Super Review (April 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 F O R T H E S U P E R A N N U A T 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 R Y

3 SUPER FUNDSMany funds are facing weak organic growth

For the latest news, visit superreview.com.au

12 ROUNDTABLEWhy Stronger Super will be 2012’sbig challenge

21 CHARITY GOLF WARPhotos from Super Review’s annual charity golf day

Despite strong argumentsmounted by the AustralianInstitute of Superannua-

tion Trustees (AIST), leadingsuperannuation industry bar-rister Noel Davis insists theGovernment should legislate toensure all superannuationfunds operate under the sametrustee model.

In a column published inthis edition of Super Review(page 24), Davis claims “thereis no logical basis for the ex-istence of the current differ-ences between retail and in-dustry funds in the way inwhich their directorships areorganised”.

“The applicable legislationfor both models is in need ofreform,” he said.

Davis said some of the areasthat need to be addressed are:

• There needs to be consis-tency in the requirements thatapply to both retail funds andindustry funds.

• It is not appropriate to haveemployer representatives infunds offered to the public.

• At least a majority and, ar-guably, all of the directors shouldbe required to be people who arenot associated with serviceproviders and who don’t, there-fore, have conflicts of interest inmaking investment, insuranceand other decisions.

• The chair should be in-dependent to ensure, amongstother things, that all relevantissues come before boardmeetings.

• Policy committees havenever been an effective meansof providing equal represen-tation and are, generally,pointless.

Davis’ argument is stronglyat odds with those of AISTchief executive FionaReynolds, which she ex-pressed both during the recentConference of Major Super-annuation Funds (CMSF) andlater during a Super Reviewroundtable.

Reynolds told the round-table that superannuationfunds were different to pub-licly-listed companies, andthat while companies had cor-porations law, super funds hadthe Superannuation IndustrySupervision (SIS) Act 1993and trust law.

“That makes the regulationsdifferent,” she said.

Reynolds said that while theprinciples should be the same,the laws were different andshould not be confused.

“Some funds choose to haveindependent directors, and ifthey want them and need themthey should be able to havethem and it should be encour-

aged,” she said. “But I don’tthink there should be some rulethat says every fund must haveone independent director, ortwo independent directors.”

AIST consultant DavidHaynes pointed to the factthat while there had been agood deal of discussion aroundthe make-up of industry fundtrustee boards, there had beenlittle discussion around thecomposition of retail superan-nuation funds boards “wherealmost to a man and a womanthe representatives of thoseboards are employees of theparent financial institution”.

“I would suggest that thereis a conflict that exists therebetween the responsibility as anemployee and their parallel re-sponsibility as a trustee of a su-perannuation fund,” he said.

NGS Super trustee JohnQuessy suggested that it mightin fact be the retail superan-nuation funds which neededreform.

“What I fear is happening isthat there is a situation whereyou did this and it was reallygood and therefore we aregoing to make it compulsoryfor everybody. That’s dumb,”Quessy said. SR

Strong differences have emerged in

the superannuation industry about

the make-up of trustee boards, with

barrister Noel Davis suggesting

common standards should apply,

writes Mike Taylor

Trustee boards issue proves divisive

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MANDATES 2 NEWS 3 EDITORIAL 10 ROUNDTABLE 12 APPOINTMENTS 31 EVENTS 31 ROLLOVER 32

APRIL 2012 Volume 26 - Issue 3

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26 EQUITIESAustralian equities still reflectglobal sentiment

“Some funds choose to have independentdirectors, and if they want them and needthem they should be able to have them.”

Fiona Reynolds

COMPANY INDEXReceived by Type of mandate Issued by Amount

Five Oceans Asset Management Custody Skandia Investment Group $350 million

Delaware Investments Custody MLC n/a

J.P. Morgan Collateral management AustralianSuper n/a

Bravura Administration Prime Super n/a

2 PAGE TWO www.superreview.com.au

SUPERREVIEW * APRIL 2012

Super funds facing weak organic growth: Tria

APRIL 2012 * SUPERREVIEW

By Tim Stewart

MANY of the largest superannuation fundsin Australia are relying on mergers to mask rel-atively weak organic growth, according to a re-port by Tria Investment Partners.

Tria managing partner Andres Baker saidthe report revealed the extent to which fundswere dependent upon mergers to fuel growthin a weak economic environment.

“Beneath the headline growth numbers,

organic growth generated by net inflows re-mains a clear challenge. Strip away growthachieved from expensive merger and acquisi-tion exercises and we are left with some mar-ket participants struggling to keep pace withsystem growth,” said Baker.

While many of the funds that have under-taken mergers are in “market leading posi-tions”, they face the challenge of retaining theircurrent funds under management, Baker said.

The Tria Super Funds Review examined

81 funds across all sectors, with assets undermanagement of over $1 billion. The report is anexpansion of the Tria Industry Fund Review, andallows subscribers to compare the health andposition of super funds from different marketsegments, said Baker.

The report also includes maps of the totalmarket, the impact of mergers, market sharetables, net inflow rankings, insights and trends,and profiles of all 81 funds reviewed, accord-ing to Tria. SR

By Bela Moore

SELECTING stocks based onhigh yields rather than the sharemarket index will provide high-er ongoing income post retire-ment, according to Merlon Cap-ital Partners analyst HamishCarlisle and chief executive NeilMargolis.

Carlisle said most investmentcompanies chose assets based onthe index weight, but selectingthe cheapest stocks as measuredby sustainable dividend yieldacross the market could allowfund managers to provide betteroutcomes for retirees.

He said that while tradition-al investment strategies may dealwith the income and risk objec-tives of retirees, bonds and otherforms of fixed income did not pro-vide ongoing capital accumula-tion and therefore fell victim toinflation.

Carlisle said traditional strate-gies were skewed about 70 percent toward growth assets, withthe majority invested in sharesand around one-third tied to fixedincome investments. Merlon’spost-retirement portfolio holdsapproximately 40 per cent inhedged shares.

Margolis said that because theindex is skewed towards the bigbanks and mining, stock selec-tion based on index weight doesnot diversify a portfolio enoughto effectively manage risk.

“The problem with that ofcourse is you carry a lot of ex-posure to one sector, which is not

necessarily something that youwant from a risk perspective; andyou carry a large equity marketrisk skew as well, which againmay not be what people are try-ing to achieve,” Carlisle said.

He said the skew towards re-sources and banks is the “sin-gle biggest risk” in most post-retiree Australian portfolios, astraditional strategies place onethird of shares in one sectorwhich was a “substantial bet onChina and…a very risky positionto carry”.

Carlisle said that using options,fund managers could avoid thetypical trade-off between risk andyields. He said Merlon engagedin “value investing” by selectingthe top 30 stocks as measured bysustainable dividend yield.

Taking into account frankingcredits, Merlon has provided 3 per cent higher returns com-pared to traditional asset alloca-tion strategies by “titling towardsyield in the portfolio, putting inplace some protection using op-tions and increasing…equity ex-posure”, according to Carlisle. SR

QSuper signs custody deal with State StreetQSUPER has dropped NABAsset Servicing as its custo-dian and signed State Streetas the replacement.

The decision to sign a newagreement with State Streetcame after a six-month tenderprocess from a “range of po-tential custodians”, said QSu-per chief financial officerMichael Cottier.

“State Street stood out fromthe crowd, offering quality,breadth and depth of servic-es, advanced technology, andglobal capability,” Cottier said.

The new custodian will pro-vide services such as unitpricing, compliance monitor-ing, alternative asset report-ing and tax services for QSu-per’s $32 billion in globalinvestment assets, said Cottier.

State Street Global Servicesvice president, head of sales,Greg O’Sullivan said StateStreet’s proprietary technolo-gy gave it an advantage over theother custodians in the market.

“We own the build, we own

the development, and we ownthe maintenance [of ourtechnology] – which gives usincredible flexibility,” O’Sul-livan said.

State Street now servicesaround $80 billion in Australiansuperannuation assets. Sun-Super, REST and NGS Superare also clients of State Street.

A transition plan will nowtake place as the custody ofQSuper’s $32 billion in assetsis handed over to State Street,said O’Sullivan.

“We work with the clientand we work with the in-cumbent. Everybody goes intothat process with the right at-titude. Everybody’s focusedon mitigating risk for theclient and for themselves,”said O’Sullivan. SR

JP Morgan picks up collateral management mandatesCONCERNS about counterparty credit risk haveprompted AustralianSuper to appoint JP Mor-gan to provide end-to-end third party deriva-tives collateral management.

JP Morgan has also won mandates to providecollateral management services to three NewZealand superannuation funds: New ZealandSuperannuation Fund, Government Super-annuation Fund Authority and National Prov-ident Fund.

Recent volatility and counterparty defaultshave driven home the need for “appropriatecollateralisation of counterparty exposures forsuperannuation funds and asset managers”, ac-cording to JP Morgan Asia Pacific head of col-lateral management Blair Harrison.

JP Morgan has also announced a $30 millioninvestment in technology solutions for insti-tutional investors in Australia, with the stagedroll-out of the Global Funds Servicing Platform.

Recent enhancements that have gone liveglobally include: a performance engine thatincludes mobile iPad reporting; investmentanalytics and a portfolio risk system; over-the-counter derivatives risk processing; a recon-ciliations platform; and an application for au-tomated processing of managed fundstransactions.

JP Morgan Worldwide Securities Serviceschief executive Mark Kelley said JP Morganrecognised the importance of the “dynamic andfast growing” Australian market.

“Australian clients are sophisticated and theywant an increasingly broad array of servicesfrom across the bank – whether that be cus-tody and securities services or access to glob-al banking capabilities such as structured prod-ucts, research capabilities or leveraging theintellectual property of our investment bank-ing teams,” said Kelley. SR

www.superreview.com.au NEWS 3

Greg O’Sullivan

Neil Margolis

Providing ongoing incomefor retirees: Merlon


By Andrew Tsanadis

INVESTMENT managers based inAustralia may need to evaluate theircurrent reporting systems ahead ofwide-reaching US-based reform, ac-cording to DST Global Solutionsglobal head of asset servicing GeoffHarries.

Harries said that with such alarge client base across a numberof countries, DST Global needs tocut fairly broad when it comes tomarket regulation.

In regards to the taxation issuesrelated to the Foreign Account Tax-ation Compliance Act (FATCA), hesaid it is important for Australianinvestment managers to have aclear understanding of UnitedStates fund structures.

Although FATCA is a US-basedstatute, he said the regulatory effectscould have global implications.

“Within DST systems’ productportfolios there will be a larger im-pact on the street side of the equa-tion, which is more the unit registrytransfer agency,” Harries said.

He said the impact of the legis-lation will have an effect on DST’sHiTrust and Blue Door offerings.

“It (FATCA) is definitely some-

thing that we continue to track asthe regulation shapes up – in termsof looking at the implementationtimeline, it will move through 2013all the way though to 2017,” he said.

According to Harries, Australianinvestment managers may need toeventually add an extra level of re-porting capabilities over their cur-rent processing capabilities.

He said the amount that needsto be invested to upgrade currentsystems will depend on the vol-ume of exposure that investorshave to the underlying position ofan investment.

“There will be a tipping point wherethere needs to be a systematic solu-tion as opposed to a manual pro-cessing intervention,” he said.

In relation to the Dodd-FrankWall Street Reform and ConsumerProtection Act, and its aim to makethe derivatives market more trans-parent, Harries said there wouldneed to be a review of derivativesoperations, specifically in the areaof implementing central clearingand dealing with intra-day margincalculations.

While he conceded that out-sourcing middle-office functionali-ties “runs on pretty thin margins”,Harries said that outsourcers needto offer better services in relationto unit processing and areas of cor-porate actioning processing, inorder to reduce operational risk andto make sure the operational con-trols are robust and secure. SR

Super funds regain2011 losses, andthen someBy Tim Stewart

THE median growth su-perannuation fund re-turned 4.3 per cent in thefirst two months of 2012– more than recouping thelosses suffered in 2011, ac-cording to Morningstar.

The gains in the begin-ning of 2012 reflect thestrength of growth assets so far this year, withthe ASX 300 Accumulation Index rallying by 7.3 percent and the MSCI World Ex Australia Index up 4.5per cent, according to Morningstar.

The legacy of the global financial crisis is stilllooming over superannuation fund returns, withthe average super fund losing 23.7 per cent overthe 2008 calendar year.

According to Morningstar, the average growthfund requires a return of 14 per cent over the 2012calendar year to fully recoup the losses of the glob-al financial crisis.

“Over the five years to 29 February 2012, the me-dian growth manager had an annualised returnof 0.3 per cent. Ten-year figures show a modest an-nualised return of 4.8 per cent,” said Morningstarresearch products manager Peter Gee.

“The best-performing growth managers over thethree years to 29 February 2012 were Schroder(13.2 per cent), followed by Legg Mason Balanced(12.0 per cent), and CFS Growth (11.7 per cent),”he added.

When it comes to the top performing Australianequities funds for the year to 29 February 2012,Lazard Select came out top of Morningstar’s re-view (returning 5.4 per cent), followed by Ben-nelong Concentrated (3.7 per cent) and InvestorsMutual (1.8 per cent).

The best performing Australian equities strate-gies for February 2012 were Legg Mason Value (6.5per cent) and Lincoln (6 per cent).

CFS Future Leaders was the best-performingsmall cap manager for the 12 months ended Feb-ruary, returning 13 per cent. BT’s small cap strat-egy returned 9.1 per cent for the year to 29 Feb-ruary 2012, and 14.4 per cent for the month ofFebruary.

International equities were best handled by Mag-ellan for the year to 29 February 2012, with a 10 percent return. T. Rowe Price and Zurich GlobalGrowth were the top performers in February – bothreturning 5.3 per cent for the month.

APN, SG Hislock and Challenger were thebest fund managers when it came to listed prop-erty for the year ended February 2012; while Mac-quarie, AMP and Perpetual were top dogs whenit came to fixed interest strategies for the year. SR

Robeco launches Australian office By Bela Moore

NETHERLANDS-BASED asset firm Robeco has an-nounced the opening of a Sydney office focused ondriving institutional sales to Australia’s domestic assetmanagement industry. The Australian operation willbe led by Stephen Dennis, former head of institu-tional business at Aberdeen Asset Management inAustralia.

Robeco aims to translate its success in Europe andAsia to the Australian institutional investment mar-ket by focusing on alpha-oriented strategies such as sus-tainable and responsible investing, quantitative, Asia-Pacific and alternative capabilities.

“There are tremendous opportunities in the Australianmarket for an established asset management firm suchas Robeco, which mixes deep research with long-termclient focus, an innovative product range and a proventrack record,” said Tony Edwards, chief executive of-ficer of Robeco Asia-Pacific.

Dennis, who reports directly to Edwards, will head

a two-man team from the Rabobank offices in Sydney.Prior to working at Aberdeen Asset Management, Den-nis was the head of institutional sales at Deutsche AssetManagement in Australia.

Robeco’s Hong Kong office will leverage sales and offeroperational support to the Sydney office as part of abroader Asia-Pacific strategy. SR

Australian investment managers mayneed to review reporting processes

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By Mike Taylor

AUSTRALIANS are still baffled by the jargon surroundingsuperannuation, according to new research released byVirgin Super.

The research found that the confusion around jargonwas acting as an impediment to people engaging with theirsuperannuation.

The research is the result of a survey conducted byGalaxy Research of 1,010 Australians, and has been usedas the basis of a call by Virgin for a review of superan-nuation industry terminology.

It said the research had conclusively demonstratedthe existence of a link between jargon and consumer ap-athy, with three in four respondents saying that superterminology acted as a barrier to them engaging withtheir super fund.

Commenting on the outcome of the survey, Virgin Moneycommercial director David Curneen said disengagementin the face of jargon was particularly evident amongthe younger age group.

“A review of super industry terminology would deliver ben-efits to Australia, and the research demonstrates that the vastmajority of Australians support his idea,” he said. SR

SCT urges trustees to better educate membersTHE Superannuation Com-plaints Tribunal (SCT) has urgedfund trustees to better educatetheir members about things suchas insurance entitlements andbenefits.

In the SCT’s most recent bul-letin, SCT chairperson JocelynFurlan has pointed to the latestdata on complaints handled bythe tribunal and commented that,“at first glance, the figures sug-gest that trustees could poten-tially reduce complaints by almost20 per cent by better educatingmembers about insurance enti-tlements and premiums”.

“Interestingly, anecdotal evi-dence suggests that just as manymembers complain about un-wanted insurance as those whocomplain that they are not cov-ered, but that would just seem tounderline the need for improvedcommunication in this area,” herbulletin said.

Furlan said that it seemed to

the tribunal that targeted mail-outs to “at risk” groups, such aspart-timers and casuals, or high-lighting sections of regular dis-closures for these groups, mightgo some way to reducing the num-ber of complaints that trusteeshad to deal with.

She said that another exam-ple of an “at risk” group was de-fined benefit members ap-proaching retirement.

“It is clear to the tribunal thatthese members need to be betterinformed about the treatmentof their benefits from the datetheir service ceases to the datetheir benefits are paid or rolledover,” she said.

Furlan said the tribunal wasworking towards providing moredetailed information aboutthese types of complaints in thefuture. SR

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Mike Taylor

THE Federal Opposition hassought to make the handling offund transfers and rollovers by in-dustry superannuation funds anissue.

The issue has been raised byTasmanian Liberal Senator DavidBushby, who has placed a series

of questions on the Senate noticepaper directly aimed at deter-mining the time industry fundstake to handle rollovers andtransfers, as well as the indus-try average.

The questions, directed at theAustralian Prudential Regula-tion Authority (APRA) via therelevant minister, ask the status

of funds taking less than 30 daysto roll money over to a differentfund or to a member following amember’s request.

As well, they ask “what is theextent of non-compliance, list-ed by industry segment?”.

Bushby has also asked whetherthe industry fund sector gener-ally takes significantly longer than

the retail fund sector in arrang-ing and administering rollovers.

The questions appear to fol-low on from long-running accu-sations within the financialplanning industry that industrysuperannuation funds takelonger than their retail fundcounterparts in handling mem-bers’ rollover requests. SR

ETFs superior tofutures over longerterm: State StreetINSTITUTIONAL investors looking for longer-term exposure to Australian equity markets mayfind exchange-traded funds (ETFs) more costeffective than futures contracts, says StateStreet.

Currently, many super funds are holding theirexposure to Australian equities through futurescontracts – typically through an external man-ager – and rolling them over every three months,according to State Street Portfolio Solutionsvice president Michael Putica.

“Many of our clients have them there forliquidity purposes. And the question came up:does this make sense for a lot of the super funds,because they’re giving up a lot in regards tofranking credits,” said Putica.

According to a State Street Global Marketsreport comparing the benefits of ETFs andfutures, Australian equity ETF investors canutilise franking credits associated with dividendssince the vehicle is backed by a physical stock.

“Funds have been paring back and realis-ing that there are opportunity costs of hold-ing exposure in futures, because they are miss-ing out on something – particularly withAustralian equities, because of the frankingcredits,” said Putica.

“Additionally, capital gains from ETFs canalso receive favourable tax treatment againstfutures,” according to the report.

The State Street report compared StateStreet’s SPDR S&P/ASX 200 ETF with the ASXSPI 200 Index Futures Contract, and found thetracking error was much higher for futures (50basis points) than the ETF product (10 basispoints).

Institutional investors can also lend out theirAustralian equities ETF holding to other in-vestors to generate extra income, said Putica.

Although the State Street analysis only lookedat the one ETF, Putica said the points aboutfranking credits and capital gains could be gen-eralised to all Australian equity ETFs. SR

APRA research confirms benefits of scaleTHE Australian Prudential Regulation Authority has de-livered new research which seems to confirm the bene-fits of funds merging and achieving the benefits of scale.

According to the research, size definitely matters in termsof driving cost benefits.

The research, contained in a paper developed by DrJames Cummings titled Effect of fund size on the per-

formance of Australian superannuation funds,

found that larger funds, both in the not-for-profit and retailsectors, had significantly lower operational expense ra-tios to net assets.

It said this finding suggested that larger funds were ableto spread fixed costs associated with administration and ITinfrastructure over a larger asset base.

“Furthermore, not-for-profit funds with larger accountbalances per member have significantly lower opera-tional expense ratios,” the paper said.

It said this suggested that not-for-profit funds withlarger member balances were also able to reduce vari-able costs, such as those associated with member interface

and insurance claims management.The paper said that while they benefited from spreading

fixed costs over a larger asset base, retail funds did notrealise any reduction in variable costs from administer-ing larger member balances.

“In sum, this paper provides strong evidence that the per-formance of not-for-profit superannuation funds improveswith fund size,” it said. “Based on this evidence, fund mem-bers are likely to benefit from further industry consolida-tion in the not-for-profit sector.” SR

IFM launches low carbon/ESG strategyBy Tim Stewart

INDUSTRY Funds Management(IFM) has announced an environ-mental, social and governance(ESG) and low carbon strategy thatdraws on IFM’s indexed Australianequities process.

The new strategy is designed tohelp institutional investors reducetheir exposure to companies thatpose ESG and carbon risks, accord-ing to IFM listed equities executivedirector Aidan Puddy.

“A low carbon version of a portfo-lio can be engineered to deliver 50 percent of the carbon emissions of anequivalently sized portfolio invested inthe S&P/ASX 200 Index,” said Puddy.

Industry fund HESTA is one of thefirst institutions to take up the strat-egy, having already awarded IFM a

$100 million mandate.The strategy utilises MSCI ESC

Research’s quantitative dataset andresearch to integrate ESG factors

into the investment process, ac-cording to IFM.

“We chose MSCI following an in-depth analysis of a number ofproviders, based on data quality, cov-erage and methodology,” said IFM list-ed equities director Laurence Irlicht.

“MSCI consistently rates highly oneach of these measures,” he added.

IFM director of sustainability andresponsible investment, AzharAbidi, noted the significant risksthat ESG and carbon issues can cre-ate for investors.

“Listed companies face potentialcost impositions from carbon pric-ing, as well as from poor governance,labour relations or environmental prac-tices. In a rapidly changing regulatoryenvironment, IFM is committed to giv-ing investors the strategies they needto invest responsibly,” said Abidi. SR

Federal opposition targets rollover performance


David Bushby

Remaining independent and apolitical

Due to the time framesdictated by FederalGovernment’s Stronger

Super agenda, the public ser-vants working within theAustralian Prudential Regu-lation Authority (APRA)ought to be very busy overthe next 18 months.

Indeed, the deputy chair-man of APRA, Ross Jones, wentto some trouble to outline tothe recent Conference of MajorSuperannuation Funds(CMSF) just how busy his or-ganisation would be, saying hebelieved that the deadlines,while tight, were achievableboth for APRA and the super-annuation industry at large.

As busy as APRA must be,Jones and his boss, APRA chair-man John Laker must havebeen very disturbed to read aletter published in the Aus-tralian Financial Review from

Tasmanian Liberal SenatorDavid Bushby lamenting thatthe regulator had not deliveredon range of questions and re-quests he had made during Sen-ate committee proceedings.

Bushby, who has not beenthe least bit shy about direct-ing criticism at APRA, sug-gested that the organisationshould be more focused on di-recting time and resources to-wards addressing its core tasks.

In doing so, Bushby was re-ferring to the time and effortAPRA had clearly been di-recting towards research, andin particular, a research paperdeveloped by Dr JamesRichard Cummings on the “Ef-fect of Fund Size on Super-annuation Funds”.

The essential bottom lineof Dr Cummings’ research wasthat size matters, and that su-perannuation funds withscale do better than thosewithout scale.

The abstract said: “Largernot-for-profit funds have high-er allocations to investments,such as private equity and realestate, where they are likelyto have a size-related advan-tage. Lower investment ex-pense ratios of larger not-for-profit funds suggest that they

negotiate more favourable feeschedules with external man-agers. Larger funds (whetherretail or not-for-profit) realisesubstantial operational costsavings. However, fund sizedoes not have an overall pos-itive impact on the perform-ance of retail superannuationfunds.”

Followers of Cummings’ re-search might have recalled hiscontribution to an APRA Work-ing Paper published in 2011that found not-for-profit su-perannuation funds earn high-er risk-adjusted returns thanretail superannuation funds asa result of their higher allo-cations to illiquid investments– for example, private equityand real estate.

Now there is absolutelynothing wrong with a chap likeDr Cummings undertakingsuch research, but a largequestion mark ought to hangover the appropriateness of hisundertaking such work as anemployee, and therefore rep-resentative of a financial serv-ices regulator which ought tobe beyond reproach in terms ofbeing both independent andapolitical.

A number of questions havebeen raised about the role

APRA plays in collecting dataand statistics across the fi-nancial services industry andwhether this ought not be atask more properly undertak-en by the Australian Bureau ofStatistics.

Given the nature of financialservices and the value whichcan be gleaned from particu-lar data sets, it is possibly ar-guable that APRA should retainits role in financial servicesstatistical collections, butthere seems little to no justi-fication for conducting the typeof work undertaken by DrCummings.

Given his background inacademe, someone such asAPRA deputy chair Jones mightargue that contributions suchas that made by Cummings holdvalue in terms of stimulatingdiscussion and debate, butagain, that is not the role of aregulator and certainly not oneto which extensive funds shouldbe directed.

If APRA had wanted to stim-ulate debate, it could have pro-tected its independence bysimply commissioning researchfrom someone within an aca-demic institution.

Over the past decade and ahalf, there has been a dis-turbing blurring of the lineswith respect to the appropri-ate role of the financial serv-ices regulators – such that alltoo often they have soughtto be players in the policygame rather than servants of

a government charged withpolicing the regulations.

This blurring of the lines isas much a product of bad gov-ernment practice as it is of em-pire building and ego withinthe regulators themselves.Over time, the notion of theregulators being the servantsof government policy has givenway to the practice of treat-ing them as stakeholders ca-pable of being trusted not onlyto interpret the law into reg-ulation but to police it.

To date, nothing untowardhas occurred as a result of theblurring which has occurredaround the role of the finan-cial services regulators, butthe Gillard Government andits successors need to be con-scious that while there hasbeen intense scrutiny of thefinancial services industryand a significant rewritingof the ground rules, no simi-lar scrutiny has been appliedto the regulators.

In any review of the APRAand the Australian Securitiesand Investments Commission(ASIC), a good starting pointwould be determining whetherthe two bodies sufficientlycomply with the underlyingtenets which guide the Aus-tralian Public Service. Key el-ements of such compliance areremaining independent andapolitical.

In these circumstances, theregulators would be best advisedsticking to their knitting. SR

Regulators are playing a dangerous game when they

appear to be dabbling in debates rather than serving the

interests of Government and policing the industry.

Mike Taylor


10 EDITORIAL www.superreview.com.au

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MT: Okay, welcome everyoneto the Super Review/CMSFroundtable. I don’t know howmany people here were at thesessions yesterday with the reg-ulators, but Ross Jones, thedeputy chair of APRA, was es-sentially saying that the im-plementation timeframe forStronger Super was very tightbut immensely doable, orwords to that effect – I mightbe misquoting him a little.

On that basis I thought I’dput that as the first question:that is, whether in fact thetimeframes of Stronger Superare doable. I thought I’d throw

to Peter Beck, who has prob-ably got more skin in the gamethan most as an administrator,so Peter?

PB: Thanks Mike. I guess weas administrators, whateverthe rules are, we have got to getthem perfectly right and wehave got to build them intocomputer systems, and every-one always underestimateshow long that takes. So we al-ways ask to be given enoughtime between when the rulesare actually finalised and whenwe have to implement them.

A lot of people think if they

tell you it’s coming, that youcan get yourself ready to im-plement, but in fact you can’treally do anything until you ac-tually know what the rules are.So there generally needs tobe more time between whenthe rules are completed andwhen we have to implement.

I agree totally it’s very tight,whether it’s doable or not de-pends on whether APRA, andASIC to a lesser extent, butmainly APRA, actually finalis-es the guidelines and the rulesin sufficient time to give us agap to be able to implement it.

DH: All of what you say is cor-rect Peter, but it’s also in thenature of the superannuationindustry to be preparing for su-perannuation change wherewe don’t know all of the infor-mation until the change isabout to happen. I recall withthe implementation of tax filenumbers in 1996, the require-ment to notify members aboutthe change actually came ei-ther at or before the time of theregulations about how youcould contact members wasadvised, and there were awhole range of system changesthat had to be made without

knowledge of the regulations.It’s a very unsatisfactory

arrangement, it’s certainlynot something we’d want.The position Peter puts is en-tirely accurate, but the su-perannuation industry has atradition of actually steppingup and getting things doneon time and in a way that iscompliant, albeit it is witha run to the winning post.

FR: I think there’s no doubtthat the timetables are verytight, and it’s a shame that so

Stepping up to the plate

Continued on page 14 ☞


12 ROUNDTABLE www.superreview.com.au

PRESENT:MIKE TAYLOR - MANAGING EDITOR, SUPER REVIEWFRANK CRAPIS - EXECUTIVE MANAGER WHOLESALE,

RISK PRODUCTS, COMMINSURERUSSELL MASON - PARTNER, DELOITTEJOHN QUESSY - TRUSTEE, NGS SUPERPETER BECK - CEO, PILLAR ADMINISTRATIONDAVID HAYNES - CONSULTANT, AISTFIONA REYNOLDS - CEO, AIST

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many things have been held up,but I don’t think we want todelay the reforms. I thinkthey’ve been going on longenough, but that’s not to saythat there might not be ele-ments in the overall packagesof the reforms that, if thingsdon’t happen in the right time-frame, that wouldn’t need to bepushed out.

But I don’t think we want tojust say ‘let’s delay everythingby 12 months’ or something likethat. Just let’s get moving andif there are different parts thatwe need to have pushed back,let’s just push those parts back.

FC: The key message that I gotwas that really it was about theplanning and getting ready andgetting the resources ready be-fore the key dates come intoplace. I understand your pointPeter, when the regs come outand the legislation comes out,it’s not really going to go intothe detail that we expect it togo into to be able to help us runour business.

So we, as an industry, needto get together and really refineand understand the key risksthat will come out of the leg-islation so that we are prepared,so that we can plan and havethe resources available.

RM: And yet it will be the ad-ministrator that gets the blameif things don’t go right. It’s re-ally easy, it’s easy for trusteesto make a decision in a sim-

ple meeting about what MySuper is like. It’s relatively easyto change the insurances, butI have sympathy for Peter’s po-sition because the administra-tor has a huge amount of backoffice work to do, and they willbe the ones that get pinged ifthere’s some element that does-n’t comply.

So I think there’s two verydistinct groups upfront for thetrustees, for the executives. Ithink My Super for many funds,especially DC industry funds,will be reasonably straightfor-ward, but I can certainly sym-pathise with Peter’s point ofview as far as the back office

compliance, which has the po-tential to be significant.

PB: I agree with you that wealways step up to the plate anddeliver, but sometimes it’s avery inefficient delivery. If wedo it once and then we findit wasn’t quite right, we haveto then refine, and it’s not ex-actly like the administratorhas got big margins to actu-ally be inefficient.

So the more time we get toprepare, the better, and we areat end of the chain, so what-ever regs come up, the trusteeoffice still has to decide howthey are going to implement

them. Then, when they havemade their decision and theytell us, then we’ve got to im-plement it. So you know, thebigger the gap the better, thefaster we can move, the fasterwe can at least nail the basics,and at least we can get on withthe planning.

DH: And I guess in this casePeter it’s also overlaid withsome lack of certainty aboutwhat’s going to happen in re-lation to account consolidation,and what impact that is goingto have on administrator rev-enues. So you are planning formajor changes in an environ-

ment where the number of totalsuperannuation accountsmight significantly decrease,perhaps by a factor of 10 mil-lion accounts.

JQ: I find myself in the rather,almost unique position, Mike, ofagreeing with people. I certain-ly agree with the position thatFiona put, and I have great sym-pathy for Peter’s concerns fromthe administrator’s point of view– being a trustee, what you wantis your administrator to get itright. We become very impatientwhen they don’t, and when



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MT: I will change the topic abit, and in fact it relates tosomething Fiona said yester-day at the opening plenary,which was the make-up oftrustee boards, and the ques-tion of whether the same rulesthat apply to publicly-listedcompanies ought to apply toall superannuation?

I knew it was a compellingquestion and I heard whatFiona had to say and I knowwhat drove what she had tosay, but I’d like to know whatthe panel thinks of the generalview, particularly, I guess,

being put out there by the FSCwith their latest issuance.What is the view of the panelon the make-up of the boards?Should uniform rules applyacross companies and super-annuation funds, or do super-annuation funds stand assomething which are distinct-ly different?

FR: Well, superannuationfunds are different from pub-lic companies. While publiccompanies have got corpora-tions law and we have corpo-rations law, we’ve got SIS and

we’ve got trust law. Thatmakes the regulations differ-ent.

What often comes up abouttrustees is that they are not in-dependent, but when you aretaking about the ASX, and youare talking about companies,the whole concept of inde-pendence is being independ-ent of management. The di-rectors of funds in the not-forprofit sector are independ-ent of management. They arewhat you would term in a pub-lic company space, well, non-executive directors.

So people are trying to fitthe rules around public com-panies around here. Now theprinciples should be the samebut the laws are different, andpeople shouldn’t confuse thetwo. But absolutely, I think theprinciples of good governanceshould apply across all ele-ments of every kind of busi-ness and superannuationfront.

PB: I’ll just make one pointwhich is, I think, what makessuper unique – the fact thatwe hold money in trust forother people. And just with mybackground in life insurance,life insurance is very similarto that, so fundamentally Ithink it’s hard to argue thatsuperannuation and life in-surance regulation shouldn’tbe similar.

I think there is an argu-ment about life insurance ormoney being held in trust andpublic companies, that theyare two different levels ofgovernance. Now having saidthat, when you have money intrust for someone, you actu-ally need a higher level ofgovernance, not a lower levelof governance.

JQ: I don’t look past the sole-purpose test, and that is thatif you’ve got to act in the bestinterests of members you’vegot to know the members.Bringing someone onto aboard who has no particularbackground with the mem-bership, who doesn’t know

what their aspirations are,who likely doesn’t even knowwhat their earnings are, whodoesn’t know the pattern oftheir work or anything else –if these are relevant things,and in our industry I thinkthey are – then how does thathelp anyone?

FR: That’s right, why do youwant to have people who areindependent..?

JQ: Because independent, dis-interested, well I don’t wantsomeone who is disinterested.

FR: Independent of yourmembership, why do you wantto be independent if you…

RM: Well you assumed John,I have to disagree with you,you assume their disinterest.One would assume that ifsomeone is coming on theboard of a company or atrustee, that they are going tobe interested persons.

Secondly, all that informa-tion can be found out. If youor I went on the board of abody that we weren’t famil-iar with, I’m sure the initialtime we’d spend doing re-search learning as much as wecan, and there’s analytics,there’s data out there thatwould help you understand.

JQ: You are still fixing some-thing that isn’t broken.

www.superreview.com.au ROUNDTABLE 15


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Governance within industry funds





there’s a need for tinkeringafter the event, and there willbe because it’s going to addcosts, there’s going to be mis-takes, it’s going to be frustrat-ing.

We just know all of thosethings and it’s doubly frustrat-ing to be sitting here at thisstage knowing that there is ahuge likelihood that there’sgoing to be a bit of a mess. Itwill be delivered, it will work,but it won’t be perfect firsttime.

Well, it would be great if itis, but I don’t have that sort offaith, and people will start get-ting very cross with each otherbecause things are not quitethe way they should be. ThenI think there’s another di-mension from the administra-tor’s point of view. The ad-ministrator is going to bedealing with X number offunds, all of whom want some-thing slightly different, andthey’ve got to get that intotheir platform. I don’t wantto be an administrator.

FR: And it may be the thingsaround administration thatneed to be pushed out.

JQ: But I certainly agree, Ithink we’ve all had enoughnow, it’s pick a date and let’sjust go.

DH: But there is a third el-ement to all of this, and thatalso adds to both the bene-fits and the challenges foradministrators, and that’sthe implementation of Su-perStream, which will alsobe rolling out through 2013,2014, 2015, and that will alsoinvolve major administrationchanges. So just in the fewminutes that we’ve beentalking about it, we’ve beentalking about three very sig-nificant, but very differentchanges, each of which isgoing to put significant pres-

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FR: Yes, and I think in the su-perannuation industry whatwe need to be able to have arethe principles and flexibility.Some funds work perfectlywell with no other directorsexcept those appointed on theemployer and employee side.Some funds…

JQ: By the shareholders.

FR: Some funds choose tohave independent directors,and if they want them andneed them they should be ableto have them and it should beencouraged. But I don’t thinkthere should be some rule thatsays every fund must have oneindependent director, or twoindependent directors, or letfunds working with the regu-lator decide what are the skillsthe board needs? Do the peo-ple that are on the board havethem? Can we get themthrough this mechanism, or dowe need to do something else?

A lot of funds don’t just usethe board to bring in differentskills, they use their committeeprocesses. So if they say, “well,we think we need some moreparticular skills in invest-ments”, they might bring insome other people to be in theinvestment committee, orequally the administration com-mittee, or something like that.

I’m not saying that our sec-tor can’t do better, we can al-ways improve what we aredoing, but it’s pretty hard toargue that our system of gov-ernance doesn’t work when weare the top-performing sec-tor year after year, decadeafter decade. So I think peo-ple need to show evidence,compelling evidence of theneed for some radical change,and that evidence doesn’texist.

DH: And I think it’s very tellingthat there isn’t an argument,a public argument, or hasn’t

been much of one about thecomposition of retail super-annuation fund boards wherealmost to a man and a womanthe representatives on thoseboards are employees of theparent financial institution.

I suspect that in a lot ofcases they have got KPIs tomaximise the profit of thatparent financial institution. Iwould suggest that there is aconflict that exists there be-tween that responsibility as anemployee and their parallel re-sponsibility as a trustee of asuperannuation fund.

PB: You don’t see too many su-perannuation funds going tothe wall, but a hell of a lot ofpublic listed companies dofrom time to time. I would beinterested in your views onthat, Russell.

RM: And I agree David, and Ithink just because reform issuggested in one sector, othersectors shouldn’t be excluded.I agree with you, I think in theretail space there are clearconflicts of interest that needto be addressed.

I think we, in the wholesaleindustry, have to be carefulhowever about the perceptionout there, and that we arefighting back against some-thing that might not neces-sarily do any harm. I’ve beeninvolved with a number offunds that have got inde-pendent directors, and cer-tainly it hasn’t detracted fromthe performance of the board.

So if I’m a member of a fund,do I perceive that having an in-dependent there gives me a bitmore security? Perhaps, some-one who hasn’t got a vested in-terest on either side. As I say,with the funds I’ve seen thereare a number that have got in-dependent shares that workswell, or an independent di-rector who brings a set of skillsthat doesn’t exist on the board.At the same time I agree withyou, a reform of the entire su-

perannuation industry, in-cluding all sectors, retail, issomething on the governmentsides of things that the gov-ernment needs to look at. I doagree with.

PB: I think we are singing offthe same hymn sheet. The lifeinsurance companies too, justto make sure they don’t getmissed. Life insurance com-panies always have had inde-pendent directors, for a num-ber of years now. I don’t thinkthe superannuation funds,their responsible entities, havegot independent directors inretail – I think that’s what youwere talking about. I knowthere’s a move, and I don’tthink the retail funds are re-sisting putting independent di-rectors…

JQ: Some retail do have in-dependent directors, there’s amixture and I know some outthere do. It works well, itwould be nice to see it …

PB: Absolutely independent isthe wrong word, when we talkabout this and get emotional.It’s about conflicts, so maybethe definition needs to beturned around and to talkabout directors who are notconflicted.

JQ: There’s an assumptionthat there’s a conflict, or a con-flict of interest. If there is ex-ample of that I want to seethem. No one’s been able toproduce them.

DH: There’s the issue in retail,where the executives or di-rectors of a company are con-flicted…

PB: I was suggesting that ifNGS Super, for example, said,‘We are going to change ourboard and it will be made upof the CEO, who will also bethe chair, and the operationsmanager will be a trustee, andthe marketing manager will bea trustee’, there would be anenormous hue and cry. Andthat’s exactly what happens inthe retail sector, it’s some-what…

JQ: So it’s probably the re-tail sector that needs re-form? It’s not this sector? Imean, we have the capacity,and sometimes some indus-try funds have done it, to ei-ther appoint independentchairs or other directors –and as Fiona said, to pick upperceived missing skills atan investment committeelevel, if that’s where youthink you might be lacking,or insurance, or whateverit might be.

Those capacities exist andare utilised by some fundsfrom time to time. If it worksfor them, that’s great, but whatI fear is happening is thatthere is a situation where, “youdid this and it was really good,therefore we are going to makeit compulsory for everybody.”That’s dumb.


“What I fear ishappening is that

there is a situationwhere, ‘you did this

and it was reallygood, therefore weare going to make it

compulsory foreverybody’. That’s

dumb.”– John Quessy




sure on administrators.

PB: I agree.

DH: However, if we zoom outit’s not just a matter of the dif-ficulties of change, it’s also aquestion of putting this in thecontext of the Government leg-islating to increase the amountof mandated contributions thatcome into the system, the gov-ernment putting superannu-ation at the same level of pru-dential regulation as bankingand insurance, and helping theindustry to actually have ad-ministration platforms that willbe world-class and will leadto savings of billions of dol-lars a year.

So it’s not all doom andgloom, in fact it’s the opposite,it’s an enormous opportunityfor the superannuation indus-try as it matures.

AUTO-CONSOLIDATION – HOWHARD WILL IT BE?MT: Well, one for the insur-ers and I guess and the ad-ministrators again, is the ques-tion of auto-consolidation: andI say for the insurers on thebasis that at a previous round-table, I think last year, wherewe had the argument that saida lot of people had multiple ac-counts simply because theywanted to maintain some veryseriously good insurance ben-efits. So I just ask, have theygot the framework right forauto-consolidation? Or do youthink there still needs to besome tinkering at the margin?

FC: Right, I think going backto the point I raised earlier,there isn’t anything in thelegislation that’s going to out-line exactly how the auto-con-solidation will occur from theinsurance point of view. Thetwo or three key risks in thereare, once it moves to 1,000[dollars] it’s generally fine, be-cause I think that with theauto-consolidation of accountsless than 1,000 there won’t be

too many accounts there anec-dotally which will have the in-surance impacts.

It’s once it moves to 10,000that I can see that it will havea major impact on thoseaccounts where membershave multiple accounts. Thequestion really is around, ‘sowhat will be the process?’What will be the process thatwill be followed when thoseauto-consolidations of thoseaccounts occur from aninsurance point of view?

If you look at the processtoday, you’ve got eight or nineinsurers out there and they alloffer this choice of wheremembers can consolidatetheir insurance balances; butif you look at all the processit’s eight different processesand there’s no one uniformway of actually consolidat-ing insurances today. Behindthose eight insurers there areabout six or seven differentreinsurers who have differentpractices again, and will in-fluence the way auto-consol-idation occurs today.

So for me, the first pointis about the process. Theprocesses aren’t uniform andthat’s going to be one of themajor hurdles that we willneed to overcome as an in-dustry in terms of getting alltogether and ensuring thatwe’ve got a uniform individ-ual transfer process.

The second would be, yes,obviously through the admin-istration, Peter. I mean thepressure will then come backthrough to yourselves as ad-ministrators in terms of whatwill happen when consolida-tion occurs, but the thirdbiggest point would be morearound [the question], “sowhen does insurer A go off riskwhen that member decides tomake that choice and moveto fund B under insurer B?”

So in terms of the benefitsprovided, if they can transferthe insurance across, whendoes it go off risk from insur-

er A to insurer B? That’s quiteeasy when we are just talkingabout death cover, but whenwe are talking about terminalillness and TPD and IP, that’swhere the devil in the detailstarts coming through. It’sgoing to be a major challengefor the industry to outlinewhen risk moves from insur-er A in fund A, to insurer B infund B. So…

PB: Yes, so I will agree withFrank, auto-consolidation isprobably going to start quiteeasily. I’ve got to say I don’tlike the word auto-consolida-tion because it leaves out thefact that the member, theclient, has the option to optout, so maybe it should becalled “opt-out consolidation”or something to convey thatit’s not just automatic, thatthe members do have a choiceto opt out of consolidation.

I think that the first roundwill be reasonably easy becausethe insurance will just be can-celled as far as I can see. It’swhen it starts getting to sig-nificant amounts that it be-comes a member issue in termsof what we do. I think perhapsthe insurance industry has gotto do some work to figure outhow it can be transferred be-tween insurers, you know?

DH: I don’t think it’s too latefor those discussions to takeplace. The mechanics of con-

solidation and auto-consoli-dation are not strongly devel-oped beyond the frameworkof the different elements thatare involved in it. As you say,the consolidation of less-than-$1,000 accounts will be rela-tively straightforward, al-though I think they accountfor something like 16 or 17 percent of all of the accounts inthe industry, so again it willhave a significant impact onadministrators, but not somuch on insurers.

One of the purposes of thefirst round is in fact to see whatimpact it has on a number ofaccounts, and for the Govern-ment and the industry to beable to review what the out-come of that exercise was. As-sociated with that of courseis the whole question of thetreatment of insurance. I’m amember of the SuperStreamworking group and that wasone of the most vexed discus-sions within that group.

Insurers weren’t represent-ed significantly on that group,and I think there is a press-ing need for the government toget together with the insur-ers to actually work out whatthe most appropriate way ofconsolidating larger accountsis in a way that doesn’t leadto distortion or misuse.

For example, one of the op-tions with auto-consolidationof larger accounts is to flag ac-counts. It sounds like a ter-rific idea, but if you have flag-ging operate at the time whena person joins the fund, peo-ple will have low balances andthat account will be stuckthere, so you will have thesame situation.

Whereas if you have flag-ging which is introduced a fewyears down the track, wellthen don’t you have an addi-tional administrative issue?So there are very significantissues, but if anyone says, “thisis what’s going to happen”,

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“The administrator isgoing to be dealingwith X number of

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or “that’s going to happen inrelation to insurance”, whenyou are talking about largeraccount balances, they aretalking from a position of cer-tainty or correctness, that willbecome clear.

Finally, the $10,000 limitthat people are talking about,that too is not a fixed amount.The position of AIST in fact isthat the final position withauto-consolidation of thoseaccounts should be uncapped,because the aim of this ex-ercise should be actually to fa-cilitate the consolidation ofall accounts, not just the mi-nority of smaller accounts.

That is also consistent withthe Government position,which says that the subsequentexercise will be the auto-con-solidation of accounts with bal-ances of at least $10,000.

FR: And funds should be doinga lot of work on using the TFNsnow, already. They should bedoing a lot of work on match-ing up members within thefund. They should be tryingto find tax file numbers formembers that they don’t havetax file numbers for.

They should be doing awhole lot of pre-work now, be-cause they actually want tokeep those people in theirfund, and we think at AIST thatthe funds aren’t doing enoughpre-work on things like thisand are underestimating whatthe potential downside can befrom some of these reforms,and from losing so many mem-bers. So when we talk to fundswe are encouraging them to‘don’t wait for later, be doingnow. Get in ahead of the game’.

PB: This is a good example ofadministrators having to be theend of the line, because withauto-consolidation, we’ve beentalking about it for two yearsand in principle no one can dis-agree with it. But the devil is

in the detail, we’ve actually gotto figure out now how we areactually going to do it.

Consolidation within thefunds is relatively easy. I don’thave much concern about that,but the rule, and the simplerule, is that at less than 10,000[dollars] the insurance isgoing to be cancelled, becauseI don’t think we’ve got anyother choice. Again, we candeal with that so we sort ofknow where we are going.

But as soon as you get tomore than that, we start run-ning into this issue about in-surance, and it’s going to bequite a lot of work for the in-surers to come up with trans-fer terms, right? And untilwe’ve got transfer terms wedon’t know how that’s goingto work, so we can’t actuallybuild that transaction to dotransfer terms until we knowwhat the rules are going to be.

FR: Well, I would suggest tothe insurers that they shouldvery quickly get together, be-cause if they don’t the Gov-ernment will come along, andhaving worked with the Gov-ernment through MySuper,Stronger Super and Super-Stream, you don’t want theGovernment coming anywherenear it, or three years later youwill be sitting here having thisconversation about this verycomplicated process that’sbeen designed for you.

PB: Let me make a finalpoint there, which is therub: there’s an assumptionthat if we auto-consolidatea million accounts, we aregoing to save a million times$50 in administration. Well,that’s just not so. A lot ofthese are just passive ac-counts and no work, or hard-ly any work, is done onthem, so the saving is notgoing to be anywhere nearthe amount.

JQ: The potential for com-plaints will just go through theroof.

RM: Yes and...

JQ: I’m a huge sceptic.

PB: And complaints and morework for less money, that’s thebottom line. So the savings:there are going to be some sav-ings, let’s not get too carriedaway, but the savings aren’tgoing to be anywhere near thesize that’s been put out there.

DH: Well, I would take issuewith that in relation to the firstround. I would suggest that ac-counts worth less than $1,000generally derive fees for allconcerned at a level that is sig-nificantly greater than the costof maintaining those accounts.

FC: I agree with that.

DH: Because the level oftransactions and activitythat’s involved with holdingan inactive account for whichyou don’t hold an address isactually very low. The issuewhich you raise becomes rel-evant when you talk about ac-counts which actually involvethe production of memberstatements, the posting ofthose member statements,talking to someone on thephone about those accounts.

PB: No, actually I’m saying

the opposite. We are collect-ing $50 for all of these ac-counts, but we are not actu-ally doing any work. So thework is not going to change,but we still have to get the $50from somebody, and so the$50 is going to be spreadacross the rest of the clientbase, that’s what I’m saying.

FC: The other point on thecosts as well, Peter, is that froman insurance point of view wetalked about individual trans-fers at the individual level, andat the aggregate, at the fundlevel. Once the membershipprofile changes for a particu-lar fund, whether it’s down orup, or even if it stays neutralbut the actual membershipprofile changes, that’s going tohave an impact on the insur-ance risk.

Then from that comes: whatwill be the insurance premi-ums charged going forward? Alot of that information againwill require assistance from ad-ministrators to provide us withthe data, and then the insurersto do the analysis going back toyourselves, to actually imple-ment the new change. With theauto-consolidation will come achange in product design, soit’s not just the premium thatwill be impacted, but a changein product design and a changein processes will also come for-ward as well.

PB: That’s true. I think we aredefinitely going to see a moveto more asset-based fees be-cause of this, the fixed dollarfee, and we are sort of goingaround in circles on this thing.As administrators we are quitehappy with the activity-basedfees, we think that’s the rightway to go and it’s the fairestway, but we can’t just absorbadditional costs without ac-tually getting additional rev-enue. So I would suggest thata lot of funds will move moreto asset-based fees, which topick up Frank’s point is


SPONSORED BY

Peter Beck

“The mechanics ofconsolidation andauto-consolidation

are not stronglydeveloped beyond

the framework of thedifferent elements.”

– David Haynes




another product change that’sgoing to come.

MT: John, Russell? You arevery quiet there.

JQ: Well I’m on record, I’m ahuge sceptic. I’ll just wait andsee what happens, but I don’tthink people are going to takevery kindly to being forced allover the place, being pushedaround in this way.

RM: We’ve got to get back tobasics. Why was auto-consoli-dation brought in? Auto-con-solidation is great for the 23-year-old who has worked athalf a dozen different jobs, andhas had a couple of thousanddollars here, there and every-where.

He’s got different funds andforgotten or lost that money,that’s what it was all about– not for people with $100,000in active balance to have thatmoney moved or their insur-ance threatened. I thinkwhatever regulations the Gov-ernment brings in they’ve gotto get back to the first prin-ciples, to why we all thoughtauto-consolidation was goodin the first place.

And what I hear from Frankand Peter, we don’t want thecomplexities to overtake thepracticalities of getting smallaccount balances consolidat-ed with the member’s currentfund. I think that’s what weshould be focusing in on, andif someone’s got a $20,000 bal-ance sitting there, we’ve gota valid address for them, theyget a statement twice a yearfrom Peter saying that this isthe balance, these are the feescoming out, and if they arehappy with that they should beleft alone.

FR: Well, a lot of it is aboutwhat is the definition of theperson who is not active. Soit’s going to be a key in iden-tifying people. But I’ve seenpeople with very high bal-

ances being in AusFund, frombeing on the Board, and it’slost, you know? So it does hap-pen, and I think in some waysthe industry has a little bitbrought this on itself.

There could have been a lotmore done about people whowere hanging on to balancesthat they shouldn’t have beenhanging on to, about takingfees from [them]. I thinkthere’s an expectation in thecommunity that this is a com-pulsory system and it should bemuch easier for their money tomove around: ‘The governmentis forcing me to put this moneyinto a super account, my bossdoes it for me’ – that is aboutthe level of interest until theaccount balance has built upconsiderably. So all thesethings should just happen.

DH: Well, let me just throw afew figures your way, Russell,to support what Fiona is say-ing. There are five million lostaccounts, five million. There is$20 billion worth of lost su-perannuation money, $20 bil-lion. I don’t know where youguys come from, but $20 billionis a lot of money for me.

There are 28 million su-perannuation accounts for aworking population of 11 mil-lion, but probably the killerstat is that each year there are1.3 million new superannua-tion accounts created for anet workforce increase of200,000, what does thatmean? It means there’s prob-ably something like a millionunnecessary superannuationaccounts, all of which havefees associated with thembeing created every year.

That situation cannot go on.There needs to be a mecha-nism to actually align the num-ber of accounts that exist withthe number of accounts thatare needed, and in doing so weneed to be cognisant of the fi-nancial and operational posi-tion of administrators.

We need to get the insurance

arrangements correct, but fun-damentally we need to get theoperational and policy settingsright, so that insurance main-tains credibility with the peo-ple who say, ‘Oh Jeez, I’ve gotseven or eight accounts outthere and I’m paying $150 oneach of them.’ That doesn’thelp the credibility of…

JQ: Can I ask you then whatyou think is the number of ac-counts that is needed?

DH: Well…

JQ: Is it one per person? Two?

DH: A number of people havedone studies on the number ofnecessary accounts [Australia-wide], and they’ve come upwith various conclusions of be-tween 14 million and 18 mil-lion. I thought the 18 millionestimate was the most gener-ous and overstated becausethere was quite a lot of dou-ble counting within it.

JQ: So that’s about 1.5 perperson?

DH: However, that’s still 18 mil-lion accounts and there are 28million in existence, so even onthat very generous assessment,there are probably 10 millionaccounts more than are nec-essary in the system.

PB: Can I just make a point thatthe solution for additional ac-

counts is not just all about con-solidations. It’s when peopletake up new employment, aboutwhat they should actually do,and at the risk of offendingFiona I think there was someASFA research which actuallysays more and more people areactually keeping their exist-ing account.

I was quite astounded bythat statement, but I think itwas about 70 per cent. I don’tcarry numbers in my head, butI think it was about 70 per centof people are now actuallykeeping their existing account.

FR: I just find as an employ-er myself – and yes, I employpeople who work in super, buta lot of people I’ve employedhave never worked in super be-fore – I find that more andmore, nearly everyone nowbrings their account with them,‘this is my account’.

PB: I can look that up for you,but I’m pretty sure the latestASFA research said somethinglike 70 per cent of people ac-tually are keeping their ex-isting account, which actu-ally astounded me. I thoughtit was much more heavily theother way.

JQ: I was always interestedto watch, but I was never ableto get any reliable figures whenchoice in super was first in-troduced, whether peoplewould in fact choose, in termsof which fund – they have mul-tiple funds – which one wouldthey elect to make their prin-cipal fund? Would it be the onethat was just associated withtheir current industry, or wasit the one that had the biggestbalance?

And no one was ever ableto tell me the answer to that.But I think that would havebeen particularly instructive toknow, because what Fiona issaying I think is that, most

SPONSORED BY

“The most recentlyactive account was

the one that was thedefault for

consolidation. Afterconsolidatinghundreds ofthousands ofaccounts, we

received basically Ithink no complaints

about that frommembers.”

– David Haynes

Fiona Reynolds


likely, people are now bringingtheir favourite fund with thebiggest balance and makingthat mobile.

FR: Well I think a lot more peo-ple are, yes.

PB: I think the research says70 per cent of people whochange jobs are electing notthe new super for that em-ployer, but the one they’ve got.

DH: Coming back to your pointabout addressing the situationat the point when peoplechange jobs: that in fact is partof the consolidation package.At the point of enrolment, itis anticipated that there will bea process to facilitate consol-idation, and it is quite likelythat that process will be a com-bined TFN declaration form,choice-of-fund form and con-solidation form.

So people at that time willnot be forced, but will be en-couraged, they will be given theopportunity to tick a box tocommence a process, of con-solidation of their existing ac-counts either into the employ-er-nominated fund, or theirexisting fund.

FR: And that would have somesort of declaration about in-surance too, that ‘you have ac-knowledged that there may besome changes in your benefits’,blah, blah and legal…

PB: The critical issue is, what’sthe default for that? Becauseif the default is going to be theone that most people wantwhen they don’t fill the form in,[the form] comes to us as ad-ministrators and we’ve actual-ly got to have a default for that.My understanding is that thedefault is actually going to bethe new fund, new employer.

FC: New employees fund.

DH: Yes, it’s proposed to be.And in relation to your ques-tion John: sorry, I used to bechief executive of AusFund,which specialised in lookingafter small, mostly, and inac-tive accounts and so it’s myfavourite subject…

FR: And he can talk about itfor hours and hours…

DH: The answer – and whenwe did consolidation exercis-es, the rule of thumb that weused – was that the most re-cently active account was theone that was the default forconsolidation. After consoli-dating hundreds of thousandsof accounts, we received ba-sically I think no complaintsabout that from members.

FC: John raised a good pointearlier when he asked whatis the ultimate number of su-perannuation accounts that weshould have. I mean if you lookat other financial servicesproducts, what’s the averagenumber of mortgages someonehas, or the average number ofsavings accounts someone has?Is there..?

JQ: It seems there’s almostan ulterior motive, because wehave – this is me taking off thetrustee hat and putting thetrade union hat on – we havea mechanism by which we candeny people a choice of fund,because you can do thatthrough registering industri-al instruments, by naming twofunds and saying ‘and any otherfund, any other complying fundthat the employer offers’, andthe employer doesn’t offer anyother complying fund.

So people can have an ar-gument with their employer,but there’s two funds herethat are mentioned in the en-terprise agreement and youget a choice of those two.The employer just says “no”if you want to bring your fundin, “no, these two, you pick.”And it’s quite legal.

So this is a potential prob-lem because you’ve got some-body who has already gotperhaps two funds, one ofwhich is their favourite fund,and they have come into anindustry where they poten-tially are going to have tohave a third one.

Now they might just let the

balance rise for a year or twoand then transfer the bulk ofit, but most won’t, they’ll prob-ably just end up with threefunds, or four, depends on thenature of the industry. Wherethere are several industriesdoing a similar thing, and peo-ple drift between them, auto-consolidation is never going towork for them.

PB: We definitely need, we’vegot to have clarity of rules, be-cause otherwise if membersdie their spouses will be saying‘where’s my money?’. If theysurvive they will say ‘why areyou taking insurance from me?’.

So we’ve got to have clear rulesabout this, that’s the most im-portant thing, and we needlegal protection for what de-fault rules we implement.

JQ: Let’s not just have clearrules, let’s have a simple lan-guage where everybody callsthe same thing by the samename and gets rid of some ofthe confusion. I mean, I’veharped on about this, but whycan you call any particular in-vestment option whatever youwant to do? Now there’s rules,and you can’t use words likeconservative unless it’s what-ever, but you can still have,well, a diversified account andexactly the same accounting ina competing fund and it’scalled a balanced account. It’sjust there to confuse people.

Income protection insur-ance or salary continuance? It’sthe same thing, but peoplethink they’ve got two differ-ent things because the indus-try does nothing to help, noth-ing. In fact it works almost asthough it doesn’t want peopleto understand, let’s make itvery, very complex. So bite thebullet on all of this at once, andwhen you get all the insurerstogether to talk about auto-consolidation, talk about usingthe same names.

DH: I reluctantly rise in de-fence of APRA here, in that Ido recall that Ross Jones talkedyesterday about a parallelprocess that is underway aboutlabelling and statistical col-lection, which AIST is involvedin with APRA, about address-ing exactly that problem John,but as you say, it’s probablyabout 10 years too late.

JQ: Yes, very much.

MT: On that note, thank youladies and gentlemen for par-ticipation in the roundtable –and we always end in furiousagreement about something.So thank you very much. SR




David Haynes



The annual Super Review Charity Golf Daywas held at Sydney's Roseville Golf Club inmid-March with around 60 golfers teeing off insupport of the Emerge Foundation. Thewinners on the day were the Pillar Team withthe individual prizes going to Noel Davis andMaxine Khouri.

Charity Golf Day in support of the Emerge Foundation

1. Ben Smith – BT Financial Group, Michael Gillard – BT Financial Group, Martin Kelly – BT Financial Group.

2. Alex Masters – JP Morgan, Nick Paparo – JP Morgan, James Manning – JP Morgan, Doug Roberts – Super Review.

3. Noel Davis – Pillar, Adam Gee – Pillar, Col Gellatly – Pillar, Chris Woodward – Pillar.

4. Craig Hobart – Tyndall, Rob Mcgreggor – Tyndall, Lee Frankish, John Berry.5. Richard Gilbert – Rolia, Brett Jolie – Aberdeen, Zeina Khodr – Super Review,

Phil Hart – Legg Mason.6. Guy Cotter - CA Financial Services Group.

1

2

3 4

5 6

www.superreview.com.au SUPER REVIEW GOLF DAY 21


22 SUPER REVIEW GOLF DAY www.superreview.com.au

Charity Golf Day in support of the Emerge Foundation7. Maxine Khouri wins the Leading Lady

Award.8. Pillar team holds their trophy up.9. Noel Davis wins the Leading Man award.10. Shree and Indy Singh, Frank and

Maxine Khouri.11. Bruce Murphy – BNY Mellon,

Tom Burns – Abi Group, Rob Plour – UBank.12. Chris Richards – Pillar, Yane Tupanceski -

Pillar, Bill Moris – Pillar.

7 8

9 10

11 12

Professional Associations Superannuation Limited (PASL) (ABN 14 056 917 303 AFSL 222590 RSE L0000352) is the Trustee of Professional Associations Superannuation Fund (PASF)

ABN 78 984 178 687 RSE R1000429). RecruitmentSuper, Accountants Super, Australian Enterprise Super and SMARTpension are divisions of PASF. Past performance is not a reliable

indicator of future returns. *SuperRatings Fund Crediting Rate Survey June 2010 and June 2011 - Balanced (60-76% Growth Assets).

To learn more about us visit pasl.com.auor contact us on [email protected] or 03 8605 4400

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24 TRUSTEES www.superreview.com.au

The governance of trusteesof superannuation fundshas become a contentious

issue. It has been argued thatgovernance should be im-proved so that there is a sim-ilar standard to that which ap-plies to listed companies.

Amongst the increased stan-dards being suggested is thattrustees should have a majori-ty of independent directors, thatthe chair should be independ-ent and that there should bedisclosure of directors’ fees andremuneration of executives ofthe trustee.

Currently, there is a signif-icant difference between thegovernance of retail and in-dustry funds. Both modelshave issues that need to beaddressed.

Retail funds operated by fi-nancial institutions generallyhave executives of the institu-tion as directors of the trustee,with – in some instances – someindependent directors.

Industry funds usually fol-low the equal representationrequirements of the Super-

annuation Industry (Su-

pervsion) Act (SIS Act) byhaving an equal number ofemployer and member orunion-nominated directors.

Such a difference in deter-mining directorships does notmake any sense when bothtypes of funds are generallyon an equal footing, in thatmembership of both is offered

to members of the public.The reasons for the differ-

ence in approach are essen-tially historical, but are nolonger relevant.

Under the SIS Act, a fundthat is offered to the publichas to either comply with theequal representation re-quirements or have an inde-pendent trustee.

Retail funds operate underthe ‘independent trustee’ re-quirement, with the conse-quence that they are requiredto form policy committees formany of the employers thatcontribute to the fund. Suchpolicy committees must com-ply with equal representationrequirements, but have beennotoriously difficult to formand manage.

Employer policy commit-tees are supposed to advisethe trustee on issues that re-late to members employed bythat employer, but everyonein the superannuation indus-try knows that policy com-mittees have been almost en-tirely ineffective. They arenot, therefore, an appropriatemeans of providing equal rep-resentation in retail funds.

Another issue with theway in which the director-ships of trustees of retailfunds are organised is thatany executive of the asso-ciated financial institutionwho is a trustee director hasa conflict of interest in deal-

ing with the investmentmade by the trustee in an as-sociated company, and withissues that arise under an in-surance policy that thetrustee invariably has withan associated insurer. Forexample, if the associatedinsurer has rejected a dis-ability claim, the executivehas a clear conflict in de-termining whether thetrustee should take issuewith the insurer’s decision.Directors with such a con-flict of interest should notparticipate in deliberationson the matter.

Of course, conflicts of inter-est can also arise on the partof directors of industry funds.Sometimes they invest with as-sociated entities of the trustee.Directors with a conflict of in-terest should not participate indecisions to make such in-vestments. Directors may alsohave conflicts in relation toother service providers.

In relation to the equal rep-resentation model that mostindustry funds follow, it canbe well argued that, becauseof the effect of the choice offund regime, the public offerstatus of most funds and theresponsibility that trusteeshave to fund members, it is nolonger relevant or appropri-ate to have employer repre-sentatives on trustee boards.It is also arguable that, as alltrustee directors are required

Trustee governance has become a hot political topic.

Barrister NOEL DAVIS examines the issues and argues there

is no basis for differences between industry and retail funds.

Independence vital for super

trustees

www.superreview.com.au TRUSTEES 25


by the SIS Act and trust lawto act in the best interests ofmembers, it is no longer nec-essary to have member rep-resentative directors.

Some attempts have beenmade to bring about reform.The Super System Review(the Cooper Review) recom-mended that equal represen-tation on trustee boardsshould no longer be manda-tory. That recommendationhas not, at this stage, beentaken up, but the governmentis considering what legislativechanges should be made.

The Cooper Review alsorecommended that, if there isnot equal representation,there should be a majority ofnon-associated directors inthe sense that they should-n’t be associated with spon-sors of the fund. A further rec-ommendation was that, ifthere is equal representation,one-third of the member rep-resentatives and one-thirdof the employer representa-tives should be non-associ-ated people.

The Financial Services Coun-cil, which represents retail su-perannuation funds, has adopt-ed a policy that, from 1 July nextyear, its members’ funds havean independent chair and a ma-jority of independent directors.

That development is com-mendable, but it would still per-mit executives with the con-flicts of interest referred toabove, to be directors. How-ever, where they have a conflict,at least there will be a major-ity of the board, the independ-ent directors, who can partic-ipate in voting on the decision.The two-thirds majority re-

quirement of the SIS Act mayrequire reconsideration in lightof this development.

CONCLUSIONFor the reasons stated, thereis no logical basis for the ex-istence of the current differ-ences between retail and in-dustry funds in the way inwhich their directorships areorganised. The applicable leg-islation for both models is inneed of reform.

Some of the areas that needto be addressed are:

• There needs to be con-sistency in the requirementsthat apply to both retail fundsand industry funds.

• It is not appropriate to haveemployer representatives infunds offered to the public.

• At least a majority, and ar-guably, all of the directorsshould be required to be peo-ple who are not associatedwith service providers andwho don’t, therefore, haveconflicts of interest in makinginvestment, insurance andother decisions.

• The chair should be in-dependent to ensure, amongstother things, that all relevantissues come before boardmeetings.

• Policy committees havenever been an effective meansof providing equal represen-tation and are, generally,pointless. SR

Noel Davis is the authorof The Law of Superannu-ation in Australia and isthe editor of The Aus-tralian SuperannuationLaw Bulletin, both pub-lished by LexisNexis.

Amongst any number ofglobal economies whichcontinue to falter, it seems

clear that Australia can stillbe considered ‘the lucky coun-try’ when it comes to thestrength of its economic fun-damentals.

Unemployment is low, infla-tion has been well controlled,debt is negligible and yet the re-ality, according to Paul Taylor,Head of Australian Equities atFidelity, is that Australia re-mains affected by what is a verymacro environment.

“We seem to take two stepsforward, two steps back, and themarket goes nowhere,” he said.“It gets depressed about sov-ereign debt issues in Europe,Greece potentially defaulting orrestructuring, and then the dis-aster comes off the table and wetake two steps forward again.

“We’re really in that sort ofmacro bounce that can only bedescribed as risk on/risk off.”

Robert Van Munster, head ofEquities for Tyndall, said thatfor investors in the Australianequity market, performanceover the past 12 months hadbeen disappointing.

“And that’s particularly thecase when you compare it withour international peers likethe United States,” he said.“Their economy has beenmuch weaker, their debt is a

lot larger, unemployment re-mains a lot higher - and yet,their share market performancehas been better than ours.

“Even if we look back to pe-riods where the Australian mar-ket has fallen more than 50 percent in a year, and that wouldinclude 1927, 1973, 1980, 1987,and then look at the reboundspost that this market recoveryis the weakest,” Van Munsteradded. “The question, of course,is why?”

But while he acknowledgedthat investors – institutionaland retail alike – were scratch-ing their heads as to why theAustralian share market’s re-covery had been so weak, VanMunster said that Tyndall wasattributing it to a number of fac-tors.

“Firstly, it’s the strength of theAustralian dollar which is cor-roding international competi-tiveness and translating intoweaker foreign earnings,” hesaid. “It’s adversely affectingAustralian retailers, particularlythose with cross-competitioncoming from the internet.

“The second factor is a lackof productivity growth in Aus-tralia,” Van Munster continued.“We have productivity growthrunning at less than 1 per centand wages growth running atcirca 4 per cent, which obviouslyimpacts the bottom line of Aus-

tralian companies.”According to Van Munster,

the third and final aspect wasthe emergence and persistenceof a two-speed economy with-in Australia.

“Our economy is goingthrough structural change,” hesaid. “We have a capex boom oc-curring in the resources sector,but a lot of that capital expen-diture is being provided by over-seas companies.

“Australian companies aremissing out on a large part ofthat economic growth and theshare market isn’t really ex-posed to those benefits,” VanMunster continued. “Then, onthe other side, the ReserveBank of Australian is keen tokeep the rest of the economy

capped so that we don’t have aninflation problem – particular-ly an asset bubble such as an-other property boom like we’veseen after previous resourcesbooms.

“As a consequence, the restof the economy is suffering, butat the end of the day, we haveunusual fiscal conditions andmonetary conditions in Aus-tralia, and it means that, for thetime being, both the market andconsumers are doing it tough,”Van Munster said.

Yet that is not to say that theAustralian equities market has-n’t had its fair share of standoutperformers. While acknowl-edging the headwinds outlinedby Van Munster, Hyperion AssetManagement chief investment

officer Mark Arnold said thatthe market’s more defensivestocks were those that had donereasonably well.

“The defensive, high-yieldstocks have actually done pret-ty well in a general sense,” hesaid. “A good example of that isTelstra, which was one of the top-performing stocks last year aftera decade of underperforming.

“In terms of the stocks thatwe have in our own portfolio,the internet stocks that wehold, the likes of the REAGroup, carsales.com.au, andSEEK, those stocks have per-formed very well in terms oftheir financial metrics over thelast 12 months as well,” Arnold

Australia’s economic fundamentals

may remain relatively sound, but as

Damon Taylor reports, the

performance of Australian equities has

continued to reflect the sentiment

generated by global events.

Dealing with global sentiment



26 EQUITIES www.superreview.com.au

continued. “Their propergrowth and sales growth hasbeen very strong and that’s beenreasonably well reflected intheir share price performanc-es.”

For Taylor, when lookingfor Australian stocks that hadoutperformed over the past12 months and those likely todo so in 2012, the key wouldbe discernment.

“To me, the interesting thingis that if I look across the worldat valuations, everything’s trad-ing at very similar valuation lev-els,” he said. “If we look at allworld markets, they’re all re-ally trading on 10x or 11x, every-thing’s on the same multiple.

“And if you start to delve intothe Australian market, all thesectors are trading about thesame multiples – even if you gointo the stocks, the same pat-tern exists there as well,” Tay-lor added.

“There’s been this real com-pression and I think that saysthe markets are extremelyfickle at the moment; theydon’t believe anything anyoneis telling them to the extentthat it’s a case of ‘I’ll believe itwhen I see it’.”

Taylor said that whether thecompany was good quality, badquality, high growth, or lowgrowth, everything was tradingon the same sort of multiplesbecause the market was view-ing those stocks with equalscepticism.

“However, I do think that2012 is definitely going to beyear of differentiation, a year ofdiscernment and lookingthrough the market,” he said.“So using the resources sectoras an example, it’s going to bethe mining services stocks that

do well rather than the min-ers themselves.

“In a low-growth world, if youcan deliver dividend yield andsustainable dividend yield,that’s going to be a sought-afterasset,” Taylor continued. “Andsimilarly, if you can delivergrowth in a low-growth world,that’s also going to be bid up bythe market as well.

“So that just means there’sgoing to be a lot more dis-cernment. There’s going to bea lot of individual stocks thatstand out, those with strongmanagement teams who havesound strategies that can ac-tually deliver growth and en-

sure that yields are sustain-able. They’re the ones who aregoing to do well.”

Of course, while Taylor’s pre-diction of greater stock differ-entiation may prove accurate,the fact remains that investorshave been and are likely tocontinue to be wary. The cur-rent trend is risk aversion andfor Van Munster it is a fact thatdomestic equities managersneed to be aware of, if not con-cerned by.

“Certainly, there’s a high de-gree of uncertainty about thestructural changes occurring in

Australia and the strength ofthe global economy,” he said.“So yes, in that regard investorswant to remain defensive andprotect their capital.

“This is reflected in theamount of funds flowing intoterm deposits, for example,”Van Munster added. “And glob-ally, particularly private in-vestors have been happy to in-vest their funds into relativesafe havens – even if they’renot getting a return.

“It’s been more about the re-turn of your capital rather thana return on your capital, if youlike.”

Arnold said that he too hadseen significant evidence ofmoves down the risk curve overa prolonged period.

“At the asset allocation level,there’s certainly been a movetowards more defensive assetclasses like cash and fixed in-terest and away from growth as-sets like equities and property,”he said. “But we see that as anopportunity for investors in thatwe think that moves towardsmore defensive asset allocationsare really being driven by back-wards-looking thinking andbackwards-looking fears.

“We think it’s far more likelythat markets will revert,” Arnoldcontinued. “So price/earnings ra-tios have come down a long wayover the last few years and wethink there’s potential for theprice/earnings ratios within themarket to expand from currentlevels.

“And that, for us, is a definiteupside.”

Like Taylor, Arnold noted thatcurrent current price/earningratios were sitting at around12x. However, his view was thatif investors took a longer-termview and excluded the high in-flation periods during the 1970s

and 1980s, the averageprice/earnings ratio had actu-ally been around 13.5x to 14x ona trailing basis.

“So we think there’s upsidepotential in terms of theprice/earnings ratio,” he said.“Also, because there’s quite afew sectors of the economywhere things are pretty tiredand demand’s pretty depressed,we think there’s earnings re-covery potential in a cyclicalsense as well.

“And that’s particularly so ifyou have a situation where theAustralian dollar started to driftlower,” Arnold added. “Thatwould take a lot of pressure offsome of the key sectors in theeconomy and lead to higherearnings for those particularsectors.”

The reality, according to VanMunster, is that risk-averse andbackwards-looking attitudescannot last forever.

“Sitting in investments thatprovide literally zero returnsis not the best strategy,” he said.“In Australia, we have the lux-ury that term deposits are of-fering relatively good interestrates, but that’s not going to lastforever either.

“At some point, investors

need to have a diversified port-folio and they need to look atgrowth opportunities,” VanMunster continued. “If theworld’s economic prospectsimprove, the risk premiumthat people will require to in-vest in more risky assets willerode and that will create thebest investment opportunitiesfor equities.

“At the moment, you couldmake a case quite easily that in-vestors should be defensive, butin the long run, that’s not goingto assist them for very long.”

So if investors’ current wari-ness is likely to be short-livedand if the opportunity in do-mestic equities markets is therefor the taking, the question liesin where they are likely to turn.

For Australia’s super indus-try, the upcoming MySuper en-vironment has created a sig-nificant focus on cost. Managerselection has become critical,but for Van Munster the key isto understand the super fund’sinvestment strategy and howa fund manager fits into that.

“Across a number of superfunds, we’re seeing a continua-tion of the core/satellite ap-proach - going passive for a corepart of the portfolio and thenhaving satellite managers whotake a more risky, active, andconcentrated approach,” hesaid. “We’re seeing more andmore of that.

“But in the active manage-ment space, I think institutionalinvestors are becoming in-creasingly more scientific aboutit,” Van Munster continued. “Anumber of funds have consoli-dated the number of fund man-agers they have to reduce thedegree of stock duplication andimprove diversification.




Dealing with global sentiment“The key is to

understand the superfund’s investmentstrategy and how afund manager fits

into that.”


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“They’re looking for fundmanagers who complementeach other.”

For Taylor, having runs on theboard over a prolonged periodof time was also critical.

“Over the last few years, Ithink a number of fund man-agers have really struggled inthis sort of environment, re-ally struggled to deliver solidperformance,” he said. “And Iguess that’s what we’ve doneand super funds and investorsgenerally have liked whatthey’ve seen.

“So over the last 9 years now,we’ve delivered outperformancepretty much every year, aver-aging about 4 per cent outper-formance per year - and it ob-viously gets people’s attention,”Taylor continued. “They like theability to do that up-market anddown-market and the consis-tency of it.

“In a broader environment

where fund managers have gen-erally struggled to outperform,we’ve actually delivered the per-formance that investors havebeen looking for.”

Looking within the invest-ment teams themselves, VanMunster said super funds werelooking for an ‘X factor’.

“In the first instance, theywant to know that the man-ager can not only provide thereturns that they’re looking for,but have stable teams that canproduce those returns andproduce them on a consistentbasis,” he said.

“They want to see a repeat-able process that can providereturns through the cycle, andthey want to know that the rightincentives are in place for theinvestment team managing theportfolio so that there’s an align-ment of interests between themand their clients.

“Most importantly, they wantto know that you’re focused ondelivering investment returns

rather than just purely in-creasing your funds undermanagement.”

But regardless of which do-mestic equities fund managersend up winning the large in-stitutional mandates, it seemsall will be focused on similargoals for 2012.

For Taylor, the macro/microtheme that persists within thelocal market is an interestingone.

“That said, we tend not to gettoo caught up in the wholemacro environment becausethat’s how you can get yourselfcaught out,” he said. “We try tofocus on what we think we’regood at, which is picking goodcompanies.

“For the year ahead, peopleare going to get excited aboutUS growth or excited about theLTRO of Europe, and then therewill also be macro fears that wewill go up and down on as well,”Taylor continued. “But some-times a lot of it can just be noise

and if you just focus on the goodcompanies delivering good re-sults with a strong balancesheet, they’re the ones that willgo through that.

“That’s the way we general-ly try to look at the world.”

Alternatively, Van Munstersaid that while Tyndall re-mained an intrinsic value man-ager, they had also changed andadapted to what they saw asemerging market trends.

“One is trying to avoid asmany value traps as we possiblycan,” he said. “Now you alwaystry and do that, but we’ve ac-tually been more regimentedabout that in the last coupleof years because Australia andthe world is going through struc-tural change.”

“There will be winners andlosers out of that, and unfor-tunately, we will have industriesand businesses that may notexist in five or 10 years time,”Van Munster continued. “Busi-nesses will attempt to adapt

to those changes and whilesome will be successful, therewill be just as many that won’t.”

The goal, according to VanMunster, has to be minimisingthe downside risk in a givenportfolio.

“It’s actually wading throughthose issues rather than justpurely looking at value,” he said.“It’s realising that there aregoing to be potential losers outof this structural change andtrying to avoid them.

“And then the other trendto be aware of and adapt to isshorter market cycles,” VanMunster added. “It’s that real-isation that we can no longerlook over the valley and hopethat the Australian economyand local businesses are strongenough to withstand any head-winds that they have.

“We’ve got to be surer andsharper, not just in readingthese trends, but more impor-tantly, in how we deliver returnsfor our clients.” SR




Dealing with global sentiment


IN a six-month handoverprocess, QBE Insurance Grouphas announced that John Nealwill succeed long-serving groupchief executive Frank O’Hal-loran from 17 August 2012.

As the former chief executiveofficer (CEO) of specialist com-mercial motor insurer Ensign,Neal has considerable under-writing skills.

For eight years he served aschief underwriting officer andchief operating officer in QBE’sEuropean operations beforeheading to Sydney in 2011 tomanage the company’s globalunderwriting operations.

As QBE’s current CEO of glob-al underwriting operations, Nealfacilitated global forums to driveboth strong underwriting disci-pline as well as operational andcost efficiencies.

Following a company rebrand-ing, Antares– formerly Aviva In-vestor Australia – has an-nounced the appointment ofMLC Investment Managementgeneral manager, product SamHallinan as Antares managingdirector.

Hallinan will report to MLCchief investment officer NickyRichards, who is now responsi-ble for leading all of MLC’s in-house asset management teams.

Along with Hallinan’s addi-tional duties, Antares has alsoappointed Nick Pashias to therole of head of equities.

Hallinan said the investmentphilosophy and process for theteam will remain unchangedunder the rebrand.

Rice Warner Actuaries hasappointed Mark Blair as a

principal to head its superan-nuation consulting practice.

Blair will be responsible foradvising clients and growing thepractice.

With more than 20 years’ fi-nancial services experience, hehas worked Pillar, Russell andTowers Watson in roles in-cluding client consulting, ac-count management, productmanagement and institutionalsales and strategy.

The company stated thatBlair’s appointment is part ofan overall strategy to expandits consulting services within thefinancial services space, follow-ing the appointment of deputychief executive Melissa Fuller.

She is now responsible forstrategy, marketing, and oper-ations at Rice Warner, allow-ing chief executive MichaelRice to focus on expanding thebusiness and public policy.

Furthermore, Rice Warner di-rector Richard Weatherheadhas taken on the additional roleof building the company’s in-vestment consulting practice.

Global bond manager Pimcohas announced the appoint-ment of John Valtwies as a port-folio specialist within the glob-al wealth management group.

Working alongside fellowportfolio specialist MichaelDale and Pimco head of glob-al wealth management PeterDorrian, Valtwies will commu-nicate the elements of Pimco’sfixed income investment strate-gies to its adviser marketclients, including private banks,financial planners and dealergroups, the group stated.

Valtwies was most recently

a senior research analyst withMorningstar, where he pro-vided analysis and investmentadvice to large financial serv-ices institutions, investmentcommittees, dealer groups,and advisers on asset alloca-tion, portfolio construction, in-vestment manager selectionand approved product listmanagement.

Prior to this, he worked in arange of investment analystroles which included stints atSkandia, Close Wealth Man-agement, and Goldman Sachs.

Dorrian said Valtwies’ skilland expertise will build onPimco’s position in the Aus-tralian adviser market, includ-ing through dealer groups andwrap platforms.

nabInvest has confirmed theappointment of Rob Sullivanas global head of institutionaldistribution.

Reporting to nabInvest ex-ecutive director investment so-lutions Stewart Hancock, Sul-livan will work with thenabInvest and asset manage-ment leadership group to de-velop solutions in relation to thedistribution of investmentstrategies to institutional clientsglobally.

Before joining the company,Sullivan headed global distri-bution at Treasury Group andhas managed the distributionoperations for their boutiquepartners since 2006.

Prior to that, he held seniorproduct development and insti-tutional distribution roles atCredit Suisse Asset Manage-ment and portfolio manager re-sponsibilities at ESSSuper. SR

Reporting to AUI chief ex-ecutive officer DavidBryant, Dunn moves

into her new role followingthe appointments of StephenAlcorn as head of institu-tional and Kara Gilmartin ashead of joint ventures. BothAlcorn and Gilmartin will now

report to Dunn.Dunn has more than 22 years’

experience in financial servic-es, having held a number of sen-ior business advisory roles. Shewas previously general man-ager of Perpetual’s wholesalebusiness, and a division direc-tor with Macquarie Bank’s

funds management division.Commenting on her ap-

pointment, Bryant said Dunnhad a proven track record build-ing successful businesses – pre-dominantly within the institu-tional space – and an abilityto create and maintain strongbusiness relationships. SR

AUI strengthens teamEvents Calendar

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

APRIL

VICTORIA

12 – ASFA Super Reforms Event Series. SuperStream:Practical guidance on the data standards framework.Venue: Savoy 1, Grand Hyatt Melbourne. 123 Collins Street,Melbourne. Enquiries: ASFA Events Department, Ph: (02) 92649300 or 1800 812 798.

19 – ASFA Super Compliance Summit. Conqueringcompliance. Venue: Grand Hyatt Melbourne. 123 Collins Street,Melbourne. Enquiries: ASFA Events Department, Ph: (02) 92649300 or 1800 812 798.

19 – ASFA Luncheon. SCT Update: What funds need to know.Speaker: Jocelyn Furlan, Chairperson, SuperannuationComplaints Tribunal .Venue: Grand Hyatt Melbourne. 123 CollinsStreet, Melbourne. Enquiries: ASFA Events Department, Ph:(02) 9264 9300 or 1800 812 798.

NEW SOUTH WALES

18 – ASFA Super Reforms Event Series. SuperStream:Practical guidance on the data standards framework.Venue: Melbourne and Sydney Rooms, Sofitel SydneyWentworth. 61-101 Phillip Street, Sydney. Enquiries: ASFA EventsDepartment, Ph: (02) 9264 9300 or 1800 812 798.

23 – ASFA Super Compliance Summit. Conqueringcompliance. Venue: The Westin Hotel, Ballroom, Lower GroundFloor. No. 1 Martin Place, Sydney. Enquiries: ASFA EventsDepartment, Ph: (02) 9264 9300 or 1800 812 798.

23 – ASFA Luncheon. SCT Update: What funds need toknow. Speaker: Jocelyn Furlan, Chairperson, SuperannuationComplaints Tribunal .Venue: The Westin Hotel, Ballroom, LowerGround Floor.No. 1 Martin Place, Sydney. Enquiries: ASFA Events Department,Ph: (02) 9264 9300 or 1800 812 798.

QUEENSLAND

23 – ASFA Super Reforms Event Series. SuperStream:Practical guidance on the data standards framework.Venue: The Grand Ballroom, Stamford Plaza Brisbane. CnrMargaret and Edward Streets. Brisbane. Enquiries: ASFA EventsDepartment, Ph: (02) 9264 9300 or 1800 812 798.

Australian Unity Investments (AUI) has appointed Fiona

Dunn as general manager – joint ventures and institutional.

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

www.superreview.com.au APPOINTMENTS 31

ROLLOVER T H E O T H E R S I D E O F S U P E R A N N U A T I O N

Got afunnystory? about people in the superannuation industry?

Send it to Super Review and youcould be raising a glass or two. Super Review is giving away a bottleof bubbly for the funniest story published in our next issue.

Email [email protected] send a fax to (02) 9422 2822.

ROLLOVER wishes tothank all those who par-ticipated in the annualSuper Review Charity GolfDay competing for the cov-eted plastic and woodentrophy.

As reported elsewherein this edition, the winnersfor 2012 were the Pillarteam, ably led by ChrisWoodward – but Rollovernotes that they were car-ried across the line by thesingular golfing effort of

well-known barrister andman about town NoelDavis.

As someone who sits onthe Superannuation Com-plaints Tribunal andwrites sundry worthy arti-cles for Super Review,Rollover is all admirationfor Davis, but notes thegreat man’s explanation ofhow he managed thisyear’s win.

“I filled in the scorecard,” Davis said. SR

GIVEN what transpired just a few daysafter the Super Review Charity Golf Day(see below), Rollover imagines quite afew delegates to the Conference of MajorSuperannuation Funds (CMSF) in Bris-bane were pleased to leave the Queens-land capital ahead of the State electionresult.

CMSF wrapped up on Wednesday 21March, and the Australian Labor Party

found itself reduced to just a hand-ful of seats on Saturday 24 March –ending nearly a decade and half inpower.

But it did not matter to membersof the Gillard Government because nota single minister or parliamentarianfronted CMSF 2012.

Perhaps the guys at the Australian In-stitute of Superannuation Trustees

(AIST) knew something when they de-cided to make CMSF a politician-freezone, but Rollover also wonders whetherthe pollies had been monitoring the pollsand decided to make themselves scarce.

Whatever the case may have been, itis worth noting that AIST is not lettingthe electoral ebb and flow impact itsselection of venues, with CMSF re-turning to BrisVegas in 2013. SR

WHEN Rollover suggeststhat CMSF was a politician-free zone this year, thatshould not be taken as sug-gesting the event was en-tirely without a Prime Min-isterial presence.

The entertainment at thegala dinner involved a come-dy parody of Phantom of theOpera, with the central char-acters being the Prime Min-ister, Julia Gillard and herpredecessor, Kevin Rudd.

Rollover is not entirelysure what Andrew Lloyd-Web-ber would have made of thePhantom parody at CMSF,but if audience reaction wastaken as a gauge, the per-formance was well-receivedby most.

The difference between po-litical life and comedy artwas that in the parody ver-sion, Julia made sure thePhantom Kevin never re-turned to haunt her. SR

Phantomof thesoap opera

Mine’s a legal eagle,says first Noël

Well done, FionaROLLOVER wishes to congratulate Australian Instituteof Superannuation Trustees chief executive FionaReynolds for the manner in which she carried outher duties at this year’s Conference of Major Super-annuation Funds.

While not wishing to go into the details, Rolloverknows that Reynolds was keeping up with a very busyschedule at CMSF at the same time as dealing with anumber of sad family events.

Well done, Fiona, and the team supporting her. SR


No pollies – what a cracker!

Super Review (April 2012)

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Transcript of Super Review (April 2012)