Australia has been a country in search of leadership during much of 2010. The prolonged period of ‘horse-trading’ that followed the Federal elections in August does not bode well for the fate of many of the changes sought as a result of the Cooper Review. With the balance of power being held by three MPs from rural areas, it is unlikely that any minority government will seek to drive through the most controversial reforms proposed by Cooper. It’s a political reality that will create little impetus for dramatic regulatory change in pensions and financial services, unless particular aspects of the reforms catch the imagination of the independents.
In the real world of superannuation investing, while the industry continues to grow in terms of funds under management, government figures suggest that over the next 25 years the number of regulated funds will reduce from 447 to 74, by 2035. This has implications for investment mandates. The consolidation of funds will see those surviving being much larger, with larger member account balances.
The Cooper Review created intense debate in the pensions industry, principally due to the stratified nature of Australia’s superannuation market, which is broken into three core sectors: industry super funds (not-for-profits - or ‘all profits to members’), corporate and government funds, and retail master trusts and self managed super funds. The SMSF sector managed $332 billion as at 30 June 2009, the last year that figures from APRA are currently available. Of the $756 billion in regulated super funds, retail funds have $335 billion, industry super funds have $195 billion and corporate and government funds have a combined $230 billion.
In July 2010, the Australian Government released the final report from the Super System Review. The Cooper Review examined the efficiency and structure of Australia’s $1.26 trillion pension system, recommending a considerable number of changes. Some of the recommendations, including proposals around improving the efficiency of the administration of the pension system, have received broad industry support and are therefore likely to be implemented. Others, such as the proposal for a low cost ‘My Super’ default pension product, have been hotly contested. It is difficult to see how the more controversial proposals could be pushed through Australia’s hung parliament, where the political reality for either major party could see pension reform issues well down on the priority list.
A range of reforms to superannuation administration could proceed, if they were supported by both major parties. This would put some pressure on parts of the industry to improve outdated and inefficient administration processes. The need for super funds to invest in their administration has been publicly stated by a number of high profile commentators, including the Cooper Review itself, which put forward the ‘Super Stream’ proposals to streamline the processing of payments into the superannuation system.
Even if the new parliament passes the reforms, it is likely that Australia’s pension industry regulator APRA will provide the industry with time to transition the changes, meaning that the commencement is likely to be some years away.
Consolidation of the number of super funds is likely to continue in both the retail and the not-for-profit sectors. The increased regulation of trustees, including recently released APRA guidelines on prudential practices, and proposals for increased liquidity holdings is making the job of the trustee more difficult. This is leading to the creation of the ‘professional trustee’ and is forcing many funds to consider whether to stay in the business of superannuation.
The $30 billion AustralianSuper fund was borne of the merger between the Australian Retirement Fund, the Superannuation Trust of Australia and Finsuper. In the retail sector, large master trusts continue to swallow up corporate superannuation plans. The upcoming merger of Cbus and Connect industry funds in October 2010, and the merger of the energy industry super funds ESI Super and SPEC Super, represent just the latest in fund mergers.
Damian Hill, CEO of the $17 billion REST industry superannuation fund says “We have seen significant consolidation over the past 10 years but the drivers are becoming even stronger. It will be challenging for the industry to manage that consolidation but it will drive improved scale benefits which can be passed on to members.”
Since late 2008, CONNECT has been considering options available to it to meet the increasingly complex challenges of providing members with the right benefits at an appropriate cost. CONNECT chairman Mac Russell says, “This merger is about serving the best interests of our members and employers, who will reap the benefits of greater economies of scale, efficiency and an even stronger overall market position”.
The Australian pension system allows individual pension fund members to select their own pension fund. The introduction of ‘choice of fund’ has led to the retail and not-for-profit sector competing around aspects of the pension system, with a particular focus on fees and commissions. One area of debate is whether funds should move to daily unit pricing, to give members more information and control over their own investments. High net worth superannuation account holders are starting to expect timely access to pricing and valuation information for their holdings, and there has been strong focus on the issue from the industry regulators such as APRA and ASIC.
The Cooper Review also pushed for stronger requirements on trustees to have such pricing information available in a timely manner. Daily valuations are not available for all types of assets, however. REST’s Damian Hill says, “We currently have twice weekly pricing. Unlisted assets can obviously not be re-valued at each unit price valuation so there are some equity and transparency issues that need to be closely managed by trustees.”
Aside from the difficulties of getting a daily valuation for unlisted assets, there are obviously benefits to holding these assets. Hill says, “The positives of unlisted assets completely swamp the negatives related to unit price valuations. We believe that unlisted assets will continue to form an integral part of our portfolio in order to produce better returns for members.”
One of these benefits is the smoothing effect on pricing that unlisted assets can give a fund over the longer term, as well as steady income generation. AustralianSuper, the $30 billion multi-industry fund, points out that unlisted assets can bring stability to the portfolio, particularly as the performance of Australian and international share markets continues to fluctuate. The fund said that unlisted assets can balance out the peaks and troughs and help to provide solid investment returns.
In July 2010, research house Chant West released data showing that retail master trusts outperformed industry super funds again, the 13th time in 17 months. Chant West Principal, Warren Chant cautioned that it was not a trend that was expected to continue.
One of the explanations they gave to account for the recent outperformance of retail master trusts over the industry funds, was the different asset holdings of the two sectors. “The recovery in equities markets directly assisted the retail super funds, as they have a greater percentage of their assets invested in these markets, whereas the industry funds have more in unlisted assets”, said Chant. “Secondly, the industry funds were hit with the need to dramatically revalue downwards their unlisted assets in the post-GFC environment.”
The retail master trusts saw a drop in voluntary contributions in the post-GFC environment, whereas flows into industry funds were upheld due primarily to compulsory Super Guarantee contributions.
Australian pension funds are still receiving strong cash flows thanks to the 9% compulsory employer SG contribution for employees and Australia’s low rate of unemployment - currently around 5%. The continuing growth of pension assets means that the Australian market continues to attract interest from international fund managers and will, despite pressure on costs, be a strong source of growth for investment managers.