IFAA to host 19th Annual Director Education Conference

IFAA Director & Executive Education Conference 2018

Join us for our 19th Annual IFAA Director and Executive Education Conference themed "A Brave New World" on 10 & 11 May 2018 at the Sheraton Mirage, Gold Coast. 

2018 is shaping up to be the year in which a series of powerful and at times divergent forces such as rapid advances in technology, changing consumer behaviour, shifting economic and geopolitical pressures and increasing Federal Government scrutiny and legislation are set to collide and change our world forever. This conference is designed for Industry Superannuation Fund Trustees and Executives who want to network with others to find innovative ways to manage the brave new world of superannuation and ensure that they are able to provide meaningful and transformative benefits to their Members.

Our current confirmed speakers are:

Drew Klease (Principal Economist - QIC)

Alan Sher (General Manager - MySuperFuture) 

Danielle Duell (Founder and CEO - People with Purpose)

Angie Mastrippolito (COO - NGS Super)

Wendy Tancred (CEO - Mercy Super)

David Southwood CFP® (Financial Planning Manager - BussQ)

Representative from QPS (District Crime Prevention)

Melinda Fisher (Midja) (Founder - Midja)

Dr June Smith  (Lead Ombudsman Investments and Advice - FOS)

Andrew Griffioen (Head of Technology - IFAA)

For more details please contact Trudie Willcox at trudie.willcox@ifaa.com.au or download the registration form.

When push comes to shove with APRA

There is much to be said for the Australian Prudential Regulation Authority’s (APRA’s) proposed changes to the superannuation prudential framework to lift operational governance practices of APRA-regulated superannuation trustees, specifically the changes to the so-called ‘outcomes test’.

However, APRA would be going much too far if it sought to use those changes as a mechanism via which to drive further consolidation of the superannuation industry; effectively forcing mid-scale funds into merger discussions with larger entities.

APRA deputy chair, Helen Rowell should be well aware of the widely differing views in the superannuation industry about whether scale actually drives better outcomes for fund members, with plenty of examples of mid-scale funds which consistently outperform their larger peers in terms of both investment returns and services. She would also be well aware of mid-size funds which serve particular industries and callings which require highly specific insurance needs.

It is in these circumstances that APRA will need to ensure it does not seek to over-reach itself in making assessments of superannuation funds, particularly those which fall on the cusp in terms of scale, service and returns.

Rowell’s August letter to superannuation funds outlining the regulator’s approach needs to be read in the context of comments she made to July’s Financial Services Council (FSC) Leader’s Forum where she seemed to make clear that APRA believed that some superannuation fund trustees and executives were not being objective enough in assessing the outcomes they were delivering to members.

She said APRA had long recommended that registrable superannuation entity (RSE) licensees adopt a broad ‘member outcomes’ perspective in assessing the outcomes of their business operations for all beneficiaries, noting that “beneficiaries of all 
products provided by an RSE licensee, not just MySuper products, are entitled to have confidence that the RSE licensee is continuing to deliver quality, value for money outcomes in their best interests”.

“…to this end, APRA intends to consult on a proposal to require all RSE licensees to regularly assess whether the RSE licensee has provided, and is likely to continue to provide, quality, value for money outcomes for beneficiaries in all of its RSEs and products. The proposed assessment would include consideration of net investment returns, expenses and costs, insurance, and other benefits and services provided.”

In other words, superannuation funds are going to be assessed across a range of metrics and are going to be asked some difficult questions if, in APRA’s assessment, they are not living up to their members’ expectations.

The question is, of course, whether those within APRA are suitably qualified to make those objective assessments and whether such assessments can be uniformly applied across the diversity of funds which inhabit the APRA-regulated universe.

Indeed, it is arguable that a mega-fund such as AustralianSuper is just as capable of failing on one or two metrics as a mid-size fund such as LegalSuper and this begs the question of whether the regulator would then treat them equally.

While APRA should quite rightly nudge superannuation funds in the right direction, that nudge should not be allowed to become a compelling push.

_{Source: Mike Taylor, Super Review (http://www.superreview.com.au/features-analysis/editorial/when-push-comes-shove-apra?utm_source=Super+Review+Newsletters&utm_campaign=97f69835f3-EMAIL_CAMPAIGN_2017_09_05&utm_medium=email&utm_term=0_4096365ee1-97f69835f3-77252405)}

Budget 2017/18: Overview & specific superannuation measures

Source: ASFA Action, Issue 627

While not as substantial as the landmark reforms in last year’s Budget, the package of superannuation-related measures announced today by the government will nonetheless have a wide-ranging impact. Key measures include a new role for superannuation in addressing housing affordability issues, changes to the way members’ and beneficiaries’ complaints will be handled, and an extension of tax relief for merging funds.

The major measures with direct impact on superannuation include:

1. new measures targeting housing affordability – super contributions from the proceeds of downsizing, a first home super saver scheme and a bond aggregator scheme for institutional investors
2. complaints about superannuation to be handled by a new Australian Financial Complaints Authority (AFCA) from 1 July 2018
3. tax relief for merging funds extended until 2020
4. changes to the treatment of limited recourse borrowing arrangements and non-arm’s length arrangements, as refinements to last year’s Budget super reforms
5. refinement of the small business capital gains tax (CGT) retirement concessions
6. an increase in the Medicare levy from 1 July 2019
7. funding for Treasury, legislative drafting and the regulators.

Details of specific superannuation measures

1. Super to play a role in addressing housing affordability issues
As expected, the Budget contains a diverse package of measures designed to improve housing affordability. Two of these relate to the way in which individuals will be permitted to utilise the superannuation system, while a third is likely to present investment opportunities for superannuation funds.

1.1 Downsizing the family home – contributing proceeds into superannuation

The government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018.

These contributions will be in addition to those currently permitted under existing rules and caps and they will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions. The Budget materials confirm that sale proceeds contributed to superannuation under this measure will remain subject to the Age Pension assets test.

This measure will apply to sales of a principal residence owned for the past 10 or more years and both members of a couple will be able to take advantage of this measure for the same home.

The government estimates that this measure will have a cost to revenue of $30 million over the forward estimates period.

1.2 First home super saver scheme: voluntary contributions accessible to fund a deposit

The government has indicated that it will allow first home buyers to withdraw future voluntary contributions to superannuation made from 1 July 2017—over and above any compulsory contributions—to be withdrawn for a first home deposit, along with associated deemed earnings.

The details of the measure are somewhat unclear, as the Budget materials do not always use consistent terminology when referring to the contributions covered by the measure. ASFA understands that the measure will apply to ‘voluntary’ contributions including:

• salary sacrificed contributions
• personal contributions from after-tax monies for which the individual claims a tax deduction, including under rules introduced in last year’s Budget and applying from 1 July 2017 (these are treated as concessional contributions)
• personal contributions from after-tax monies for which no deduction is claimed (these are treated as non-concessional contributions).

Other key aspects of the measure include:

• first home buyers can contribute up to $15,000 per year from 1 July 2017, and will be limited to $30,000 per person in total under the scheme
• concessional contributions and earnings will, while in the fund, continue to be taxed at 15 per cent
• withdrawals of concessional contributions and associated earnings will be taxed at the individual’s marginal rate, less a 30 per cent offset
• existing contribution caps will continue to apply
• withdrawals will be allowed from 1 July 2018 onwards
• both members of a couple can take advantage of this measure to buy their first home together.

This measure is expected to have a cost to revenue of $250 million over the forward estimates period.

The government will provide $9.4 million to the ATO to implement and primarily administer the scheme.

1.3 National Housing Finance and Investment Corporation – bond aggregator scheme for institutional investors

The government will provide $63.1 million over four years from 2017–18 (including $4.8 million in capital) to the Department of the Treasury to establish the National Housing Finance and Investment Corporation (NHFIC).

The NHFIC will operate an affordable housing bond aggregator, to provide cheaper and longer term finance for community housing providers by aggregating their borrowing requirements and issuing bonds to the wholesale market at a lower cost and longer tenor than bank finance.

Establishment of the bond aggregator was foreshadowed by the government in March.

Establishment of the bond market is likely to present investment opportunities for superannuation funds as institutional investors.

2. New complaints handling body for superannuation and financial services – government response to the Ramsay Review

Over the last 12 months, an expert panel chaired by Professor Ian Ramsay has been conducting a review of the external dispute resolution (EDR) and complaints framework (Ramsay Review), including the effectiveness of the current EDR bodies and the merits of replacing them with a ‘one stop shop’. The panel’s final report and the government’s response have been released as part of the Budget (see below for more information).

2.1 A new Australian Financial Complaints Authority

The government will replace the current EDR and complaints framework in financial services with a new dispute resolution framework from 1 July 2018. The Superannuation Complaints Tribunal (SCT), Financial Ombudsman Service (FOS) and Credit and Investments Ombudsman (CIO) will be replaced with the new Australian Financial Complaints Authority (AFCA).

The AFCA will be an industry funded complaints resolution body for all financial and superannuation disputes. Australian Financial Services licensees will be required to be members of AFCA, and its decisions will be binding on all firms.

The SCT, FOS and CIO will continue to operate until they are wound down by 1 July 2020, to allow them to clear their existing caseloads.

ASIC will be provided with stronger powers to oversee the new EDR body, including a general directions power to ensure AFCA complies with legislative and regulatory requirements.

The government will provide $4.3 million to ASIC over four years from 2017–18, including capital of $0.9 million in 2017–18. This will be offset by:

• an increase in levies of $3.6 million over three years from 2018–19 under the new ASIC industry funding model
• a reduction of funding of $7.2 million over four years from 2017–18 associated with the SCT being wound down and no longer operating from 1 July 2020. The financial institutions supervisory levy collected by APRA (part of which is allocated to ASIC to fund the operations of the SCT) will be reduced accordingly.

2.2 Internal dispute resolution

The Ramsay Review’s final report recommended that financial firms—including superannuation trustees—be required to undertake public reporting of their internal dispute resolution (IDR) activity and consumer outcomes.

The government has accepted that recommendation, with the funding provided to ASIC intended to also allow it to develop infrastructure for the reporting and analysis of IDR performance data by financial firms.

2.3 Compensation scheme of last resort for financial services

The terms of reference for the Ramsay Review require it to consider the merits of introducing a compensation scheme of last resort for financial services, and to provide a report to government by 30 June.

The Ramsay Review final report does not address a compensation scheme and accordingly, the government’s response and the Budget papers do not make any announcements in this respect.

2.4 Other Ramsay Review recommendations

The government has now published the final report from the Ramsay Review and its response. In essence, the government has accepted all 11 recommendations from the Review which relate to:

• replacement of the existing EDR and complaints bodies with a single body (see 2.1 above)
• the features , powers and accountability of the new EDR body
• transparency of IDR (see 2.2 above)
• referral of complaints back to the financial firm or superannuation trustee for a final opportunity to resolve them via IDR.

Notably, the Review’s final report does not include a specific recommendation for introduction of a superannuation code of practice, as outlined in its interim report, although it does consider it desirable in the longer term.

3. Fund mergers: tax relief extended

The current tax relief for merging superannuation funds, which was due to lapse on 1 July 2017, will be extended until 1 July 2020.

Since December 2008, tax relief has been available for superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. The tax relief will be temporarily extended as the Productivity Commission completes a review into the efficiency and competitiveness of Australia’s superannuation industry.

The government notes that extending this relief will ensure superannuation fund members’ balances are not reduced by tax when superannuation funds merge. It will remove tax as an impediment to mergers and facilitate industry consolidation. Consolidation should lead to better retirement outcomes through reduced costs.

This measure is estimated to have an unquantifiable cost to revenue over the forward estimates period.

4. Refinement of 2016–17 Budget super reforms – limited recourse borrowing arrangements and non-arm’s length arrangements

The Budget papers include two refinements to the superannuation reforms announced in last year’s Budget, relating to the use of use of limited recourse borrowing arrangements (LRBAs) and non-arm’s length arrangements.

• From 1 July 2017, the use of LRBAs will be included in a member’s total superannuation balance and transfer balance cap.
  LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap. The outstanding balance of a LRBA will now be included in a member’s annual total superannuation balance and the repayment of the principal and interest of a LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.
  The measure was announced by the Minister in late March (see ASFA Action issue 622) and is estimated to have a gain to revenue of $4 million over the forward estimates period.
• From 1 July 2018, the law will be amended to reduce opportunities for members to use related party transactions on non-commercial terms to increase superannuation savings.
  The non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.
  This measure is estimated to have a gain to revenue of $20 million over the forward estimates period.

5. Small business capital gains tax retirement concessions refined

The government will amend the small business capital gains tax (CGT) concessions—including the retirement concessions—to ensure they can only be accessed in relation to assets used in a small business or ownership interests in a small business.

An existing package of small business CGT concessions assists owners of small businesses by providing relief from CGT on assets related to their business, including by allowing small business owners to contribute to their retirement savings through the sale of the business. However, the government has identified that some taxpayers are able to access these concessions for assets which are unrelated to their small business, for instance, through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.

The amendments will apply from 1 July 2017 and are estimated to have an unquantifiable gain to revenue over the forward estimates period.

6. Medicare levy to increase

The government will increase the Medicare levy by half a percentage point from 2.0 to 2.5 per cent of taxable income – with effect from 1 July 2019. The increase is to ensure that the National Disability Insurance Scheme is fully funded.

This will impact the rates at which superannuation funds must withhold Pay As You Go tax from members’ benefit payments.

7. Funding for Treasury, legislative drafting and the regulators

7.1 Treasury

The Department of the Treasury will receive $29.5 million over two years from 2017–18, (including $6.2 million in capital) to build capability to better support the government on issues including taxation policy and forecasting of revenue, macroeconomic modelling and foreign investment.

7.2 Legislative drafting

The government will provide $16.9 million to the Department of the Treasury and $5.2 million to the Office of Parliamentary Counsel over four years from 2017–18 to ensure dedicated drafting resources are available to progress financial services and taxation reform legislation.

7.3 ASIC

7.3.1 Extension and finalisation of the ASIC industry funding model

Last year’s Budget confirmed the introduction of an industry funding model or ‘user pays’ for ASIC with effect from 2017–18. This year’s Budget papers contain details of amendments to extend and finalise the funding model.

Following several rounds of consultation, bills to implement the framework for the proposed model are currently before Parliament and draft regulations have been released for consultation outlining the mechanisms that will be used to calculate the annual levies payable by each class of regulated entity, including APRA-regulated superannuation entities.

The Budget papers indicate that the government will recover an additional $112.6 million over the forward estimates period from all ASIC-regulated entities, through the annual levies to be imposed under the new funding model. This is intended to ensure that all of ASIC’s regulatory costs are recovered from those entities that create the need for regulation.

As potentially relevant to superannuation and retirement incomes, the additional activities to be cost-recovered under the funding model include the promotion of financial literacy and activities funded by ASIC’s Enforcement Special Account.

7.3.2 Improving financial literacy

ASIC will receive additional funding of $16 million over four years from 2017–18 to broaden its financial literacy program.

The funding is intended to assist ASIC in promoting investor and consumer confidence, trust and participation in the financial system, by the provision of impartial information, tools and guidance.

The additional funding will be partially offset by an increase of $12 million over three years from 2018–19 in the statutory levy amount recovered from entities regulated by ASIC.

7.4 APRA

ASIC will receive additional funding of $28.6 million over four years from 2017–18 (including $2.3 million in capital) to undertake new regulatory activities to support a stable, efficient and competitive financial system.

The Budget papers indicate that this funding is intended to assist APRA in protecting the financial interests of depositors, insurance policyholders and superannuation fund members including by responding to new financial system activities and products.

The additional funding amount will be recouped via a $26.8 million increase over four years from 2017–18 in the annual financial institutions supervisory levies collected by APRA, while the capital component wil be met from within APRA’s existing resources.

The Budget papers also provide for an adjustment in the financial institutions supervisory levy collected annually to reflect the cessation of the SCT by 1 July 2020 (see 2.1 above).

7.5 ATO

The ATO has not received any specific increase to its funding in relation to superannuation, other than to administer the first home super saver scheme (see 1.2 above).

7.6 Australian Competition and Consumer Commission (ACCC)

The ACCC will receive $13.2 million over four years from 2017–18 to establish a unit to undertake regular inquiries into specific financial system competition issues.

This implements a recommendation of the House of Representatives Standing Committee on Economics report, Review of the Four Major Banks (often referred to as the Coleman Report), but appears to have the potential to extend beyond banking to financial services more broadly.

The cost of the additional funding to the ACCC is offset by an increase in the APRA financial institutions supervisory levies of $13.2 million over four years from 2017–18.

The Budget also contains a number of more general measures that are of interest and more details can be found here.

Smaller funds in box seat on automated engagement

Giving everyday working Australians proactive notifications about personal advice they should act on in order to improve their financial situation, is one of the biggest transformations in the superannuation landscape for many years, says Decimal Software chief executive officer Nic Pollock.

The change is made possible through enterprise digital advice technology available to funds of all sizes. Super funds now have the ability to automate personal recommendations to each of their members digitally.

Right now some people are able to access fully automated end-to-end advice through their super. It’s proven and successful. They log in to their account, are qualified for online advice suitability, select advice topics and are able to implement their personal advice.

This personal advice is convenient and free to the member, and affordable to a fund of any size as every part of the process is fully digitised. However, members of funds are required to initiate their own personal engagement and most ordinary Australians don’t know of the benefits to them of personal advice.

In the age of digital, the next exciting phase is to remove this limitation by proactively providing personal advice to all their members based on personal goals that are locked in and tracked. We like to call it “meaningful engagement”

It’s why this shift in the landscape is so significant. Funds are finally able to engage meaningfully with every member in a personalised yet cost effective manner.

The technology works by proactively analysing peoples accounts and generating notifications about what could be done to improve their situation – without them thinking or making a request for the information.

And importantly the technology doesn’t discriminate against the worth of an individual member, from someone with the lowest super balance to the highest, while the scale and capability of the technology means it doesn’t incur additional costs for the fund.

With messages that go direct to apps, mobile devices and personal computers, members are informed where and how they can make financial gains to improve their situation.

The benefits are focused on improvements to people’s retirement income outcomes as opposed to advice on how best to administer large disposable incomes for investment purposes.

The transformation comes at an opportune time for super funds. The industry is faced with the challenge of finding member focussed services to distinguish themselves in the market, while seeing much of its services commoditised.

Appetite among people of all ages continues to grow for more online automated services, while pressure from political circles is increasing with calls in the recent Productivity Commission report for industry to reinvent itself.

In stark contrast to the current fee-based model, digital advice gives an opportunity to revolutionise the fundamentals of member engagement.

It’s already being openly canvassed by several large funds, however somewhat surprisingly, it’s the smaller to medium sized providers that are rapidly able to transform.

The agility required in order to embrace innovation means smaller funds often adopt technology faster, putting them at an advantage over larger and more bureaucratic organisations.

This transformation is creating an opportunity to engage members in a way that’s convenient and compliant.

Meaningful engagement gives super funds a competitive advantage, and by doing so creates an ideal way to gain relevance again.

^{Source: Super Review (http://www.superreview.com.au/knowledge-centre/smaller-funds-box-seat-automated-engagement)}

Landscape changes with potential for super implosion

^{By Stephen Fay, FS Super}

Changes to default superannuation outlined by the recent Productivity Commission report have potential to fundamentally alter the landscape for current market stakeholders.

So altered is the new paradigm - that should it become law - the current default framework is not even used as the baseline or in any of the options within the PC report. It would seem the current default system is so far from the base criteria of members' benefits, competition, integrity, stability or system wide costs that the PC used. This is more than a nudge to the market, it's a fundamental shift.

The PC report only deals with the allocation of default for those who don't choose. It doesn't suggest shifting people from current funds, or limiting members' choice. Even so, the impact could be dramatic given that it will affect those who enter the system for the first time.

This cohort is disproportionately young (more than 60% less than 25-years-old) and by definition not au fait with the risks and complexity of superannuation. There are 400,000 of them each year, representing an estimated $800 million in contributions annually, and they are sticky.

This makes the stakes very high.

The options put forward by the PC for default funds are the following:

• Assisted employee choice;
• Assisted employer choice (with employee protections);
• Multi-criteria tender; or
• Fee based auction

All of the options put forward by the PC are likely to lead to a significantly reduced number of funds on default menus - to less than 10 and perhaps even as low as four or five.

This reduction in choice is intended. The PC notes the research that shows the correlation between diminishing member engagement with the increase in the number of financial products to choose from.

So what are some of the potential implications for the various stakeholders in the superannuation ecosystem?

Members: Members still have the flexibility to choose however experience shows that majority have the default chosen for them. Non-choosers are to go to a shortlist of default options possibly from a much smaller list of products.

Employers: Employers are the parties that engage administratively with superannuation funds, and even the SG contribution is notionally from the employer not the employee. But the era in which all employers took an active interest in superannuation as a perceived benefit rather than a regulatory duty has long passed (at least the PC seems to think it has). This is reflected in the continuous decline in corporate super funds.

The PC report goes even so far to state: "it is implausible to impose an obligation on employers to act in their employees best interests" given the variation in employee needs. The potential conflicts of interest are also noted as a risk - so while employers may continue to be facilitators, the choice will be less singular but will be limited and with oversight.

Selection panel for default funds: There will be a panel of wisdom required to select the chosen few defaults. While it is recommended by the PC that set criteria would be used to identify funds on any shortlist, the models largely also require government established panels or selection bodies to finalise these choices. The battle over any such shortlists will be fierce and hotly contested. It could be envisaged that participation on these panels will be contentious in its self and sway with political winds.

Superannuation funds: On face value it may appear that funds simply need to undertake all their current responsibilities. And while this is true in the sense there are only minimal differences to what qualifies in general between a MySuper product and a default product, the challenge is there will be a lot less funds that will qualify as defaults.

For those funds not on the selection list, and that will be the majority of existing funds, a major source of new members and contributions will dry up. Sure they could still compete for the choice market, but they will be swimming against a demographic tide.

If we are seeing sprouts of commentary about the implications of scale, under the new proposed framework this will become a hostile jungle for superannuation funds.

And importantly there is little mention of industry specific capabilities influencing selection of the default list. This has potential to strike at the heart of the stated differentiation of many smaller funds currently serving bespoke industry segments, often very well. These are both large and small.

When a game changes so fundamentally, things happen. There will be winners and there will be losers. There will also be challenges to the new rules as parties start to work them out. And there will be more new innovative entrants arising from the potential ensuing opportunities.

There are many rounds to go of review and progress, including federal elections, the requirement for legislation to be passed and market cycles. But changes are afoot and all players' best be ready.

Strong support for competition in super admin

^{Source: Mike Taylor, Super Review}

Just weeks out from the Australian Competition and Consumer Commission (ACCC) making its final decision around those eligible to bid for Pillar Administration, a new survey has revealed overwhelming support for more competition in the superannuation administration sector. This is part two of a survey.

The survey, conducted by Super Review during the recent Association of Superannuation Funds of Australia (ASFA) conference, noted that the outsourced administration service provider market was very concentrated with limited choice and asked how important respondents believe it was for new providers to enter the market.

The survey found that nearly half of all respondents (48.9 per cent) believed it was very important, while a further 49.2 per cent believed it would be useful, while only 6.3 per cent believed it was unimportant.

The survey findings come as the ACCC considers whether Link Market Services should be allowed to bid for Pillar which is being sold by the NSW Government subject to a number of conditions.

The ACCC has already issued a preliminary opinion indicating that it believes Link has already achieved a dominant market position but subject to further representations on the issue.

In the absence of Link being permitted to bid for Pillar, the likely contenders are Mercer and private equity interests.

Super deserves a more aspirational objective

^{Source: Mike Taylor, Super Review}

The Minister for Revenue and Financial Services, Kelly O’Dwyer is quite wrong about the objective of superannuation – it needs to be aimed much higher than simply acting as a supplement to the Age Pension.

It does not require any great economic sophistication to understand the messages contained in successive Intergenerational Reports pointing to Australia’s ageing population, its consequent rising health bill, and the reality that 9.5 per cent superannuation is not nearly enough.

Future Governments and, in particular, future Federal Treasurers will not thank the Turnbull Government for having gone for the entirely non-aspirational objective of superannuation as defined in the legislation – “to provide income in retirement that substitutes or supplements the Age Pension”.

The bottom line is that it is an objective that does not seriously look beyond the next 10 years and which leaves the Age Pension front and centre in the retirement incomes equation even though all the available analysis clearly suggests Australia’s future taxpayers will struggle to pay the bill.

It is precisely because of the findings of successive Intergenerational Reports that the former chairman of the Association of Superannuation Funds of Australia and former chief executive of TAL, Jim Minto, was right to call for a more aspirational objective – one which looked to retirement incomes adequacy and comfort.

It is also worth reflecting upon the fact that the original authors of Australia’s superannuation guarantee regime were wholly cognisant of the need alleviate pressure on the Age Pension in the knowledge that its cost to the Budget was likely to accelerate as Baby Boomers began to exit the workforce.

A part of the Government’s problem in accepting a more aspirational objective for superannuation is that the 2016 Federal Budget did so little in terms of encouraging people to contribute more to superannuation and therefore more to their retirement incomes adequacy.

While the Government’s changes around lifetime caps had some positive elements, they were nonetheless undermined by the reality that the Budget lowered the concessional contribution cap to $25,000 – a comparatively paltry sum for those looking to play catch-up.

If the Government doubts the need for people to be given more incentive to contribute more to their superannuation, it should examine the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO) data pointing to how few people are now making contributions over and above the superannuation guarantee.

Up to and including the Budget there was much talk about the cost of the tax concessions directed towards superannuation but, in reality, the impact of removing or reducing those concessions will prove to be the greater future burden to the Australian economy.

As the Parliamentary year drew to a close, a number of the legislative measures resulting from the 2016 Budget were still yet to pass the Parliament and it may well be early 2017 before those initiatives are finally passed into law.

One of the Government’s underlying promises around the objective of superannuation and some of its Budget measures is that they would inject certainty into superannuation and reduce the scope for Government tinkering.

With the Productivity Commission (PC) still examining superannuation efficiency and competitiveness alongside alternative dispute models, that policy certainty still seems a long way off.

ESG Risks & Superannuation Trustees: A Legal Perspective

By Jonathan Steffanoni, Principal Consultant at QMV

The responsibility of superannuation trustees is greater than that of typical businesses - holding an important economic and public policy role to Australian society to provide income in retirement. What duty or responsibility do superannuation trustees have towards environmental, risk, and governance factors?

There has been gradual shift in focus over the past decade from sustainability and socially responsible investments towards ESG risk. This change intersects with the law regulating superannuation fund trustees and is an area clouded by some confusion. Bearing this in mind, I intend on covering a few main themes:

• Clarifying the distinction between the terminology which is frequently confused;
• Taking a closer look at what ESG factors and indicators actually are;
• Focusing on some global trends which are likely to be influential in Australia; and
• Looking at specific legal issues which arise in relation to these global trends.

Putting ESG in cotext

Upfront, there needs to be a clear distinction between ESG factors as tactical indicators relevant for selecting and timing decisions about specific investment opportunities; and investment strategies which are conditioned by proscription or prescription of certain non-financial outcomes (such as avoiding tobacco, armaments or fossil fuels or investing in renewable energy technology).

Inclusion of ESG factors differs significantly from divestment or negative screening of assets involved in certain activities. We're also not talking about impact investing in assets intended to achieve a non-financial outcome. Equally, we aren't focused on investing in assets with the intention of controlling or influencing towards non-financial objectives. We are talking about the inclusion of ESG factors as relevant financial considerations informing investment decisions about particular opportunities.

There is too-frequent confusion between the process focused consideration of ESG factors with the outcome focused (to varying degrees) ethical, sustainable or responsible investing. In some ways, the awkward acronym "ESG" itself may have contributed to the confusion. The E and S relate to particular groups of non-financial outcomes, while the G relates to process.

Sustainable, responsible or ethical conditions on investing typically require that the trustee's duties are conditioned by consent of the beneficiary. ESG factors relate more specifically to the active exercise of investment powers where there has been no conditioning of the financial objective and therefore investment strategy.

When we hear or use the term ESG, it can be easy to oversimplify the detail of what is a broad and diverse range of non-financial indicators. Typically, risk factors are those things which may result in financial detriment to the value or income generating capacity of an asset. These risk factors are then reflected in risk indicators, which are can be analysed by investors to inform decision making, and possibly create alpha for managers.

Te other important aspect of ESG risk factors and indicators is the role of complex supply chains. Exposure to ESG risks isn't constrained to direct investments, and flow though very complex supply chains of investment management, goods and services. These have traditionally been tricky to monitor, however advances in technology are making this kind of deep analysis possible.

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‘For-profit’ culture weighs down super system

The "for-profit" culture enshrined in the banks' business model is weighing down the superannuation system, Industry Super Australia believes.

Pointing to the latest SuperRatings' data, the body's chief executive, David Whiteley said not-for-profit industry super funds continued to outperform for-profit bank-owned funds in the short, medium, and long-term.

"The habitual underperformance by bank-owned super funds is a drag on member returns and national savings, they are letting the Australian public down," Whiteley said.

"The ‘for-profit' culture enshrined in the banks business model is weighing down the super system. This is the same culture that has overseen countless financial scandals and a loss of trust in the banking sector. It is time that government acted and investigates this underperformance."

Whiteley said while banks chased profits at members' expense, industry funds were focused on getting the best super returns by making deep, long-term investments especially infrastructure, which in turn would strengthen the foundations of the economy.

Jassmyn Goh - Super Review

Energy Super appoints MLC as income protection insurer

Industry super fund, Energy Super, has appointed MLC Life Insurance as the provider of its Group Salary Continuance Insurance.

MLC said the contract was a significant step for the firm as it continued to expand its presence in the industry fund sector and in the Brisbane market.

MLC Group Insurance general manager, Suzanne Smith, said: "We're passionate about partnering with funds whose culture aligns with our values of being customer centric".

"Energy Super demonstrates these values to its members, which is why they are the perfect partner for us as we continue to expand our offering within mid-size industry super funds," she said.

Energy Super chief executive, Robyn Petrou, said: "Together, we have built a model to enhance service and speed up claims management for members which will enable us to drive and deliver on our members' experience of service quality and responsiveness".

Insurance – one size does not fit all

Superannuation funds need to consider different types of default insurance cover which better reflects the status of their members, according to leading actuarial research house, Rice Warner.

The firm has published an analysis in which has examined the shortcomings of the current insurance within super regime and suggested that some significant challenges exist in making insurance cover appropriate in circumstances where one size does not fit all.

"Perhaps the biggest challenge for superannuation funds in providing appropriate and adequate life, TPD [total and permanent disability]and income-protection cover is that the insurance needs of members vary significantly depending upon the composition of their families," it said.

The analysis suggested that this could be addressed by funds differentiating members' default cover by marital status and number of dependent children instead of just by age.

It said that, ideally, fund data bases should record the family characteristics of their members.

"The level of default cover held by young single members, is likely to be higher than their needs given that most have no children," the analysis said.

"In contrast, the insurance needs of members tend to increase with age as they form families and accumulate debt. Yet the typical default cover meets only about 30 per cent of the basic life insurance needs for families with children."

Rice Warner suggested there were steps which superannuation funds could take to improve the adequacy and appropriateness of their insurance cover offerings including:
  • Differentiating members' default cover by marital status and the number of independent children instead of merely age.
  • Tailoring insurance cover for younger people to reduce the possibility of over-insurance given their typically more limited liabilities and responsibilities.
  • Maintaining insurance for older members. Many superannuation funds' default covers taper rapidly as members grow older but their insurance needs may not reduce.
  • Encouraging members to report to their superannuation funds life events such as having children, taking a home loan and older children becoming financially-independent. This information would assist funds to better align default cover to their members' circumstances.
  • Considering the fundamental redesign of their TPD and income-protection cover to provide a "disability package" that is closely aligned to needs.

The analysis said members should not assume that their superannuation fund's default cover is adequate for their circumstances because it almost certainly was not.

Mike Taylor

This article appeared in Super Review, 3 May 2016

In Transit - the difficulties of transitioning service providers

The difficulties of transitioning service providers should not be underestimated . Vincent Sita provides a handy checklist to ensure trustees consider all the processes when making the transition.

Those within the industry do not need to be told about the unprecedented change that the superannuation sector has undergone over the last decade; whether managing regulatory change, consolidating, producing innovative products or changing how to better meet member expectations. The consistent themes through all this upheaval have been striving for good governance and delivering good value to members.

One way trustees are responding to this continued change is by critically assessing their operating models. In an increasing number of cases, this has led to the transitioning of service providers for key functions including member administration, custody, and insurance.

It is now timely to reflect on how these transitions have gone and what has worked well. There are many case studies on the impact of poorly planned and executed transitions, which become costly for all parties involved. It is easy to fall into the trap of underestimating the significant time, resources and experience needed to achieve a successful transition .

Trustee check list for transition success - A trustee may follow this checklist to better enable transition success.

1. Process and controls

• An early benefits realisation plan should define specific objectives that are easily measurable and represent a positive return. This plan, and expected benefits, should be revisited at the completion of each major milestone or stage gate.
• Defined go/no-go decision criteria, with specification of the following critical factors that often get neglected: evidence requirements; when and how involvement of a senior group of approvers is necessary; and minimum requirements to pass through a stage gate.
• An adequate warranty period post-go is essential to allow for any issues to be resolved by the project team who have the skills and knowledge to rectify issues efficiently and effectively. Allowing the warranty period to span across at least one month end or periodic review process is critical.

2. Governance

• Strong executive support and continuous involvement throughout the project. While the initial planning and final 'go/no go' decisions are critical, so too are each of the key milestones and stage gates.
• A steering committee composed of representatives from across the entire business. Trustees should consider including a strong independent adviser who has worked on programs of this type before, to provide the board with confidence that the transition is being managed effectively, and provide a perspective that is not clouded by history or vested interests.
• A project manager with experience executing similar projects in similar environments and circumstances . This person should understand the business, people, process, data and technology aspects.
• A working group structure that spans the organisation. It is important to include client and service provider representatives (for a service provider transition this will be trustee representatives).
• A multi-disciplinary project team. This will usually include staff from multiple vendors, so the team should be co-located to aid collaboration, cohesiveness and information transfer. 
• An operating rhythm of management and governance meetings that permits the cascading of information and appropriate flow and escalation of decisions.

• A robust planning process involving all key stakeholders, with particular focus on alignment and agreement on what success looks like, including clear objectives and detailed measures of success.

3. Risk Management

• A comprehensive risk identification and management process that includes all key stakeholders and risks threatening the project's successful delivery. A pre-mortem that looks ahead at the challenges that could cause failures is a valuable tool for identifying risks.

• This should be supplemented by an issue management process that allows for quick remediation of risks that become issues. In particular, actions taken to address issues should be well defined with clear accountabilities and an appropriate evaluation and escalation process.

• A process for  involving the business in the identification of delivered risks arising from changes made   to systems, processes and roles. This includes a wide range of considerations such as information security risks, impacts on regulatory obligations, the effectiveness of operational process and ultimately member and reputational risks that may have severe consequences for trustees and the superannuation fund.

• An independent assurance program that performs review activities at key points throughout the project lifecycle, to provide trustees with confidence over the transition. This should include, at a minimum, an initial setup review, a post-design review and a pre-implementation review.

4. People and Culture

• Organisational design needs to be considered early as part of the target operating model, by a dedicated organisational change stream. This must consider more than just a system and process change-the impact on people is critical.

• A detailed resourcing plan needs to take into account the balancing of competing resource demands, such as business as usual activities or other projects. Agreements should be in place to cover the time commitment of resources with multiple business and project roles.

• Training and up-skilling the right people at the right time is a key to the ongoing success of the organisation. A detailed training plan, identifying and addressing training needs and appropriately evaluating staff knowledge, is critical.

• The cultural aspects of change should not be neglected; a process for planning and measuring changes to the organisational culture should be formulated. The Australian Securities and Investments Commission has flagged an increasing focus on conduct and culture within financial services organisations, and any change program should have a strong focus on all organisational change

5. Data and Technology

• The use of a cross-discipline architectural decision making committee. Such a committee is necessary to future-proof the solution and ensure alignment with information technology strategy. Key decisions are likely to be needed around systems and the organisation's approach to technologies, like cloud computing. The project's impact on existing infrastructure will need to be considered, such as the need for an increase in processing capacity  or bandwidth.

• A thorough test strategy should be in place, with an early and long user acceptance testing (UAT) cycle, involving a broad range of affected staff . These should include all business specific scenarios, including unusual or one-off events or transactions .

• The early assessment of data quality, as an input to the data migration plan and in order to identify possible process deficienc ies that can be remediated. These deficiencies, which can be identified through advanced data analytics tools and techniques, can be remediated prior or during the migration, depending on their severity . The team should create a thorough data migration plan that has tested and rehearsed the extract, transform and load in a test environment.

• A business as usual transition plan, which gives due consideration to operational support for hardware, software, process and people elements.

This article appeared in Superfunds December 2015

Super helps financial services become dominant sector

Superannuation has been confirmed as one of the key drivers making financial services the fastest-growing industry in Australia over the past two decades.

The status of the financial services and the role played by superannuation has been revealed in the latest Financial Services Council (FSC) UBS State of the Industry report released today.

According to the report, in the 12 months to 30 September 2015, the financial services industry added $141 billion to the economy or $5,881 for every Australian, with the industry exceeding the value of all mining activities by $532 million.

Commenting on the report, FSC chief executive, Sally Loane said it served to confirm the significant contribution being made by financial services to Australia's economic and employment growth.

UBS Asset Management Australian head, Bryce Doherty said the report highlighted a potential opportunity for innovative financial services firms to increase exports of financial services, which are currently only 3.5 per cent of the $2.6 trillion in funds under management.

However, he said it was also clear the industry needed to play an important role at home in providing clarity and simplicity for all Australians' futures."

"Australia has world class fund managers who understand the need for the industry to continue to develop innovative, flexible, and transparent products that help Australians fulfil their current and future financial needs," he said.

However, in doing so, Doherty pointed to the issue of Australia's ageing population saying that it was alarming that recent surveys had indicated that over half of non-retired Australians considered it unlikely they would have enough money for a secure and dignified retirement.

"It is essential that the finance industry works with government to provide clarity and incentives for Australians to ensure the number of future retirees requiring tax payer support is reduced to a minimum," he said.

From Super Review Online, 25 Feb 2016

Economies of scale and scope in Australian superannuation (pension) funds.

Helen Higgs and Andrew C. Worthington are researchers in the Department of Accounting, Finance and Economics at Griffith University, Australia. Their research interests include the drivers of structural change in the Australian superannuation industry. 

Abstract This article provides estimates of economies of scale and scope for 200 large Australian superannuation (pension) funds using a multiple-output cost function. We separately define costs in terms of investment expenses—including investment, custodian, and asset management fees—and operating expenses—comprising management, administration, actuarial, director and trustee fees/charges. The four investment outputs are cash flow-adjusted net assets, the number of investment options, the proportion of total assets in the default strategy, and the five-year rate of return for investment costs, while the four operating outputs are cash flow-adjusted net assets, the number of members, net contribution flows, and net rollovers for operating costs. We find that economies of scale hold up to at least 300 percent of current mean fund output in both investment and operating costs. There is little evidence that economies of scope prevail, generally reflected in the proclivity for many superannuation funds to contract out aspects of both investments and operations.

Keywords: economies of scale, economies of scope, cost efficiency, superannuation (pension) funds

View a copy of the article here.

The End of the Road?

Is the market for superannuation administration services in Australia at the end of the road? The marketplace for what we call superannuation administration services is no longer competitive. Yet, competitive risks and opportunities remain if we divide and redefine the market into the distinct services which make up superannuation administration.

Competition in the market for superannuation administration was substantially lessened with the acquisition of Superpartners by Link Group in late 2014, giving a single service provider a market share over 85% of all outsourced Australian Prudential Regulation Authority (APRA) regulated superannuation in Australia (excluding self-administered RSEs from the market).

This appears to place Link Group in a strong market position, with few comparable alternatives for trustees of APRA regulated superannuation funds looking to outsource or change provider of administration services. On closer inspection, there are some indications that the market might start to fragment, giving rise to competitive opportunities and risks for existing and new service providers to the market.

On face value, one could be excused for thinking that the acquisition might have attracted the attention of the competition regulator. The ACCC didn't intervene, even though the acquisition has substantially lessened competition. Superpartners' technology and system related troubles over the past decade meant that they could not really be considered to be a vigorous and effective competitor. Furthermore, there was a strong argument that Superpartners was a failing firm, with Superpartners in imminent danger of failure due to being unlikely to be successfully restructured without the acquisition.

An obvious view in such a consolidated market is that with such a strong market share position, Link will be able to use their strong competitive position and stranglehold on market share to concurrently capitalise on efficiency gains through the economy of scale in centralising the fixed costs of infrastructure while incrementally increasing the fees charged per member (yet reducing fees relative to growing asset values).

There is certainly some truth in this, and is likely to be forefront in the mind of potential investors when Link proceeds with an IPO on the ASX this year. Yet on closer inspection, there remains reason to believe that vigorous competition in the market might be just around the corner.

Click here to read the rest of the article

NGS Super and QIEC look to form master trust

In what is believed to be a precedent in the industry funds sector, two superannuation funds have signed a memorandum of understanding to pursue a merger based on the formation of a master trust structure.

Importantly, the two funds, NGS Super and QIEC, represent those working in the education sector and their merger would still result in a comparatively modest $7 billion 128,000 member fund.

The chair of QIEC Super, Terry Burke, and the chair of NGS Super, Dick Shearman have issued a joint statement confirming consideration of the move.

"The master trust structure is well used by retail funds to gain benefits of size while still enabling marketing of individual funds within the trust," Shearman said.

"We think the master trust structure can make good sense in the industry funds space."

He said the boards of QIEC and NGS Super had executed a Memorandum of Understanding with the intention of investigating the Master Trust model to gain greater economies of scale while enhancing the benefits for both member groups."

"It is important to both NGS and QIEC Super that a viable and significant fund which understands the particular needs of education workers continues to exist in the non-government education space."

"Initial discussions have identified potential benefits and synergies and we now want to examine those more fully in a formal due diligence process."

Burke said that QIEC Super was the leading fund in Queensland non-government education and while the master trust structure could bring added benefits to its members the trust arrangement would also provide further presence for NGS Super as the only truly national fund in non-government schools.

"No decisions have been made ahead of the due diligence and while investments and insurance are obvious areas for potential integration, other aspects such as brand, marketing and fund administrator can continue with current arrangements under the master trust model." Burke said.

NGS Super manages approximately $7 billion and has 100,000 members nationally. QIEC manages approximately $1 billion and has 28,000 members, mainly based in Queensland. Both funds serve the non-government/independent schools sector, with QIEC having a larger presence in the early childhood education segment than NGS.

Source:http://www.superreview.com.au/news/superannuation

Retail super members gouged by $7.1bn: ISA

Industry Super Australia (ISA) estimates that in the past decade bank-owned super fund members have been gouged by about $7.1 billion for above market fees to in-house suppliers.

The estimate was released hours before the Senate will hold its final debate on the superannuation trustee governance bill.

ISA chief executive David Whiteley said the latest analysis is more evidence of the conflicted nature of bank-owned super funds and "their vertically-integrated business model, which is eating into the retirement savings of millions of Australians."

"This is the key issue which the parliament should be debating. Instead, the bill currently before the parliament seeks to narrowly target the governance of industry super funds and their successful representative trustee boards that guard against many of the practices endemic in the finance sector," Whiteley said.

The ISA research builds on APRA data from 2010 and 2012, and estimates the cost of retail and bank-owned super funds paying above market rates to their own in-house suppliers for super fund services.

ISA estimates these payments have cost members of bank-owned super funds $783 million a year since 2006 or $7.1 billion from 2006 to 2014.

"The APRA research suggests that banks are boosting other parts their business by paying above market

rates for superannuation services. This appears to be coming at the expense of the banks' own super fund members," Whiteley said.

"The extent of the related party deals exposes the key governance challenge within superannuation. There is an inherent conflict faced by the for-profit sector which must reconcile the competing interests of fund members and shareholders. The persistent underperformance of these funds reveals it is members who are losing out."

Using an APRA analysis published in 2010 which compared the prices paid to independent suppliers and related party (in-house) suppliers by for-profit retail funds and by not-for-profit super funds, ISA has updated the ongoing costs through to 2014.

While all super funds outsource administration, asset consulting and fund management services to both in-house and independent or external suppliers, APRA found that only the retail sector paid above market rates for in-house services. Where banks used independent suppliers, the APRA data found no statistically significant difference in the cost.

The ISA analysis takes into account the impact of foregone investment due to the leakage caused by overcharging relative to market rates.

Source:http://www.financialstandard.com.au/news/view/55669587

In super, the Danes are great, Australia a close third

Australia’s superannuation system has been judged to be the third best retirement system in the world, according to the Melbourne Mercer Global Pension Index (MMGPI) Report released this week. The 2013 Report replicates last year’s findings, with Denmark’s retirement system found to be the most robust, followed by the Netherlands and Australia.

The MMGPI Report ranks the pension systems of countries across a range of indicators to determine an overall index value for each nation. The Report now covers 20 pension systems affecting approximately 4 billion people, or some 55% of the world’s population, including China and India.  It is a collaboration between global consulting firm Mercer and the Australian Centre for Financial Studies (ACFS), with support from the Victorian Government.

How the Global Pension Index is calculated

The overall index value for each country’s system is made up of three sub-indices; Adequacy, Sustainability and Integrity.

Adequacy is 40% of the total, and represents benefits, tax support and asset allocation. Sustainability has a 35% weighting based on the likelihood that the current system will continue providing benefits into the future. It includes coverage, the level of current government debt and trends in labour force participation rates for older workers. The Integrity sub-index is worth 25% and considers governance, protection, communication and costs, all of which impact on public confidence.

An ‘A’ grade system requires an overall score above 80 and is “a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.

Danes hold off the Dutch and Aussies (again)

In a repeat of last year’s podium, Denmark’s pension system had the highest overall index value ‘A’ grade at 80.2, followed by ‘B+’ grades for the Netherlands (at 78.3) and Australia (at 77.8). Switzerland and Sweden were close behind, while the UK slotted into 9^th place (65.4) at the lower end of the ‘B’ grade. It was judged to have an inferior pension system to Canada, Singapore and Chile. The US fared no better, placing 11^th (58.2). Japan is the only mature, developed economy with a retirement system rated ‘D’, having been given an index value of just 44.4. Japan’s low overall score was primarily due to a woeful Sustainability sub-index score of 28.9, the equal second lowest with China across the 20 nations.

When it comes to retirement, what makes the Danes great?

According to the Report’s lead author, Dr David Knox, Senior Partner at Mercer, Denmark has design features that would be the envy of most other nations:

• a universal age pension that equates to 17% of Danish average earnings. This is reduced if an individual’s income from employment is greater than 75% of average earnings
• in addition to the basic pension, there is an income-tested supplementary pension of up to a further 17.1% of Danish average earnings. This means that the poor receive a pension of 34.1% of average earnings
• both pensions are adjusted in line with movements in average earnings. According to OECD tax revenue data, the average wage in Denmark for 2012 was US$49,887 versus US$48,199 for Australia
• a nation-wide statutory fully-funded system covers all employees and provides a lifelong pension in retirement. Contributions to this system are based on hours worked per month
• occupational schemes round out the system, with fully-funded Defined Contribution (DC) schemes enjoying almost universal coverage where end benefits are usually taken as annuities rather than as lump sums.

The level of mandatory contributions in Denmark is more than 12% for most employees, versus the current 9.25% Super Guarantee rate in Australia.

Denmark is also held in high esteem for its universal government-funded health and education systems, but it comes at a price borne by the Danish taxpayer. Danes are amongst the highest- taxed citizens in the world, with a top tax rate of 60.2% phased in at 1.1 times the average wage. Australia’s top tax rate of 47% (plus Medicare) phases in at 2.4 times our average wage.

Can Australia turn its ‘B+’ into an ‘A’?

Australia’s ‘B+’ rating indicates “a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A grade system”. Improvements could come from:

• increasing the labour force participation rate amongst older workers
• increasing the age pension age as life expectancy continues to rise (note: it is already scheduled to move to 67 for those born after 1 January 1957)
• increasing the minimum benefit access age so that preserved benefits aren’t available more than five years before age pension eligibility
• removing legislative barriers to encourage more effective retirement income products, and
• introducing a requirement that part of the retirement benefit must be taken as an income stream of some description.

The final two issues received much discussion at the MMGPI launch. As Dr Knox put it, “Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe.”

SMSFs – the $500 billion ‘joker in the pack’?

Australia’s overall index value rose 2.1 points year-on-year, mainly due to a significant jump in its Integrity sub-index, which scored the highest of any nation. A major factor was the introduction of the Stronger Super reforms that are already leading to improved governance and stronger regulation. Australia is now one of only three countries that require public offer funds to have a conflicts of interest policy in place.

However, these reforms apply primarily to ‘APRA-regulated’ funds, which account for approximately 66% of the nation’s superannuation. SMSFs are not, other than at the margin, affected by these regulatory changes. SMSFs will not have to create an operational risk reserve, nor supply members with a ‘Standard Risk Measure’ statement outlining the likely frequency of negative returns over a 20-year period. SMSFs trustees need to prepare an investment strategy but, unlike their public fund counterparts, do not need a risk management strategy nor a conflicts of interest policy. SMSF members do not have access to the Superannuation Complaints Tribunal, a government body that arbitrates on member grievances made against super funds.

It would not be unreasonable to question whether, if the SMSF sector continues to grow apace, the differing governance standards between APRA-regulated fund and SMSFs will affect Australia’s Integrity sub-index score over time, compromising Australia’s overall place in the list of elite retirement systems. Recent signs are that regulators are watching closely.

Enhanced focus on delivering sustainable incomes

The Melbourne Mercer Global Pension Index is an ambitious undertaking, but one that pays dividends in the quality of data it brings to the comparison of pension systems around the globe. The Report is now keenly anticipated by superannuation professionals and global pension managers globally. It is a key source of insight into the health and robustness of pension systems and how these systems might be improved. Australians should be justifiably proud that work of such global importance is being undertaken here.

One of the key messages from the latest report is the need to ‘start with the end in mind’. Pension systems exist to provide benefits in retirement, and the best systems deliver that goal to the greatest number by the most robust means possible. A mind-shift away from focussing primarily on capital accumulation and more toward post-retirement income generation is needed.

 http://cuffelinks.com.au/super-danes-great-australia-close-third/

Harry Chemay is a consultant to superannuation funds, an alumnus of Monash University and a member of Finsia. Both organisations are consortium members of the Australian Centre for Financial Studies. He previously worked for Mercer.

SMSFs – Have they plateaued?

While SMSFs remain an important part of the superannuation landscape, growth of the sector has slowed. However, what has not slowed are the changes, and Jassmyn Goh reports on what is shifting the dynamic of the sector. 

While self-managed superannuation funds (SMSFs) seem to be a creature of habit in terms of growth trends, the sector is facing a multitude of change. 

The sector reached $571.8 billion in assets in June 2015, according to the Australian Taxation Office (ATO), a slight drop from the quarter before. 

This was possibly due to the drop in the establishment of new funds, 6,700 in June and 7,876 in March, and 283 wind-ups in the quarter – seven more than the previous quarter. 

By the end of June 2015, Australian Prudential Regulation Authority (APRA) regulated super fund assets sat at $1.33 trillion, according to APRA statistics.  

The SMSF Academy managing director, Aaron Dunn, said though SMSF growth has slowed a bit in the last couple of years, it is what has typically happened over the last 15 years. 

“There are spikes that occur off the back of poor market performance and so previously, there’s a thought tendency that was: ‘If markets are bad, why should I pay people money to look after it?’,” he said. 

“In 2008, there was a spike in the number of funds that were set up that year, so part of it’s to do with the growth or decline in annual rates and is a function of investment performance. It’s also impacted by regulatory change, like the Simpler Super reforms.” 

Dunn said when there were a couple of good years of investment performance, SMSFs plateaued out in terms of any growth, due to the mentality of, ‘if it’s not broken, there’s no need to fix it’ when it comes to super. 

“I don’t think we’re going to see any large jumps in moving from 30,000 to 35,000 establishments a year to 50,000, or this concept of ‘will it retain growth at six or seven per cent a year?’,” Dunn said. 

“The numbers will naturally be in the 30,000 to 40,000 year-on-year mark, with any change in legislation maybe taking it towards the top end, and with everything ticking along quite well investment wise and regulation wise, it’s probably going to be at the lower end of the 30 as well. So, I don’t see any material change and that’s pretty much been consistent for a decade or so now.” 

According to Investment Trends, the main reason for establishing an SMSF was to have more control of investments.  

However, “poor super fund performance” reasons had dropped dramatically (8,000 fewer people) in 2014 and 2015, from the previous two years.  

Australian Institute of Superannuation Trustees (AIST) chief executive, Tom Garcia, said the industry funds were doing well with member communication. 

“The money flowing out to SMSFs is certainly plateauing, if not reducing, so the not-for-profits are growing the fastest now, but it used to be for many, many years the SMSF sector. So, the volume of money moving out to SMSFs is slowing,” Garcia said. 

“So, the not-for-profit funds are doing something right in providing good communication and the delivery of retirement income products, and they’re only going to get better at it for people when they retire. That is a function of these funds getting in contact with members much earlier in the piece.”

Garcia noted that industry funds were not necessarily worried about SMSFs. 

“They’re part of the landscape. They realise it is competition. Some of them even work with someone who wants an SMSF but still stays in contact. So, there’s still an element of having chosen to start with an SMSF, maybe you’d like to invest part of your SMSF back into our pooled structure and buy one of our pre-existing options, or utilise that for your SMSF investment,” he said. 

“So, there are different ways they are looking to still engage with the member instead of discarding them, so to speak, or letting them go. Some of the time they will maybe  want to come back and keep the relationship.” 

Times are changin’ 

Like many things, engagement with SMSFs is getting younger and younger, with more people under 45 looking to start an SMSF. 

“Things that are changing are the dynamic of the age group coming into the sector. We are now seeing one-in-four under 45s looking at SMSFs. The other interesting thing is around 40 per cent of members of SMSFs are drawing pensions as well,” Dunn said. 

He added that as those in their late 30s and 40s have been under the compulsory super regime their whole lives, their capacity to be thinking about SMSFs has the potential to be pushed forward. 

“Recently, there has been the strategy to borrow within a fund. That has been an attraction for that group because we can take a 25 year timeframe on those sorts of strategies, rather than thinking about it as a strategy for the next five years. There’s a whole range of levers that are supporting why those younger people are becoming more engaged at an earlier age,” he said. 

Dunn also said as the age group would have more in their account balance than the previous generation at their age, it was more justification to start earlier. 

According to the SMSF Association’s 2015 SMSF report, 72.1 per cent of advisers said they have experienced an increase in demand for SMSF services from 41 to 50-year-old clients.  

It said in 2014, those in the 35 to 44 and 45 to 54 age brackets, made up 62.4 per cent of SMSF establishments.  

“In the last two years, close to two thirds (65.7 per cent) of advisers have seen a growing demand from 31 to 40-year-olds, while more than one in five (21.7 per cent) have experienced an increase in demand from 20 to 30-year-olds,” the report said. 

Dunn said SMSFs now have a more broader appeal than just worrying about individuals on a higher income. 

“If you’ve got high income earners, they’re going to be looking at the same things that others are going to be looking at, like how much they want to put in super, and the ability to put large amounts into super. So, they are looking at other structures just as much as they’re looking at super generally,” he said. 

“I think there’s certainly going to be an appetite for those with larger income brackets. But now, SMSFs are starting to become more mainstream in terms of the type of trustees that might get attracted to it as well.” 

Things that are changing are the dynamic of the age group coming into the sector. We are now seeing one-in-four under 45s looking at SMSFs.

– Aaron Dunn

SMSF Association’s chief executive, Andrea Slattery said account balances were a secondary issue to establishing an SMSF. 

“The main issue is whether or not an SMSF is right for you financially or part of your business or family circumstances. To have something you can build for the next 40 to 60 to 80 years means it’s part and parcel of your plan to develop and grow efficiencies,” she said. 

“The $200,000 minimum balance that ASIC [Australian Securities and Investments Commission] recently talked about is, if you’ve got less than $200,000, then you should be making sure if it’s right for you and to have a good look at it.  

“What you need to take into account regardless of what ASIC suggests is to have competent advice, an understanding of what you’re doing, making engaged decisions about when you’re starting, and how you’re going about it.” 

Dunn noted that there might be a change in the demographics of gender where females may go past males in terms of SMSF membership. 

“When you look at the membership profile there are 52:48 male to female, but over time the percentage has been narrowing over the journey. Maybe because of longevity. We may see in the not too distant future females being a larger representation than males in the SMSF sector,” he said. 

Embracing technology 

With a new generation entering the SMSF space and technology capabilities changing the dynamic of the sector, providers will have to make decisions around technology and delivery of services. 

“A fifth of SMSFs are using cloud tech and tech that’s starting to redefine the way businesses are looking at offering services to existing trustees,” Dunn said. 

“The technical stuff is going through the motions at the moment, while we wait for government to give guidance.” 

Dunn said around 60 per cent of all SMSFs are being set up by 10 per cent of the service industry. 

“With the pace of change that’s happening at the front-end of the industry in terms of administration, we’re already starting to see some real gaps between those at the forefront and those in general practice who are offering SMSFs as part of a broader strategy, because they’re not taking on board the tech and efficiency gains,” he said.

 “We’ve also been able to see from our survey results that businesses that are three years into that tech footprint are now getting efficiency gains greater than 40 per cent a year. So, the way in which they price their services and deliver their services is certainly changing.” 

Dunn noted the challenge for providers who do not embrace technology will be on how competitive or relevant they will become to existing and potential clients.  

“If you don’t take on board and be conscious of the efficiency gains and how that might influence pricing, you’ll find yourself struggling to remain competitive in that landscape,” he said. 

“It’s going to need to have certain businesses look at the way they offer services, and not to say they’ll be irrelevant, but if they don’t respond to these changes, then they will find it more difficult going into the future.” 

Tax accountants, H&R Block recently set up its SMSF administration division using cloud technology. 

H&R Block director of tax communications, Mark Chapman, said their investment in tech allows their clients to access their fund more efficiently. 

“Our clients can instantly see how their investments are performing and tweak their investments, rather than passing instructions onto someone sitting in an office,” Chapman said. 

“It’s a much more instant solution, more high tech, much easier to use, and more responsive for clients.” 

Licence to SMSF 

Another reason H&R Block entered the space was its prediction that there would be a mass exodus of many accounting firms from the sector.  

“The admin space is an area we’re looking to capitalise on by increasing awareness of a specialised area,” Chapman said. 

“A lot of smaller accounting practices are looking to leave the SMSF space and we’re looking to capitalise on that.” 

From 1 July 2016, accountants wanting to provide SMSF advice will need to hold either a limited, or full Australian Financial Services Licence (AFSL).  

AMP head of policy and technical for SMSF, Peter Burgess believes that this is currently the biggest issue for the sector, as accountants are running out of time to apply for either licence.  

“It seems a lot of accountants are yet to make their move. What we’ll find is that accountants will need to think about their business models if they want to be compliant,” Burgess said. 

“When you’re talking to high-net-worth clients, it’s around asset protection and what type of strategies to protect assets. If you can’t recommend them an SMSF, then you’re limited in the advice you can provide.” 

Slattery also said there were a lot of accountants who had not applied for an AFSL.  

“People need to commit to the rules and so at the moment, we’ve got only a number of accountants who have the exemption. A significant number of our members who are accountants have committed to the licensing regime since early 2004,” she said. 

“There’s a lot of people who haven’t committed yet and unless they meet the rules to engage and advise and service SMSF trustees, then they won’t be able to provide that advice for those services. They need to be aware it takes a number of months to go through the process and to achieve the status to provide advice from 1 July. 

“There are many accountants who have full licences and part licences that are servicing SMSF trustees efficiently, as well as competently. I think that as soon as people realise this efficiency and the high quality of service, the better off the industry will be.” 

Dunn said while the regime change would not impact the number of funds established, the advice given would need to be more thought out. 

“I think the way in which the advice is provided going forward will be more robust, and coming with an advice document it means those that are coming into it are better aware of the roles and responsibilities, risks, benefits and so forth of SMSFs,” he said. 

“One of the things we’ve seen is the fact that more financial planners are actively involved in the establishment of funds, not only for advice but also for setting it up.  

“There might be a period of time when accountants will have their training wheels up and this might initially impact the timeframe of when the funds are set up. But by and large, we won’t see any major change one way or the other.”