The Association of Superannuation Funds of Australia (ASFA), has launched the FTSE ASFA Australia Index Series, the first industry-standard tax-adjusted benchmarks for Australian investors.

In an exclusive interview with IPA, Melinda Howes, director of policy and industry practice at ASFA, says that the 36 index series will enable pension funds to begin writing investment mandates on an after-tax basis with the potential for increased member returns in the long run. 

“ASFA has been saying to super funds that we think it is a good idea to look at your investments from an after-tax perspective and they have been saying that their own investment managers don’t have a benchmark to measure that against,” says Howes. “This is step one to remove that roadblock. 

If you want to write an after-tax mandate for a fund and look for a return on an after-tax basis we have some way of benchmarking the investment manager against that and see how they are performing.” 

The index series has taken a couple of years to develop and includes an independent committee to govern the ongoing management of the indices. Back in 2008, says Howes, “ASFA released a paper on after-tax management of investments so it was something that we felt strongly about for a while. We believe that it is part of good investment governance for trustees to take into account tax issues. Because super fund members receive a total tax return in their account we believe that it is important that they encourage their investment managers to manage with an after-tax outcome in mind.” 

From industry consultations ASFA expects that managing investments on an after-tax basis could significantly improve investment returns for pension fund members. According to Howes, “Some investment professionals are saying that imputation credits are a major issue. There were numbers being bandied around that you might be able to pick up tens of basis points by better managing your investments from an imputation credit perspective. 

Whereas trustees spend a lot of time managing their administration costs they might be able to get some quick wins by focusing a little more on the tax side. In the past there hasn’t been a tool to enable them to measure their effectiveness there, but now there will be. What we would hope is that funds can further reduce the tax that they are paying and improve returns to members, so the outcome for members would see improved returns over time.” 

The move of ASFA into the index business with FTSE represents a significant strategic step for the not-for-profit industry association. The index series has the capacity to be used in a number of ways, including through establishment of exchange traded funds. The index series may be of particular interest to self-managed super funds, which now collectively manage over A$320bn, or a third of all pension fund assets in Australia. 

ASFA’s move pre-empted the Cooper Review of Australia’s superannuation system. In a recently issued consultation paper, the committee provided further details on the taxation issues that will be considered, stating that the review would consider the following questions: 

• To what extent do trustees take an interest in the taxation of the underlying portfolio and, for example, the amount of capital gains tax being incurred?

 • What are members told about the tax governance policies of the fund?

 • Is mandating an across-the-board obligation to have regard only to after-tax returns Australia’s A$58bn Future Fund has moved to take a leadership position in governance, appointing responsible investment practitioners to guide the fund’s environmental, social and governance (ESG) programme while simultaneously taking the chair of the newly formed International Forum of Sovereign Wealth Funds (IFSWF), which aims to improve the international governance of sovereign wealth funds.

Gordon Haggart has been appointed as the fund’s responsible investment head. Haggard has been closely linked the United Nations Principles for Responsible Investment, serving as a programme manager for the UN Environment Programme Finance Initiative (UNEP FI) and managing the UNEP FI’s Asset Management Group, which has produced a series of influential reports on the impact of ESG issues on investment processes. 

According to the Future Fund, Haggart will work alongside the broader investment team to identify relevant investment opportunities, particularly related to environmental issues and will focus on influencing companies in (eg, in rewarding the manager) a solution? If the index was widely adopted across the industry the result could be a significant change in investor behaviour, with stocks being held for longer periods of time. Vanguard Investments Australia is one fund manager that reports on returns on an after-tax basis and has argued that reducing stock turnover can result in reduced taxation costs and improved member returns.