups, 2.0, widgets, peer 2 peer, YouTube, blogs, Google+... the list goes on. It’s hard to look around and not see the impact of social media. People’s business cards and email signatures include their Twitter handle, LinkedIn profile and their brand’s Facebook site. TV shows are asking for immediate feedback with #hashtags.

And breaking news from all corners of the globe is being broadcast through personal mobile phone videos posted directly to the internet.

Our lives have been amplified by social media, and user-generated content is growing by the day.

And it is simply not all about teenagers telling us “what they had for breakfast”.

Social media is being used in

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meaningful ways by many organisations across a broad range of industries to add value to their brands and to help people learn about and engage with these organisations’ products and services. In the financial services industry, we are seeing three primary social media sites becoming a standard part of the communication channel mix: 1. YouTube channels are turning into hubs for educational and instructional content, which is then syndicated onto corporate websites. Commonwealth Bank is a leading example of how to use these channels to help explain financial concepts such as tax and superannuation. (Heaps of handy advice on tax and super).

2. Twitter is growing as a servicing tool for members to ask questions and to receive direct responses quickly and

easily rather than waiting onhold or sifting through generic website FAQs. 3. Facebook is the primary site for involvement of the community – outside of the core product and service offerings of most funds. With one in four people on the planet having a Facebook account, we expect this trend only to increase.

As the superannuation industry begins to engage with social media, it is facing the same challenges that other industries have been tackling: • What will we talk about?

• How can we control the message?

• Where will social media fit in our channel communication strategy?

• Who will run our program?

• How do we make a return on our investment?

Although these questions are critical, even more important is

the fact that, whether you like it or not, people are already out there in cyberspace talking about your brand and your products and services. You can choose to engage and become a part of the conversation (and a number of funds are doing this) or risk leaving it up to someone else to speak on your behalf.

Many funds have the goal of increasing the engagement of members high on their strategic plans. Social media can be one of the most effective tools that you can use to help you achieve this goal. If you are unsure about how to approach the use of social media, a good place to begin is with this fundamental question: what do my members want to know?

Many people in Australia – your members – could be more financially savvy, and do not fully

understand how their superannuation fund works. Why not consider using social media to educate your members in simple English on the basics? Building your members’ financial literacy will simultaneously increase members’ engagement with you and enhance their level of trust in your products and services. Once you are engaged in a genuine dialogue with your members about the basics, you can expand into other important areas – options for improving retirement outcomes, or checking that levels of insurance coverage are appropriate.

This approach, accompanied with good levels of service, will engage you in the rewarding journey of conversing in social media.

Please consider the following ‘do’s and don’ts’ as you look at your own approach to social media:

SOCIAL MEDIA 7

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DO… 1. Observe and listen: Are people already talking about your brand? What are they saying? If you cannot answer these questions, then take the time to find out where your audience is. If they are talking about you on Twitter, then start there, and don’t worry for the moment about a presence on Facebook.

Start where the people are already talking.

2. Be prepared to service your brand: Although you can set yourself up on social media very quickly, consider how you will manage the platform and your brand going forward. Do you have content to keep your audience engaged? Do you have people available to help you? Are they trained in ensuring that your tone of voice and style stay on brand? What if there is negative press and people using social networks to vent dissatisfaction? How do you ensure that your marketing, communications and legal teams are all engaged? Establish a plan as to how you will handle these situations. Build some key scenarios, both positive and negative, and consider your responses.

3. Look for peripheral content: If your brand is associated with a team, event or promotion that has an existing community of followers, link the two together and generate content around them.

Some good examples include HOSTPLUS promoting the Big Bash cricket, the Melbourne Food and Wine festival and the Gold Coast Suns AFL team. By engaging with content other than your core services you help the personality of your brand grow, which will enable you to reach out to other online communities. Work to maintain a happy balance between your core and non-core identities, but try not to lose the focus on your core message.

as doing so will unlock the power and reach of social media. You can reach more than three million people with just three ‘likes’ of your message on Facebook, if each of the people clicking ‘like’ has 150 friends, and if each of those friends clicks ‘like’ too.

DON'T...

Statistics show that Australians are visiting social network sites in massive numbers: (visits to the site per month)

13 million Facebook

YouTube 11 million

Blogspot 3.8 million

LinkedIn 2 million

Twitter 1.8 million

Wordpress.com 1.6 million 4. Integrate your channels: Use social networks to drive traffic to your website for further engagement. Posting the questions that everyone is thinking about, like “Will I have enough to retire with?”, “How long will my super last?”, and “Did you know 50 per cent of the population is expected to live beyond their super balance?” can trigger interest and drive traffic to calculators and articles on your site. Posting questions that bring members to your site creates an opportunity to offer

more specific information, initiate a follow-up contact, or provide additional products or services.

5. Amplify your message: Producing content may not benefit your brand without an audience interested in consuming the information. Tell people where you are active in social media, and provide logos on your website that link through to your respective network presences. Once you start to build a following, encourage your audience to share your message,

1. Be an ostrich: Social media users are PR-savvy. They will immediately spot organisations that try to massage their profile by removing or ignoring bad commentary. Front up to negative comments and engage in a conversation with their authors to have your point of view heard. Not entering the conversation is generally perceived as running away from the issue entirely, and may even be seen as an admission of guilt, creating a much larger problem in the long run.

2. Don’t be random: Establish the amount of effort you want to spend producing content and engaging with your social networks. Don’t start with a rush of enthusiasm and then dwindle off as other priorities take centre stage. Social media is about now – remaining current. Try to set a pace and maintain it.

3. Don’t think in today’s mindset: Increasing life expectancy, changes in asset allocation, and baby boomers / Generation Xers heading towards retirement with more importance on capital protection and income are all factors that are changing the way the superannuation industry operates. Meanwhile, 90 per cent of all online Australians already access social media and spend 20 per cent of their time online on social media sites. Funds need to anticipate the future and the changing needs of members, and they need to start providing education through social media

to empower members with the right knowledge to protect themselves in their retirement.

4. Don’t comment and think the job is done: Posting and conversing are only part of the story. It is smart business to draw on the measurement tools available to help you track the performance of your content and optimise your efforts.

Set yourself targets, objectives and KPIs, and then make use of technology to monitor how you are being received. Are you being re-published? Are member satisfaction ratings improving? Are you building awareness of your brands? Is there an increase in your memberships? Use the monitoring tools to iterate and optimise your approach.

5. Don’t ignore the cost of inaction with social media: No matter how much you believe – or hope – that social media is just a ‘fad’, most analysts believe that social media will not go away, that it represents a significant development in the internet and how people can and want to use it. People expect organisations to have a presence on social media. Those which don’t may lose ground as their members make choices about their superannuation. The lost opportunities of viral referrals, brand perception, and being considered a progressive organisation can have a direct effect on the bottom line.

6. Don’t be inconsistent: Don’t pretend to be what you are not.

Social networks are another key channel for your mix of brand and communication, so ensure that they are aligned and manage them accordingly.

“Social networking that matters is helping people achieve their goals. Do it reliably and repeatedly so that over time people have an interest in helping you achieve your goals.” SR FEBRUARY 2012 * SUPERREVIEW

8 EDITORIAL

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Awarded by default The Government has finally referred default funds under modern awards to the Productivity Commission, but as Mike Taylor reports, the outcome is unlikely to matter in the life of the current Parliament.

Mike Taylor

he Productivity Commission will spend much of this year reviewing the controversial issue of default funds under modern awards, but the terms of reference laid down by the Government are such that it will not necessarily touch on a very important point – the relevance of the industrial judiciary to superannuation.

Notwithstanding the fact the Productivity Commission will examine key elements such as “the design criteria for the selection and ongoing assessment of superannuation funds eligible as default funds in modern awards by Fair Work Australia”, the level of fees incurred and the scale of funds, it will not examine the underlying relevance of the Government's legislation.

By introducing the legisla-

T

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tion underpinning default funds under modern awards, the Labor Government effectively turned back the clock to the early days of the Prices and Incomes Accord between the Hawke/Keating Labor Government and the ACTU and before the superannuation guarantee – the period of award superannuation.

Virtually ignoring the reality that the superannuation guarantee had significantly diluted the influence of particular trade unions on the selection of superannuation funds, the Government’s legislation saw Fair Work Australia selecting menus of default funds based on an industrial relations regime which had predated the election of the Howard Government in 1998.

The problem with the current Productivity Commission review of default funds under modern awards is that, at the end of the process, its terms of reference will have dictated that it has done little to break the nexus between superannuation and an industrial relations regime, which had more relevance in the early 1990s.

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 2819 Fax: (02) 9422 2822 email: tim.stewart@reedbusiness.com.au Contributing Reporter – Damon Taylor email: damon.taylor@c-e-a.com.au Ph: 0433 178 250

Under the terms of reference delivered by the Government, the Productivity Commission has eight months to deliver its findings – meaning that it is likely to present its final set of recommendations to the relevant minister in around September. Allowing the usual time for the Government to consider those recommendations, it is unlikely they would be reflected in policy any time much before the middle of 2013, by which time most attention would be directed towards the next Federal Election.

In circumstances where the Government promised the Productivity Commission review of the default funds at the 2010 Federal Election, the timetable and terms of reference announced by Assistant Treasurer, Mark Arbib, in midJanuary could be interpreted as adding a measure of credibility to Opposition claims that the Government has been acting to protect its union and industry fund constituents.

However, such claims overlook the fact that while many retail superannuation funds claimed to have been disad-

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vantaged by the current default funds arrangements, so too did a number of industry funds. A little-recognised fact is that reference to historical award respondents failed to accommodate the evolution of industries and the consequent and legitimate entry of other funds.

What is true of the current arrangements around default funds under modern awards, however, is that they have served to advantage those industry funds with the strongest historical union/industry links and to diminish the level of choice available to both employers and employees working under particular awards within particular industries.

Moreover, it is arguable that in an environment in which companies such as Colonial First State, AMP and BT have brought increasingly competitive offerings to market, the lack of choice within the default fund regime has served to disadvantage employees in particular sectors.

Then too, there is the question of the Government proceeding to implement its Stronger Super and Future of Financial Advice (FOFA) changes without at the same time addressing the default funds anomaly.

No-one disputes that the default fund arrangements will impact key elements of Stronger Super (including the workings of MySuper),

and there are suggestions that this, in turn, has implications for FOFA. Certainly, if the Government had delivered on its 2010 election promise earlier in its current term, then it might have been able to ensure inclusion of the Productivity Commission's findings in the legislation soon to be considered by the Parliament.

By almost any measure, default funds under modern awards represent a glaring loose end in the context of broader financial services policy, and one which is highly unlikely to be fixed in the life of the current Parliament.

If, as the Government's critics suggest, its slow approach to addressing default funds has been owed to protecting the interests of its union and industry funds constituents, the ploy may backfire if there is a change of government at the next Federal Election.

The Coalition has made its views clear on the existing default funds regime, with the result that any changes it implements will, at the very least, see a return to the regime which existed before 2008.

In the meantime, having just finished their submissions on FOFA and Stronger Super, the financial services community can begin preparing their submissions for the Productivity Commission.

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10 METLIFE/SUPER REVIEW SURVEY

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Stressing tests The latest MetLife/Super Review survey has revealed substantial support for tighter controls around multiple-trustee directorships and the liquidity stress testing of superannuation funds. uperannuation funds should be subject to annual liquidity stress testing, with the results being made public, according to the latest MetLife/Super Review Super Outlook survey.

The survey, conducted during late November's Association of Superannuation Funds of Australia conference in Brisbane, revealed strong support for the annual stress testing.

Further, the survey indicated significant support for the results of that stress testing being made public.

The survey questions were generated by reports about

S

the number of superannuation funds which had sought regulatory relief from the Australian Prudential Regulation Authority (APRA) based on liquidity issues at the height of the global financial crisis.

While the regulator has confirmed the number of funds which sought relief during that period, it has always declined to name those funds.

The MetLife/Super Review survey revealed overwhelming support for the yearly stress testing of funds, with 89.1 per cent of respondents agreeing with the concept.

Asked whether APRA

The Federal Government has signalled it wants to impose stronger rules around multiple directorships in superannuation fund boards. Do you believe this is necessary?

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should make public those funds which failed such a stress test, 64.8 per cent of respondents said this should be the case.

The survey results are consistent with the outcome of surveys conducted by a range of groups, including the Institute of Actuaries last year.

APRA defines an illiquid investment as an investment that cannot be converted to cash within 30 days or where

conversion to cash within that period, by itself, would have a significant adverse impact on its realisable value.

According to research released to the industry last year on liquidity risk management, only six per cent of trustees undertake formal liquidity stress testing, and only 14 per cent of trustees actively monitor liquidity for the investment choices offered to members.

Do you believe there should be fewer but larger superannuation funds in Australia?

Would your fund be affected by a ban on multiple trustee directorships?

Rules of multiplicity The Federal Opposition seems likely to find plenty of support in the superannuation industry for its push to impose tougher rules around multiple superannuation fund directorships.

The MetLife/Super Review Super Outlook survey conducted during the Association of Superannuation Funds of Australia national conference in November revealed substantial support for imposing restrictions on multiple trustee directorships.

According to the survey, 67.5 per cent of respondents believed stronger rules were necessary, although nearly 60 per cent believed their fund would not be affected by such a move.

The Federal Opposition has raised the issue of multiple trustee directorships in the context of a number of major industry superannuation funds in circumstances where some well-known former trade union officials sit on the boards of a number of funds.

The Opposition spokesman on Financial Services, Senator Mathias Cormann, has said he believes multiple directorships can give rise to serious conflicts of interest.

Particular concern has been expressed around conflicts where major fund amalgamations occur.

The Federal Opposition has suggested that superannuation funds should be subject to the same levels of corporate governance as publicly-listed companies.

METLIFE/SUPER REVIEW SURVEY 11

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SuperStream stronger SuperStream remains the most popular element of the Government's Stronger Super initiative, with the industry remaining less than convinced about MySuper.

That is the bottom line of the latest MetLife/Super Review Super Outlook survey, which indicated broad support for the benefits of SuperStream, but less enthusiasm for MySuper.

Asked to rank the Stronger Super measures according to the benefits they will deliver, more than 80 per cent of respondents felt positive about the improvements likely to be delivered by SuperStream.

Indeed, 50 per cent of respondents ranked it as the foremost benefit to flow from the Government's changes.

This compared to MySuper, with only 33.7 per cent of respondents listing it as the foremost benefit.

Significantly, respondents were even less positive about the regulatory changes flowing from the Stronger Super changes, with only 17.5 per cent ranking increased regulation as likely to have a beneficial impact.

Fund diversity foremost

Superannuation fund mergers and consolidations remain broadly unpopular in the superannuation industry.

The latest MetLife/Super Review Super Outlook survey has revealed a significant majority of respondents don't believe there should be fewer but larger superannuation funds.

The survey revealed 60.8 per cent of respondents were opposed to there being fewer funds in the industry – something which defies government and industry expectations of further consolidation in the sector.

Survey respondents also remained opposed to monthly ratings of superannuation

funds, agreeing such arrangements undermined perceptions of superannuation as a long-term investment.

The survey revealed that nearly 70 per cent of respondents believed monthly ratings served to undermine the necessary longterm nature of investment in the sector.

Best life insurance provider?

The government’s Stronger Super package has been delivered. Which of the major initiatives do you believe will have the most beneficial impact?

Do you believe superannuation funds should be required to undergo annual stress testing to ensure they have adequate liquidity?

FEBRUARY 2012 * SUPERREVIEW

12 INSURANCE

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When the only certainty As the Government implements its Stronger Super policy and in particular MySuper, trustees are reviewing their insurance offerings. As Damon Taylor reports, the impact is already being felt among the major insurers.

A

s the Australian superannuation industry embarks on the year ahead, the one certainty seems to be change. Of course, that change isn’t restricted to super funds alone.

From MySuper to SuperStream to the Future of Financial Advice (FOFA), the environment super industry service providers operate in is shifting, and according to chief executive officer of Group Life for TAL Limited Andrew Boldeman, insurance provision is an integral part of that shift.

“We're already seeing some of the MySuper changes flowing through at the moment and seeing people think through how MySuper impacts their insurance arrangements, particularly for default MySuper members,” he said. “So I think what these changes have done is enshrine an expectation that trustees have to consider the appropriate levels of insurance for those members who haven't necessarily selected a choice.

“Now most trustees would say that they did that before, but I think that the way it’s been written into the legislation, the guidance and so on, many trustees are taking the opportunity to think it through and make sure that there are appropriate default SUPERREVIEW

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“It’s this question of whether the changes coming through are going to create a situation where the levels of insurance go down.”

- Marc Lieberman levels of insurance in place,” Boldeman continued. “So as they split out their MySuper product, most are simply reviewing their insurance at the same time.”

According Frank Crapis, head of industry funds for CommInsure, the current raft of Government reform has turned super fund trustees’ focus to providing more comprehensive insurance benefit packages to their members.

“And there will be fundamental changes required [for that], especially in regard to product definitions,” he said.

“Trustees may be restricted to the types of benefits they can provide within the super environment, as it is likely that any benefit within super will need to meet a condition

of release under the Superannuation Industry (Supervision) Act (SIS).

“Thus, some employers are now looking to provide extra benefits outside the super environment as part of a group insurance policy.”

Alternatively, Marc Lieberman, chief executive officer for MetLife in Australia, said that the industry’s proposed legislative change also raised a number of concerns for insurance providers.

“In my two years here in Australia, what I’ve seen in the group insurance market is a highly competitive market, which can be good in terms of ensuring value for the customer,” he said. “But I think that there’s a lot more room for growth and opportunity around education of the customer, and making sure customers have appropriate levels of cover.

“So with all the regulation and change that’s coming in, that’s probably my biggest concern,” Lieberman continued. “It’s this question of whether the changes coming through are going to create a situation where the levels of insurance go down, either through auto-consolidation or other changes around FOFA, and we end up having a really exacerbated underinsurance problem.

“That’s something we need

to take great pains to avoid.”

Indeed, the problem Lieberman alludes to is one that has already been raised by a number of insurers.

After all, the consolidation of superannuants’ inactive accounts is an entirely appropriate objective but, if it comes at the expense of the insurance held within those accounts, are fund members really better off?

For Boldeman, the chal-

lenge is out there for the industry to find a solution that achieves the Government’s objectives but that also don't cause unintended consequences.

“So what the insurance and super fund industries are really looking at is what are the ways of achieving both objectives,” he said. “And one proposal that’s been put forward is to ask whether there's a way of consolidating insurance at

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is change

the same time. “So if someone has consolidated their accounts and they've got $100,000 worth of cover in both funds, well maybe they can consolidate and have $200,000 in the fund that they've consolidated to,� Boldeman continued. “And I've seen a number of different variants of that proposal in place and there's merit in those. “There are still challenges

though; you've got transition risks, and ‘what happens if I lose the better insurance product in the one fund?’ Or ‘if the fund that I'm consolidating into doesn't have as good an insurance product, do I miss out?’�

Crapis suggested that an alternative solution would be to notify a member of the potential loss of insurance benefits prior to any consolidation occurring.

“We agree that it can be inefficient for members to have multiple funds and be charged multiple fees,� he said. “In some circumstances, however, there may be valid reasons for a member to hold multiple superannuation accounts, insurance benefits being one. “Further, if a member’s health, age or occupation has changed significantly between leaving one fund and

joining another, they may find it difficult either getting the same level of cover or having the same low premiums that they enjoyed in their original fund,� Crapis added. “So the balance here is to ensure that the client is aware of the fact that they hold multiple superannuation accounts so that they can make an informed and educated decision.�

Echoing Crapis’ com-

ments, Lieberman agreed that education was the key. “So if you’ve got an autoconsolidation going on, you’ve got to make sure that the individual understands what they’re giving up in that auto-consolidation,� he said. “If they had three different super accounts, $1,000 in one, $500 in another and $20,000 in another and they auto-consolidated into the larger one, make sure in that auto-consolidation that they understand the benefits that are associated with each. “They have to have the opportunity to keep the insurance benefits that may be associated with the funds they’re being consolidated out of,� Lieberman continued. “Just don’t do it blindly because, unfortunately, most people don’t look at their super account every day, they don’t really pay close enough attention to what benefits may be around it, and you don’t want that auto-consolidation meaning coverage is lost. “You particularly don’t want the first time someone finds out that that’s the case being when they have to make a claim.�

Yet while underinsurance is a constant topic of discussion for the insurance industry, recent data released

by Plan for Life would seem to indicate that inflows into the group risk market are increasing.

So are we to assume that Australia’s underinsurance gap is increasing? Or is the insurance market itself simply getting bigger?

Continued on page 14

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When the only certainty is change Continued from page 13 The answer, according to Lieberman, is that it’s both. “I think it is an indication that the market is growing and an indication that superannuation funds are recognising that insurance plays a significant value-add to their customers,� he said. “They know that they’ve got to make sure they have a competitive offering when it comes to insurance where, for some, I think insurance was a bit of an afterthought. “They knew they had to have it but it was at minimum levels,� added Lieberman. “Now, however, they’re realising that the cost of getting proper insurance coverage is relatively small in the grand scheme of things. “There’s an awareness now that if they spend a little time and a little bit of money, they can make sure that their members are well protected.�

With regard to underinsurance specifically, Boldeman said that both the insurance and super industries had made good inroads in terms of the level of insurance most Australians have. “Going back five years ago, it was a much more significant underinsurance gap than it is today,� he said. “But there's still a lot of research out there that suggests that while we've made good inroads, there's still a fair way to go, particularly on the disability side. “The majority of Australians are chronically underinsured in the event of disability,� Boldeman continued. “Income replacement SUPERREVIEW

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benefits have a very low penetration rate and if people do become disabled, in many cases they've got access to a very small sum that's really only going to get them by for a year, two years at most, from a salary replacement perspective.� “As with so many of these things, I think there’s been good progress but there’s still a long way to go.�

On the other hand, Lieberman said that measures of underinsurance tended to depend on which report you were looking at. “Clearly, premiums seem to be going up on the group side and that’s a good sign,� he said. “But if you ask most consumers about whether or not they have insurance or need insurance, I think there’s still a big gap in terms of the understanding of what insurance is designed to do and how much is the appropriate coverage. “So I would say that we still have an issue out there,�

Lieberman continued. “I’d like to think it is getting better, but I’d say that the amount of benefit or increase is probably still pretty minimal at this point. “The industry still has a lot to do in terms of education and really getting people to understand how much they need and why they need it.�

However, if underinsurance is the problem and education an integral part of the solution, the onus is still on super fund executives to ensure they have appropriate coverage in place, regardless.

To that end, their insurance focus seems to waver between having as much

“The industry still has a lot to do in terms of education and really getting people to understand.�

- Marc Lieberman cover as possible for as little as possible on the one hand, or having as many options, cover types and enhancements as possible on the other. Yet for Boldeman, the two are not necessarily mutually exclusive. “In fact, I think we're probably trying to do both,� he said. “It’s about trying to give good value coverage to everybody but still enabling people with a series of choices. “And really everybody should be looking at their insurance and making their own decision; it’s just unfortunate that most people don't.�

Alternatively, Crapis pointed out that based on the proposed Stronger Super re-

Andrew Boldeman

forms, insurance coverage provided through superannuation was likely to be restricted to those benefits that meet a SIS Act condition of release. “So that’s likely to result in more homogenous benefits and features for the insurance coverage provided by funds,� he said. “As a result, funds will need to differentiate themselves based on premiums, sums insured and auto acceptance limits (AALs). “But service, administrative support and claims management are also features which insurance providers and funds can use to differentiate themselves.�

In admitting that super funds would inevitably focus on price, Lieberman said that he would warn them strongly against commoditising insurance. “So we don’t play the price game and we don’t try to maximise coverage for minimal cost,� he said. “We really look at what’s appropriate for the member and for the super fund partner that we’re dealing with and try to come up with a custom solution. “To me, there’s been too much focus on commoditised pricing and I think it’s going to come back and bite some of the super funds as well as the industry,� Lieberman added. “It has to be about value, it has to be about customer service, how you’re doing things for the customers, so that when it comes time for claims, you’re easier to do business with, they get their claims processed quickly, they have access to information so that they know what kind of coverage they have and can get questions answered easily.� “It’s about service, it’s about value, it’s not just about trying to turn this into a commodity so that you get maximum coverage for the cheapest price, because very often when you go out for just price, you get what you pay for.�

So with that thought in mind and looking to the year ahead, Lieberman said that MetLife’s focus would be education. “Educating the super fund partners that we have, educating the prospects that we’re working with and really educating them on mak-

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ing the right decisions for their members,” he said. “We want them to stop focusing on price, start focusing on value and look at long-term value proposition for their members.

“You don’t want to constantly switch because you’re looking for the next cheap price,” Lieberman continued.

“You want to give your customers long-term value, longterm security with a com-

pany that will be there.

“After all, you’re talking promises that are made over the next 40 or 50 years, in terms of when the payout comes, and you want to be sure you’re dealing with the right company over that time.”

On the super funds side, Boldeman suggested that ensuring there was an interplay between advice and insurance would be vital.

“I think the big thing from

the funds' perspective is really just continuing to update their product and respond to the regulatory change that we've seen,” he said. “So it’s really around MySuper and the various scalable advice components and just thinking through their advice model and how it interfaces.

“From an insurance perspective, we're just continuing to expand our service and partnering model,” Bolde-

man continued. “So the last two or three years we've really spent a lot of time focusing on our claims process and trying to have a consistency of process and service.”

And Boldeman said that the proof of success would be that insurance claimants were also the funds’, and therefore the insurers’, best advocates.

“So for people who've needed to use their benefit at some

point, hopefully the process has been quick and easy for them so that they're also advocates for the industry and the benefits of these products,” he said. “And, to do that, we have to continue to enhance our claims process.

“If we’re differentiated and known in the industry as the insurer whose claims process is the easiest to weave your way through, then we’ve done our job well.” SR

SuperReview

CHARITY GOLF DAY The annual Super Review Charity Golf Tournament is not just about coming out of the office and onto the green stuff to talk business, it’s also about getting together with your industry peers to have some fun and, at the same time, raise some much needed money for those in need.

WHERE Roseville Golf Club, 4 Links Avenue, Roseville, Sydney WHEN Wednesday, 14 March 2012 ITINERARY 11:45 pm 1:00 pm 5:00 pm 5:30 pm

- Guests arrive for registration.

- Tee-off shotgun start.

- Groups finish and move to the club-house.

- Presentation function.

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ENQUIRIES For bookings or any further equiries please contact Samantha Conway on (02) 9422 8522 or email samantha.conway@reedbusiness.com.au

FEBRUARY 2012 * SUPERREVIEW

SUPER REFORMS 17

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Getting the balance of change right in 2012 The superannuation industry recognises that 2012 will be a year of change generated by Stronger Super, but as DAMON TAYLOR reports, their real concern is around cost and time frames.

W

hen it comes to superannuation legislation and policy, 2011 was a year characterised by consultation, and its fair share of robust discussion. The reforms implicit in Stronger Super, in Future of Financial Advice (FOFA), even in MySuper have become that much clearer, and more importantly, their implementation is now that much closer.

But while Russell Mason, Partner – Superannuation for Deloitte, believes the vast majority of super funds are keen to make preparations and move into implementation mode, the key ingredient missing remains draft legislation.

“We spent last year hypothesising on what these changes would look like and what their impact would be, but for trustees and fund executives, what we really want is the legislation, or at least the draft legislation, so that we can exactly see what, for instance, the MySuper rules are going to look like,” he said. “We’re all sitting there now saying that we know we have to do things, we’ve got a bit of an idea and we can start to implement some of the changes – but again, I want to see the legislation.

“If I’m a trustee or a fund

executive, I want to see what options I might have with the MySuper product,” Mason continued. “I want to know what degree of reporting I’ll have to do, what changes I’ll have to make to my existing options, whether my existing default option for instance is adequate or not, is a lifecycle-type option going to be preferable?

“These are all questions that need answering, but most of them won’t be until that draft legislation becomes available.”

Echoing many of Mason’s comments, John Quessy, Trustee for industry fund NGS Super, pointed out not only the number of questions that remained unanswered, but also that time frame was an increasing concern.

“Now having said that, you’ve got to allow time for consultation and that [is] absolutely essential,” he said.

“And I know that there have been a fair number of changes as a result of that consultation which, again, is good.

“But there’s no doubt that we’re getting to the sharp end of this,” Quessy added. “Going from the top, I think with the SuperStream stuff, that’s all fine and there was less contention around that.

“I think that was something that pretty well everybody, whether administrators, fund managers or funds themselves, everyone put their hand up and said ‘this is sensible, let’s go ahead with this’,” he said.

Continuing down the list, Quessy said it was obvious that a number of people were still keen to make comment on the FOFA reforms.

“I read something the other day that said that the big organisations and the very small boutique organisations will survive, but everything in the middle will get swallowed up,” he said. “I’m not convinced that that’s right, but as with all of these reforms, we’ll just have to wait and see.

“In terms of MySuper, there are still a few unanswered questions there,” Quessy continued. “But I think we’re going to have to wait for APRA (the Australian Prudential Regulation Authority) to produce

their range of test scenarios so that individual funds can have a look at them, determine the ones that are similar to them, and ensure that they’re complying well before time.

“Personally, I’ve still got doubts about whether MySuper is going to achieve anything like what it’s supposed to achieve, but again, we’re going to have to wait and see,” he said.

Pauline Vamos, Chief Executive of the Association of Superannuation Funds Australia (ASFA), said that she too was concerned about rapidly approaching implementation timetables and the difficulty they would cause.

“It is going to make things a lot more difficult,” she said.

“But we all know the concepts are there, and we all know the policy outcomes.

“The unknowns are more around the system builds and the process builds, but as

often happens with legislation, I think you’ve got to make your calls now and then tweak things later,” Vamos continued. “Despite the unanswered questions that are still out there, I wouldn’t wait for final legislation, because if you do, you will almost certainly run out of time.

“There is, after all, no guarantee that there will be any extensions on timing,” she said.

Of course, most funds already have the preparations Vamos is suggesting well underway. However, the concern that remains for much of the industry is whether MySuper – as a piece of legislation – intended to simplify default superannuation arrangements, will actually end up being more complex than the current status quo.

According to Quessy, complex or not, there could be any Continued on page 18

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Getting the balance of change right in 2012 Continued from page 17 number of problems with MySuper if it focuses on the wrong aspects of superannuation to achieve its goals. “Whether it’s going to be overly complex or not, we’ll have to wait and see,� he said. “But I could never see that it was going to be simple. “It potentially was going to dumb things down – but for me, we were always looking at a default superannuation product which I’d describe as ‘set and forget’,� Quessy continued. “It’s a no frills product that will provide basic everything and look to minimise fees. “Problem is, everyone in the industry knows that minimising fees means a serious potential for minimising returns.�

For Quessy, the industry’s new focus on management expense ratios (MERs) could easily be a disaster waiting to happen. “You can get into all sorts of overlays that are fairly expensive, but they don’t show up in your MER,� he said. “So is this simply going to be a way now of people trying to find some way to get a return on their members’ money, even if it’s an expensive exercise, just so long as it doesn’t show up in your MER? “If that’s what this ends up being, then I think we’ve got a serious problem,� Quessy said.

Mason said that, complexity aside, his larger concern was that the industry was reacting to perceived problems with MySuper without having detailed knowledge of the final, or even draft, legislation. “This industry seems to be SUPERREVIEW

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reacting to the Government and to the regulators – APRA in particular – with concerns without knowing exactly what we’ve got those concerns about,� he said. “So it may turn out that MySuper is a complex product, but it may also turn out that it still remains the relatively simple product that the Cooper panel and the Government intended.�

Pauline Vamos

“In fact, I would expect that for many funds – industry funds in particular – their current default option, with some minor tweaking, will probably end up being their MySuper option without too much concern,� Mason continued. “I think that most corporate, industry and public sector funds, especially if they’re DC (defined contribution) funds as most of them are, that we could be tilting at windmills – that MySuper could be a relatively easy conversion. “Yes, there’ll be work regarding reporting, amendments to licenses and perhaps looking at the liquidity of those products and the cost structure, but I don’t believe too many funds will have to do a major re-haul or revisit of their current default option,� he said.

However, beyond the logistics of putting MySuper in place, Quessy said that his greatest concern lay in what its impact on member engagement would be. “It’s partly because my background is teaching and we’re an education fund, but what concerns me is that we’ve spent a lot of time, a fair bit of money, and a great deal of thought – as have a lot of funds – trying to get more members engaged,� he said. “And not just members on the cusp of retirement, but those just commencing their working lives. “Now we know we’re all fighting a bit of a losing battle with regard to engagement of members (especially young adults) in superannuation, but I think the whole concept of MySuper is going to become a set-and-forget,� Quessy continued. “It’s going to, in fact, entrench disengagement.�

That’s my feeling, and I know it’s the feeling of some, but the Government says that’s not the case. Well, all we can do is wait and see.�

Yet if the overarching theme behind what is currently on the superannuation policy table is increasing information and catering for all levels of engagement, most within the industry seem to agree that such objectives are appropriate.

And despite all the issues and all the unknowns, Mason’s belief is that they are objectives that can be achieved. “I think they can be achieved,� he said. “If you look at most trustees and fund executives, if you look at what’s top of their list of what they

want to do, I believe it’s understanding their members and engaging those members. “So if I was the trustee of a large super fund, I would want to say ‘do I understand my members, what information do I need, what can I do to better understand who these members are, what’s the profile of the membership, what’s their ability to pay extra contributions, what do they really want out of group insurance?� Mason listed. “Because if you can answer those questions, then hopefully better engaging them will come as a matter of course.�

For Vamos, though a modernised superannuation framework is indeed possible out of these legislative changes, the industry will still need to contemplate a number of significant gaps. “For us, the biggest disappointment is that MySuper doesn’t allow a pension to be paid out of it,� she said. “And also, that we don’t have capital gains tax relief. “So from our perspective, there are some significant pieces that are missing, and unless the industry is able to invest ‘whole-of-life’, unless the assessment of the industry’s performance is longterm, we’re not going to get the fundamental changes that we still require. “My concern is that there’s so much focus on implementation, and a lot of the detail of the legislation that trustees aren’t going to have enough time to look at their investment environment,� Vamos continued. “And this is the time that they really have to do that. “This is a very difficult time

for the industry because trustees and fund executives are already stretched, but unfortunately, that’s only going to increase,� she said.

Yet the gaps mentioned by Vamos, or more particularly, the prospect of legislative change and reform beyond what the industry currently has before, it is not necessarily a pleasant one. Many within the industry – members included – have found various Governments’ constant ‘superannuation tinkering’ a source of frustration for a number of years, but according to Quessy, constant change is a trend likely to continue. “It would be nice if there could be a moratorium on Budget night announcements about changes to superannuation,� he said. “I think there are two issues where change should still happen, and they go to the issue of adequacy.�

So certainly, we want to see the 12 per cent SG (superannuation guarantee), and certainly, we want to see capacity for people to make voluntary contributions and the like,�

Quessy continued. “And maybe the only other change that I think would be favourably entertained is a relaxing of the contribution caps. “Other than that, and unless the current changes are a complete disaster, I think we should leave it alone for five years and see what happens. The politicians won’t do that, of course, but it would be very nice if they did.�

However, Vamos’ counterargument to industry pundits’ criticism of constant change is that without change and Continued on page 20

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20 SUPER REFORMS

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Getting the balance of change right in 2012 Continued from page 18 improvement, the industry can hardly be expected provide Australians with the best retirement savings system possible. “As I said before, there are still gaps, and because of the extent of this legislative reform, we’re going to have to review it as well,� she said. “I think we have to understand that because this system is about peoples’ retirement, and the environment of retirement constantly changes. “There will always be change, and I think people just have to get over it,� Vamos said.

For Vamos, the simple fact is that it is vitally important that the superannuation is able to ensure that Australians get the most out of their retirement. “It must be fair, and it must be about driving adequacy,� she said. “But how you deliver that will necessarily change, and the social and the economic policy levers will change along with it. “The key, however, is that policy should be looking substantially forward,� Vamos added. “What is not sustainable, is tinkering every year with no lead time and with no real thinking behind the policy. “That is untenable.�

Moving beyond what the Government and Australia’s super industry currently has on its policy plate, it seems the next area of focus is postretirement. But while there are various takes on the issue and various proposed solutions, Vamos said that current social security legislation had to be the first port of call.

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“The first problem we have is that our social security legislation only really recognises an annuity and an allocated pension,� she said. “And yet because a deferred annuity is treated as income – even though you’re not getting that income – there’s a disincentive there as well. “Basically, we want to encourage people to take income streams, we want people to spend their superannuation, and we still want to make sure they have a good pension net,� Vamos continued. “So there’s a big conversation to be had, because at the moment, it’s a bit of a ‘one size fits all’ approach. “So we’ve got people who are retiring on a small lump sum, people who are retiring on a large lump sum, and people with large lump sums want to take it as an income stream, but they’re not getting the choice that they deserve,� she said.

For his part, Quessy said that funds had to have a serious look at the different offerings available in the postretirement space and start considering what would best meet their members’ needs. “But I think the one issue that we have to focus on is an investment option for the drawdown phase that inspires confidence rather than fear,� he said. “I hate to use the old capital stable-type language, but it’s about the sort of thing that I think people are retreating to. “They’re starting to say ‘look, I’ve got my nest egg and I’ve got to live off it for the next 30 years, but I just don’t see how I can do that with so much volatility in investment mar-

“There will always be change, and I think people just have to get over it.�

- Pauline Vamos

50 per cent of your average weekly earnings. “If you agree to postpone that to age 85, it will be 55 or 60 per cent, and so on,�

Mason continued. “So, as a member, I can know what I’ve got in my retirement savings and I can now target a date, because no matter what happens, you’ve got longevity risk accounted for,� Mason said.

The reality, according to Mason, is that no-one knows

Russell Mason

kets’,� Quessy continued. “And I think we’ve really got to pay a lot of attention to that. “But whoever gets it right will do extremely well in the marketplace,� he said.

According to Mason, there are undoubtedly some very clever products developed specifically to handle post-retirement, but he also pointed out that they were, almost without exception, prohibitively expensive. “My personal point of view is that we can’t develop a good post-retirement market until we have some sort of Government guarantee,� he said. “And what I would like to see – and it happens in some countries now – is that if you agree to self-fund yourself to age 80, you will get a pension equal to say

whether they’re going to live to 70 or 107, and so people will be conservative for fear of running out of money. “And with the current test for social security, they can run out of money and still not be sure of receiving a retirement of age pension,� he said. “Instead, by agreeing to postpone any social security entitlements to a reasonably advanced age, they can then have the certainty of knowing that their savings were targeting a specific date. “It’s about being able to retire and actually target a certain age, knowing that there’s going to be a reasonable backup should you run out of money,� Mason said.

So with what is evidently a full policy and reform agenda

in 2012, it seems trustees and fund executives must turn their minds to preparation.

And though legislative unknowns persist, Mason’s advice is that funds focus on meeting these changes head-on. “Engage with your service providers, seek as much information as possible, schedule strategy days and meetings, allow time in the agenda of your trustee meetings to address the changes,� he suggested. “We have committees for compliance, for marketing, for investments, but perhaps funds need to look at legislative change or benefit change in a similar way. “What funds need is to be able to do is sift through all the information that’s out there and be able to filter it through to the board,� Mason continued. “That way, when changes need to be made or new legislation is about to be brought in, the board has enough information and is educated enough to make good decisions,� he said.

Looking to the year ahead, Vamos said this would not be a year of ‘business as usual’. “That is, if there ever was a ‘business as usual’,� she said. “Black sun events are going to be happening regularly, and have been regularly happening for quite some time. “The world is shifting dramatically, so funds need to be flexible and robust in their implementation and strategy,�

Vamos added. “Priorities will change on a weekly basis and funds will have to be flexible enough to deal with that. “The challenge is for us all to be a lot more innovative in how we approach superannuation and the business that it represents.� SR

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Think globally: the 2012 outlook While Australia continues to weather the uncertainty emanating from Europe and North America, a Super Review Roundtable conducted in New York has revealed a more pragmatic assessment of conditions entering 2012 and beyond.

MT Okay I’m letting you know the tapes are running and I’m going to kick off with a question we kind of discussed a little bit over the period before lunch – and that is how the Roundtable views the next 12 months of the global economy: I guess, what are going to be the key factors that are going to drive the decisions from, say, 2012.

JM Well it’s Europe, Washington and China as we discussed. Europe is going through the midst of a reconfiguration, and we’re going to at this stage, here in November 2011, have to wait a little bit longer to see what the denouement might be.

Washington in 2012 of course features quadrennial elections with significant differences in policy among the two major parties, which will set the course for the US domestic and foreign policy over the course of the balance of the teens. And it’s probably too early to prognosticate ‌ whether China is headed for

PRESENT Mike Taylor – Managing editor, Super Review Jack Malvey – chief global markets strategist, BNY Mellon Sean Fitzgibbon – senior managing director, The Boston Company Tom Higgins – global macro strategist, Standish Mark Enman – executive director, Man Investments some deceleration in terms of economic growth.

MT Tom? TH I would add to that: what we expect to see is a further divergence between Europe and the rest of the world. We expect Europe to go through to recession as Jack mentioned earlier, and that the rest of the world will slow down, and the growth rates won’t be as robust, with one third of the global economy in a recession – but that they will remain positive. And there’s

a difference between the economy’s performance and financial market performance. We don’t think Europe is going to come to a full resolution; in fact you heard this morning from the head of the European Commission that it might take up to two years for them to fully resolve the issues that face the eurozone.

Now we’re going to go through these periodic bouts of volatility in the markets, and when there is high volatility, asset correlations increase. So in financial markets, even as the economies diverge in performance, you may see financial market performance remain high at times of volatility.

And so we still think that you still want to be where the growth is in the global economy, but you’re going to still see periodic bouts of volatility over the next year or so until the issues in Europe are fully

resolved. And then there’s some of these other issues that Jack mentioned that will continue to hang over to a lesser degree. We think the US budget is one, and also the Chinese situation and concerns about an overheating of the economy.

SF Yeah, the hope is that Europe doesn’t drag the rest of the world down, and I think that is a possible outcome, that they just continue to battle with their issues but don’t create a global slow-down. And I think we are starting to see some level of decoupling, if you think about what’s going on over there right now. But in the US, as you pointed out, people are walking around optimistic. We’re showing pretty good GDP growth, and that’s really what we’ve been talking about: Can we finally establish this decoupling of letting Europe battle with their issues and just kind of wittering away, while

the rest of the world gets along with their growth. So the US again is demonstrating that we’re a generation of spenders and we continue to spend, and that’s driving a reasonable although modest GDP growth.

And then emerging markets.

We came into 2011 worried about inflation, and that concern has really come down quite a bit. Now we’re seeing Brazil cut rates – granted they may be a little bit early and some people are questioning if they are early – esia’s cut rates, Australia’s now cutting rates. So we are starting to see easing cycles across a lot of the rest of the world. And China I think clearly is getting to the point that they engineered some level of a slow-down and we’re starting to see signs of easing there. So from that standpoint I think the US and emerging Continued on page 22

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Think globally: the 2012 outlook Continued from page 21

markets really could continue to be bright spots for 2012, while we continue to watch Europe battle with their issues.

ME I think just feeding off that, we’re seeing a lot of opportunity with our managers in commodities across the entire spectrum. If you take out precious metals for a second and (talk about) something that trades on a different set of dynamics, we’re seeing a lot more opportunity both in terms of discrete discretionary managers in commodities, as well as general macro guys playing everything from Ags to industrial metals to the energy complex. And with, I guess, the headlines last week or the week before, with seven billion people in the world, it’s going to continue to be a very interesting, and a place where we see opportunity for not just the next 12 months but for some time to come.

left behind. So specifically many now expect Greece to possibly exit at some juncture, and there are those who think that Portugal possibly could be a candidate for moving out of the eurozone. But that’s down the road and we’ll have to wait and see. So the currency is just staying. In terms of the European denouement, it seems as if it’s been a very difficult process, given so many political parties and policymakers involved. And it’s very difficult to really at this juncture say when and exactly how the denouement evolves.

Hopefully it’s not two years as someone was suggesting earlier here, but I think it’s unfortunately going to continue to drag on over the course of the coming months.

MT Okay. Again one of the things we discussed earlier was Europe, and the manner in which Europe, in Australia at least, seems to have investors fixated, even though there’s no great linkage with Europe in a lot of ways. I’m just wondering, and I’ll turn to Jack again: what is your take on Europe and whether the common currency is something that is ultimately sustainable in the long term?

ME It’s a big roll of string and I don’t even know where to attack it. I guess if we go back to 2008 people could ask how the problems at Lehman or the US sub-prime problems could affect Australia. And clearly there are ripple effects in the larger macro space to very micro effects, such as basis capital blowing up in Australia based on issues with tranches of CBOs that they’ve bought. So I think in Australia, or wherever you are in the world, you have to keep an eye on it, it just won’t go away right now. And with Berlusconi in the press and Italian yields hitting new highs today, it’s one of these gifts that are going to keep on giving.

JM The common currency is and will be sustainable in the long run. The question is the number of members in the group. And it would not be surprising to see some defections or exits over the course of the next half-decade to decade, in order to boost their competitiveness, particularly some of the southern European nations who unfortunately have been

SF I think the pain of leaving the euro in the near term is just so great that they will try to patch together whatever they can to keep all the members intact. I agree with Jack that ultimately in the long run the other side of the pain is: how do you give up your sovereignty and start allowing the euro area, Germany, to dictate some of your policies. And that’s where I think

EUROPE AND THE COMMON CURRENCY

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that battle could come to – having someone like Greece leave the euro. And again, in our view, it was just going to be Greece, and most of the others would take their medicine and try to stay part of the euro region.

From a global perspective there certainly is the hit to confidence which I think that we’ve been watching for so long. I think the hit to confidence is getting a little bit muted, that we’ve kind of seen this several times or these panic waves several times, so that the hit to investor confidence is not as great as it always had been.

will become muted over the next few years.

TH I would just second some of the comments. Regarding the euro surviving, I think it’s too painful to undo what’s been done. And although it’s difficult to see at the current time, even countries like Germany have benefited from the euro. So we don’t think that we’ll see a breakup, although as Jack said, if Greece were to leave, which we don’t think is in the Greeks’ interest to do, but if they were to leave, it wouldn’t surprise us. But a break-up of the euro, which would probably mean not only a

Mark Enman and Sean Fitzgibbon

But the other piece is, just from an economic impact viewpoint, that the emerging markets are export-oriented, and if the euro area slows, what type of impact does that have. I take some comfort in the fact that the euro area never recovered, that they never had a capex boom; they never had a housing boom coming off the crisis. That a lot of the economy is kind of running at replacement level anyway. That yes, they will have a weak economy, but I don’t see them having such a severe recession that it really drags down the rest of the global economy.

So from that standpoint I do think that euro just becomes this kind of headline that we have to deal with every once in a while, and it does have some impact on consumer confidence and investor confidence. But I think those effects

European recession but the risk of a global recession, given the undoing of the common currency and the contracts – not even just currency contracts but all the different financial markets that are tied into that, the European bond market – could cause a huge global financial crisis. And we think it’s very unlikely because it’s in everybody’s interest to avoid that happening.

In terms of adopting a solution – although it’s going to take them time adopting a solution that will actually draw the eurozone closer together and it’s partly because of what Sean talked about – you have to have moved towards fiscal union.

That’s the only way to make this system work in the long term.

And they’re making gradual steps in that direction through the European Financial Stabilisation Fund, and we think

they’ll take further steps and possibly even … you’ve heard former ECB president Trichet talk about having someone comparable to the Treasury Secretary in the United States. So in the long term we think they’ll get there, but it’s going to take time because you have all these member governments that have to agree to all these reforms.

And in the interim, we think there’s going to be continued volatility in financial markets from time to time. And what I think you’re starting to see is, that we look at say, equity markets or we look at credit markets and fixed income, and you see that things are trading at a discount because of this concern about this tail-event, this cabal financial crisis that could occur if Europe was to break up.

That’s going to remain in the back of people’s minds, and we think you’ll see a premium in credit markets as a result until the situation in Europe is fully resolved. So everything may look cheap but it’s because of this fat tail-event risk that people are concerned about.

AUSTRALIA – THE GOOD NEWS STORY MT I’m just going to move the dynamic on a little bit, and I guess this is very Australian-centric, but looking from the outside into Australia and allowing for the fact that we were discussing earlier, it’s my take on Australia that we’re all very pessimistic whereas you guys are all very optimistic about how things are here, or reasonably optimistic.

Looking from the outside in, and again I’ll start with you Jack, how does Australia look and what do you think are the sort of dynamics that need to be taken account of?

JM As a regular visitor, a most pleasant view to start Continued on page 24

Volatility is the market’s way of saying, “Watch where you’re going.”

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24 ROUNDTABLE

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Think globally: the 2012 outlook Continued from page 22

with! More realistically and culturally, there is a divide around the world and you typically find European investors would be the most pessimistic on average. You’re right – US investors tend to be more enthusiastic.

And across Asia it is more mixed, including Australia. I think looking at Australia, there’s so many great strengths.

Now while there will be fluctuations in growth, and concerns about the linkage to Europe as you mentioned earlier, Mike, as well as the beginning of the Chinese hard-landing pieces for the middle part of the teens, nonetheless it’s the case that there are so many characteristics of the Australian economy which look to be significantly offset. And that’s part of the reason why investors, whether it be in bonds or in equities, why on a global basis they enthusiastically seek to overweigh. And while that may not be constant allocation preference, I think that is the general view and will probably persist.

MT Mark, you’ve spent time on both sides of the equation, and I just wonder what your take is?

ME I guess I would offer two things, maybe moving away from the fundamental economics of it. Almost every Australian that I worked with in London and New York is back in Australia now. So whether it’s families drawing them back or the optimism about work, everybody is back and enjoying themselves. The second thing is I was fortunate enough to get an iPad for Fathers’ Day last year and one of the great things is you can read most Australian newspapers on an iPad. And so SUPERREVIEW

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whether it’s reading about the Manly Sea Eagles or whatever else it is, the tone, whether it’s the Sydney Morning Herald or reading the Perth newspapers, whatever it is, is very positive.

So from outside looking in it’s quite an envious attitude or aura, compared to what I hear speaking with my peers or my neighbours.

SF I think it’s the only place in the developed world where short-term interest rates are above 2 percent, so yeah, you guys are battling with issues we wish we had. But in terms of the Australian economy I do subscribe to the view that this is going to be a very long bull run in commodities, and so I think the natural resource-rich countries are going to fare better over the next five, 10, 15, 20 years. But they are commodities, so they will have cycles to them. But I think a lot of the mining companies’ balance sheets look great and the monetary crisis absolutely tagged. I think they’re looking at their capex budgets going out: is this going to produce a better mine that’s going to last 30 years. So from that standpoint I do think that you’ll continue to see good investments in Australia. I think that it’s going to keep unemployment at good levels, and so I think Australia remains one of the most attractive developed countries in the world and I think that will stay the case for many years.

But there’s perception and there’s reality, and people certainly do tie Australia to commodities, so from outside investors’ perspective I think that they are susceptible to [the view] that when commodities weaken people will get concerned about the currency, get concerned about the stocks in Australia. But from a long-term perspective I think everything remains positive.

TH Just to be a wet blanket, I think in general I buy into the whole short-term story. What does concern me is the point that Sean brought up regarding the reliance on commodities, and it seems to be increasing. And what worries me about that is what economists know as Dutch disease. It’s a heavy reliance on a commodity that eventually leaves too many resources going into that area

kind of pushed us in that direction, which is: do you think, looking from the outside, whether the pressures that are on from some elements of Australia for the development of a sovereign wealth fund based on the commodity boom, is probably sound thinking? I’ll throw to you for that Sean.

SF Yeah, absolutely, it is going to create boom-bust cycles and

Jack Malvey

of the economy, and a dependence on these short cycles that you see in commodities over time. And I would agree with the general story that in the long term you’re going to see commodities [grow in importance], because these are limited resources that we’re going to run out of, but as an economy I don’t know that you want to open yourself up to that kind of volatility in economic performance. And right now the macro fundamentals in Australia look very strong, particularly versus the rest of the major industrialised economies. But it is a long-term concern that you have a lot of resources flowing into the commodity complex.

HARNESSING THE AUSTRALIAN RESOURCES BOOM MT Which brings me to the question I guess, and Tom has

right now it’s been pretty good times. And so to the extent that they can create something that can provide some kind of cushion during the downtime, that’s exactly how they have to be thinking. I think that’s the mistake that most of the developed world got into; that during the good times we over-indulged and what you should be doing in the good times is trying to build up a cushion to protect you in the downside.

JM Well it makes great sense and it’s a concept that’s been around for many, many decades, actually, as you know, in Norway and the Middle East and the Abu Dhabi Investment Authority. But even the United States Teachers’ fund in Texas has effectively an endowment that generated more wealth, to the extent that you have a commodity which is at some point

exhaustible. Having a reserve against that eventual future reality does make sense.

ME I can’t really add anything to that, it makes sense.

I guess you talk about Saudi Arabia at some point being out of oil and having spent all of its money, and what’s going to happen if they don’t set aside; that’s an example of finite resources right there.

TM I think the strategy makes sense from an investment perspective. I think the other thing the government could do in the long term is just provide incentives for investment in other areas so that there’s less reliance on the commodity complex over the long haul. Changes in tax law can be an effective means of stimulating that kind of investment.

One of the things that struck me when I was at a super conference in Australia in Manly was how many of the attendees were talking about their children going into work not necessarily in the mines, but servicing the mines. And so it seems a whole service industry around that is building up as well. And so it would be good to foster I think some diversification in the economy, given this concentration of growth coming from that one sector.

WILL CHINA KEEP DRIVING AUSTRALIA? MT Of course the driver for the commodities boom in Australia is in large part China, and we discussed this as well over lunch, the idea that China at some point has to have the growth curtailed somewhat. I guess much as we discussed earlier, Jack, what’s your take on China’s growth outlook, and can it be sustained where it currently stands?

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JM Well, in the broader longer-term scheme, China is part of the great emergent story from emerging markets to advanced economies’ status. And this will be a remarkable period in history over the next 10 to 15 years; on an absolute basis, the Chinese economy will go back to being the world’s largest economy, where it was 18 of the last 20 centuries. In terms of the continuity of short-term growth, that cannot be necessarily assured. Naturally in any economic system there are fluctuations. So somewhere in the middle of the teens it would not be surprising to see some minor deceleration in the rate of growth of the Chinese economic juggernaut, particularly from the capital spending side. So there are those out there who suggest that China could effectively enter a so-called hard landing, that is, growth below 5 percent, mainly as a function of capital investment flattening for a little bit of the period. So that’s a possibility, but outright recession is certainly not on the cards in the near to immediate term.

SF Definitely a lot of concerns in terms of what we have started to see: the slow-down and that we’ve got the bears coming out of the woodwork and making the case for the hard landing in China. I think that they do have enough resources. We had seen some

tightening in some of the nontraditional lending sources, and the government I think has their arms around what the impact of that is going to be.

They’ve already started to loosen things like the reserve rate requirement for bank loans to small-to-medium enterprises – and there are even other forms of stimulus starting to creep in – so I do think that they’re going to get through this wave of the slow-down.

But there is that concern that there is a pool of non-performing loans building up, and at some point that is going to have to be recognised. I think the government does have a lot of resources to counteract that, that they’ve shown in the past a willingness to take them onto the government’s balance sheet, and with a relatively under-levered balance sheet I think they can absorb it. But that is certainly going to be the concern as you go out the next couple of years.

I think they’re very concerned about having a slowdown during the transition in the government which happens over the next 12-to-18 months, but beyond that I think they are going to have to start to deal with some of the non-performing loans.

ME Yeah, so the only thing I could do is reiterate that from the funds that we’re talking to, the cat amongst the pigeons

could be the non-performing loans, to the extent that some of the lending has created a bubble of sorts and that could throw things off in the short term.

TH I think the transition and the leadership over the next year suggests that the melt-down concerns over that time period are unlikely, but there are the longer-term concerns. The fortunate thing is that China is still a very rich country in terms of

is inevitably going to become the gorilla in the room in terms of the economy and its power in the market. I guess that means that the US isn’t. So, Jack, is that your take: that I guess the US, much the same way the UK did 80 years ago and possibly longer, is going to have to take a second seat in terms of absolute economic muscle?

JM I wouldn’t say a second seat. I think the general view

“I think it will be more of a symbolic measure when China’s GDP exceeds that of the United States.”

– Sean Fitzgibbon

the savings. With debt-to-GDP 30 percent versus the average industrialised country of 100 percent, they can deal with the nonperforming loan problem. So we don’t think it’s enough to, as Jack said, throw the economy into an outright recession. But I think the government wants to see slower growth and they’ll achieve that. But they’re going to do everything in their power to avoid a hard landing.

WILL CHINA SUPPLANT THE US? MT Something Jack raised in his last answer is that China

is that from where we characterise the dominate position in global affairs being economic and military, that the US will effectively be part of the world of a multi-polar dimension where it will be US, China, Japan, certainly other parts of the world who will be more forced to work together in situations of mutual interest, whether it be economic or environmental or questions of foreign policy. So the US will continue to have a significant stake and have a significant position in the world by virtue

of its tremendous resource strength. It has, unlike parts of Europe, a growing population base; right now to 2050 the UN report has the US going from nearly 310 million to about 400 million people, unlike again parts of Europe. There’s significant strength and I think that will certainly persist. So a more balanced world, as opposed to taking a back seat or moving into the position necessarily that the UK did 80 years ago, as you mentioned. Then again, the UK was of course bankrupted effectively by the Great War, and again by the Second World War. So the US is certainly not bankrupt.

ME I thought that was very well said. I guess I would less make the correlation between the US and the UK as the US and Europe before, say, some of the debt crises that’s going on – and you’re not going to suggest that Europe as a conglomeration is not a significant player on the global stage. The second thing is you’ll find that future presidents of the US will have a passport before they’re actually elected.

Take Bush who had never travelled outside the US; in the world that you’ve just described that’s not going to be possible.

TH China is already the second largest economy in the Continued on page 26

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26 ROUNDTABLE

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Think globally: the 2012 outlook Continued from page 25

world on a purchasing power priority basis, and they will be the largest economy in the world at some point before 2020 according to the IMF numbers, but it’s still a developing country. Per capita GDP is much lower, a fraction of the United States. And they’ll move to higher stages of development, eventually they’ll hopefully eliminate capital controls and allow the RMB to be internationally tradable, and then the currency will play a role in reserves. These are all very long-term issues, and even if we do go back to the case of the British pound and the US dollar on in the aftermath of World War II, it’s a 30year process that began before World War I. And so I don’t think anything is likely to change. If the US adopts reforms such as tax reform and addresses entitlement reform, then there could be a resurgence in the US. I think we’re looking at it from a very low point in US history, and so it’s easy to extrapolate that this period is going to continue; that’s not necessarily the case.

SF Yeah, I think it will be more of a symbolic measure when China’s GDP exceeds that of the United States. I don’t think the Chinese people will really feel it, because of your comment about the per capita GDP, they’ve still got a long way to go there. And I think what is more important is that China now has joined the rest of the world in terms of trying to work together to try to find solutions to global economic issues. And to be honest, right around the time that they cross over to [the point where] their GDP gets greater than the US, they’re going to start facing some pretty big demographic SUPERREVIEW

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headlines themselves that they will probably be trying to battle with at some point. So I think it’s more a symbolic thing than anything really meaningful.

longest slowest recovery from a recession that many people had ever experienced. I’m just wondering these some years later, did Dick call it right? Jack?

MT There is of course an argument that says that China will grow old before it grows rich. I think there’s research out there that says that the limitations on children and what-have-you are now having a huge demographic impact. Jack, undoubtedly you’ve seen that research?

JM He did call it right, it started really in February 2007, accelerated in the middle of 2007 and here we are four and a half years later. How do you define full recovery? The end of structural unemployment in the

JM We’ve seen the research and China is going to be displaced by India as a result at some point as the largest in Asia in terms of population. But I think that certainly does pose some longer-term structural adjustment issues for China, and I think they’ve recognised and acknowledged that and are encouraging larger families again.

So it’s unclear whether that really will materialise. And I think the agility of the Chinese policy makers to recognise, acknowledge and respond possibly lessens the threat in terms of having a significantly negative factor in the Chinese economy. And we’re sort of in the expected realm because we’re looking at 2030, 2040. The truth is we don’t know what the 30year US Treasury will yield on Friday let alone what’s going to happen in 2030.

WHERE NOW FOR THE GFC? MT Just turning back to the broad economy again, when I was last here, I think in this very building, I sat down and had a conversation with Richard Hoey, and that it must be remembered was in the dim dark days of the start of what we call in Australian the global financial crisis. He said then, drawing I think on his vast wealth of experience, that it would be the

the course of the last four and a half years. And the channelling and the distribution of financial assets is also something which is in the midst of a change, with investors and some wealth funds all giving consideration to how best to steer in this type of environment where there’s such significant uncertainty.

SF Yeah, I think in many ways this is playing out what a lot of us had pictured, which

“While we talk about entitlement reform and cutting that spending, really cutting shortterm spending is not what you want to do when aggregate demand isn’t exactly robust.”

– Tom Higgins US and Europe, you employ that metric and maybe it’s 2016 and 2018/19 before it’s completely concluded. So it is a decade cross-correction.

It really is for the West, the US and Europe a bit reminiscent of what’s been taking place in Japan unfortunately for the last two decades plus.

So congratulations to Dick for a good call.

Unfortunately there doesn’t seem to be a means to accelerate this recovery process because this is part of the great restructuring, the great transition period that we were highlighting earlier. The global economic system is in the midst of a radical change compared to the late 20th-Century model. The global financial system, which is a part of the global economic system, is also in the midst of significant change, with regulators, legislators and even the courts adjusting and making recommendations to effectively reduce the probability of what we saw over

was that, yes, we’ll have a recovery off what was a very low bottom, but it’s going to be immediate recovery and then we’re going to have to start to pay back all the bills for our sins of the past decade or two. And that’s really the phase that we’re entering right now: that there was stimulus initially coming off the bottom and a lot of that has waned and now we’re all trying to figure out how much austerity to apply. And the expectation was that the US GDP is going to get hit by 1-2 per cent due to less government spending and so instead of running 3-4 per cent GDP we’ll run hopefully 2 per cent. And that’s probably what the outlook has to be for the next few years. And to Jack’s point, that’s not going to bring down the unemployment rate very fast and so we’re going to feel the effect of this for quite a while.

And in Europe: the expectation was Europe is going to be in even worse shape and sure

enough, here we are watching Europe being in even worse shape. And the thought was that Europe would be around zero, and so they are going to kind of bounce around this, kind of …

I think that the medium is going to be zero but they’re going to be tiering on recession for the better part of five or 10 years as they apply more meaningful austerity than what the US will have to do.

ME Yeah, I can’t add too much from the macro perspective, I guess just a comment locally. We’re hearing about a number of financial institutions that are about to or have laid off a significant number of people and are not putting that capital to work in the financial markets. So people that I grew up with in the markets are leaving financial services, and there’s discussion that this extended recovery is going to change the way financial companies, the investment banks, operate going forwards. So it’s quite a dramatic time.

TH I think the only thing I would add is that in these environments after these deleveraging cycles – and you’ve seen it after whether it be the Great Depression or in the financial crises of the 1800s – you really see a protracted period of adjustment in this deleveraging.

And interest rates would tend to remain very low in those environments. There’s a high vulnerability to policy errors. Politicians right now in the United States are talking about tightening fiscal policy, and while we talk about entitlement reform and cutting that spending, really cutting short-term spending is not what you want to do when aggregate demand isn’t exactly robust. And so I think the economy for a lot of Amer-

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icans isn’t going to feel like it’s in full recovery mode for several years to come.

STAY SAFE OR TAKE A RISK? MT One last question, and this is maybe one where some people go off the record. Most Australian investors, as we were discussing earlier, seem to be staying in very safe havens, whether it be in cash [or] no one much really getting into the markets in the way that they used to. Knowing what you know, seeing the markets and the economy as they currently stand and the progress in Europe and here in the US, is it a smart call to be staying safe or are they missing opportunities in the market right at the moment?

JM Well it really depends on each individual investor of course, and it’s tough, almost like a physician, to suggest a generic prescription. But I think in general, as someone who grew up in fixed income, I find the world bond market entirely unappealing at the present time. High-quality low yields are just not where absolute total returns are going to be driven for high quality investments over the course of the next several years. We saw last week in the United States the lowest coupon ever for a corporate borrowing, six-tenths of one per cent for a Colgate Palmolive three-year. That does not auger well for absolute total return.

So there are opportunities and there are really two opportunities. We hear from Mark here that one of the big opportunities will be in the distressed arena over the course of the next two to three years. A lot of things have been splashed with the European contagion, which at some juncture will be money good and valuable and we’ll see

recovery in valuations.

And I think the second area is the equity market. We have dividend yields in parts of the world which are superior. For bond yields we have growth opportunities. And we’re seeing almost a miraculous decoupling in large parts of the world of corporate profitability growth. I think these low interest rates are significantly positive, and I think they will be one of the drivers of the economic recovery, particularly, as Tom highlighted, if we end up with the US and maybe other parts of the world with some additional tax incentives, as has been suggested here. So I like generically the equity market, almost as a

money into property as a safe haven is creating its own problems in extremely high housing prices, issues that come not to the extent that the US has had in terms of excess need to borrow, but certainly a lot of money has flown into property and you can read about it constantly.

And so in that sense equities, given what’s going on, I would have to agree carefully is where to segue.

SF Yes, it’s pretty easy to argue that equities are cheap right now, with most developed markets trading between 10 and 11 times earnings. Europe is trading at nine times and it probably

Tom Higgins

strategic hedge, which featured the worst absolute total returns in equities on a global basis in any decade going back to the 1920s; that’s when my records became global. So actually the ‘30s were better for global equities than the last 11 years; I don’t think that’s sustainable. I think the environment is ripe for generically high quality, good ship-type equities to outperform fixed income investors.

ME I absolutely agree that fixed income, whether it’s sovereign debt or corporate debt, is not very appealing. I guess Australia’s penchant for putting

deserves to; I’m not sure I’d point people in that direction. Emerging markets are trading at nine-and-a-half times earnings. So are they missing opportunities? Potentially yes. It is said that we are starting to see an easing cycle play out in emerging markets, and at nine-and-ahalf times earnings, if people start to feel that that’s taking hold and we’re getting back to another wave of growth in emerging markets, I’d expect those multiples to expand the earnings growth. It’s already projected to be double-digit, and we could even see upside there. So there are opportu-

nities. It’s a question of how risky do you want to be and to the extent that a lot of equity investors have just given up faith in equities.

I think at a minimum you can go into those blue-chip high dividend yields; that for the most part corporations have shown a pretty good ability to manage their capital, especially those that are paying big dividends.

And from that standpoint I think those returns are going to be superior to bonds.

I often hear people put the argument that look, over the past 10 years equities haven’t given me anything and bonds have given me a great return, so why would I go to equities. And I think that’s such a failed argument to make, because you don’t take into account the starting point of, where did we start 10 years ago when interest rates were high in general and you got principle appreciation, as rates came down compared to equities which had a high PE multiple 10 years ago.

But if you look at the starting points, today it’s pretty tough to get any principle appreciation from a bond yielding two per cent, but equities again are 10 times earnings, you’ve got a lot of potential in terms of the multiple expansion and also I’d argue some protection on the downside.

TH The first point I’ll make relates to something I said earlier regarding these deleveraging periods, and if you look back to the ‘30s, ‘40s and ‘50s, look how low interest rates stayed for that whole period and the Fed was a player in that market too. But this is not to say that treasuries are an attractive option at the current time. I’m just saying they could remain well bid in these periods. And regulatory reform adds to that

bid because right now under Basel 3 we’re going to be raising core capital requirements, and that’s treasuries effectively for US institutions. Not only that, the Fed wants to even increase it further beyond that, so you’re going to have a buyer for treasuries. I don’t think investors should be out buying them but you’re going to have low rates.

In terms of high-yield bonds, though, I think it’s an attractive alternative for investors to equities. You’re talking yields at the current time of seven to nine percent and default rates are still declining. So I think it’s an attractive option with a decent return. And I’m not sure, I know in previous periods return expectations for equities were 94 per cent or even higher, about 90 per cent range or higher, and I don’t know that that’s still the case. I think a lot of people’s return expectations have come down, because global growth, when you take all the leverage out of the system, is going to be lower and so return expectations are going to have to come down.

So a seven, eight or nine per cent yield on a high-yield bond can be a decent return.

The other place is EM local currency debt, which I think is still very attractive. Fundamentals are sounder and the yields are attractive, especially after this period of volatility. You have to be able to weather that market-to-market because we know Europe is going to be hanging over the global economy for some time. But I still think that those are two attractive options in the fixed income world. G7 debt no.

MT Thank you gentlemen, thank you for your time and for your patience and I’m now turning off the tapes. SR FEBRUARY 2012 * SUPERREVIEW

ROLLOVER

THE OTHER SIDE OF SUPERANNUATION

Ageism shall not worry them AS a more mature chap working amongst a bunch of 20-somethings, Rollover welcomed last month's release by the Financial Services Council of a report covering attitudes towards older workers – ‘Attitudes to Older Workers’.

He was particularly taken by the finding that those older workers earning almost spot-on average weekly earnings – around $75,000 to $80,000 – were more likely to have suffered age discrimination than those earning more.

Now Rollover is no guru when it comes to workplace psychiatry or labour market demographics,

but he reckons that any 55-year old earning $75,000 to $80,000 is probably sitting on a par with a whole bunch of upwardly mobile 20-somethings.

It ought to follow, therefore, that the challenge for the more mature person is to avoid being identified as an impediment to the career advancement agendas of Generation Y. Of course, Rollover has no such concerns, given that he is certain that none of his young colleagues have actually figured out what he does or whether he is actually paid for his attendance. SR

The Perils of Pauline Swingers’ ROLLOVER notes the minor furore created amongst financial planners when Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos was reported as suggesting the Government should not unduly delay the implementation of the Government's Future of Financial Advice (FOFA) changes.

He wonders, then, how this sits with some of ASFA's constituents who have been arguing for sensible transitionary arrangements around the implementation of the Government's Stronger Super initiatives, not the least of which is MySuper.

Some of the same companies required to make serious platform changes with respect to MySuper are also required to make changes relating to the Future of Financial Advice – something which the Financial Services Council has suggested could cost as much as $700 million.

Notwithstanding the state of public opinion polls and election timetables, Rollover is betting the Minister for Financial Services and Superannuation, Bill Shorten, will back appropriate transitionary arrangements for both Stronger Super and FOFA. SR

Funding by the pool ROLLOVER is wondering whether it is a measure of their success – or an indicator of the challenging year ahead – that a number of senior funds management types gave themselves a longer-than-normal break over Christmas and New Year.

Without naming any names, your humble correspondent noticed at least half a dozen who began their leave more than a week before Christmas, and then did not return to their desks until after Australia Day. Given that a number of the major banks were foreshadowing job cuts before January had even got properly underway, Rollover decided to investigate the reasons for the longer-than-usual vacations.

That reason became only too obvious when he ex-

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FEBRUARY 2012

MARCH is lining up as a key month for those in the superannuation industry, with the Conference of Major Superannuation Funds scheduled for Brisbane and the annual Super Review Charity Golf Day scheduled for 14 March.

Rollover is wondering whether, after dominating the Super Review tournament for most of its first five years, AMP will be able to regain the coveted plastic and wooden trophy in 2012.

Given the influx of golfers which occurred when AMP merged with AXA Asia Pacific, Rollover believes there is every chance the boys working in AMP Corporate Super can reassert themselves.

However he understands that Pillar Administration once again has a strong team, and that having shifted camps from Mercer to Deloitte, Russell Mason is looking for fellow swingers in his new locale. SR

amined the Plan for Life data closing out 2011 – and Warren Chant's analysis of superannuation fund performance in December.

The bottom line? If you badly needed a holiday after one of the industry's most challenging years, and you had confirmed the intentions of all your clients, then you couldn't have picked a quieter time than December/January. SR

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