Stronger Super: where to now?

Just days ahead of the Government releasing its Stronger Super package, a group of industry leaders discussed its impact and implications.

Mike Taylor, managing editor, Super Review: Okay, we’re underway — and the topic is, of course, Stronger Super.

I think one of the more controversial questions to arise is can the Government really seriously consider full legislation around Stronger Super while the question of default funds under modern awards is still to be dealt with in terms of the Productivity Commission.

So because I always start roundtables with Russell Mason, I’m going to start it with Russell today.

Russell Mason, partner, Deloitte: I think the issue of default funds has really been highlighted recently with the concerns over a couple of funds. And I think we’ve had Senator Nick Sherry comment on his concern that funds are automatically becoming default funds.

I must admit, I agree with his approach that says a fund must pass certain hurdles before it becomes a default fund under a modern award. It should be open. I don’t think it should be limited to any one type of fund — the industry fund — if other funds reach the hurdles they should be included, and it is a major part of Stronger Super.

So I just wonder how much the Government can implement before they sort out the default funds status, how it’s going to work?

Mike Taylor, Super Review: David, what’s your take on it?

David Graus, general manager of policy, ASFA (DG): Well my view is that they can certainly implement Stronger Super legislation through, and I don’t think they’ve got the political will to actually drive the award modernisation as fast as the political will to get MySuper through.

I mean, that being said, once it does get through, clearly the award process (and that includes the funds as default) will come — with prominence and importance.

Richard Gilbert, chief executive, Rule of Law Institute: I think the process is being far too slow in evolving.

The Rudd Government was elected in 2007, it’s now four years later and we haven’t even got a referral to the Productivity Commission. It’s totally unsatisfactory, and I speak on behalf of Richard Gilbert, commentator, not on behalf of any industry in regard to that.

But it gets worse than that, because Fair Work Australia is now under examination for its disclosure, and in the Senate is a resolution to excuse the President of Fair Work Australia for being accountable in relation to this issue — or not in relation to this issue particularly, but to the Estimates Committee generally.

And there’s a motion afoot in the Senate. I’m not sure that it’s up yet, but that will effectively allow him to exercise his wishes as to whether he turns up or not to be accountable.

And so the problem with the fact that nothing has been done is that we are entrenching a massive monopoly in default superannuation, which is a very large proportion of SG, and that of course means there is no built in — effectively no competition, or little competition — and there’s a couple of insurers here, you guys will be pitching tenders for a very small number of funds in the active part of the SG market.

So I think the Government really has got it wrong in not acting sooner. And this could take the Productivity Commission best estimates — they might start next year, they’ll take a year to look at it, and the Government then takes a year to come in with something. That’s got 2013 or 2014 written on it.

That is an amazing timeframe for something which seemingly is so simple.

And the Industrial Relations Club, unions and employers look as though they’ve fairly comprehensively taken over default superannuation.

And companies like AMP — and I don’t represent AMP — that have been in the superannuation market since before 1900 are effectively excluded from competing in the occupational superannuation space. And so it’s become a mutual fund show and not a superannuation entity show.

David Hartley, chief investment officer, Sunsuper: Which is what AMP used to be — a mutual fund, but anyway.

Richard Gilbert, Rule of Law Institute: Yeah well.

Mike Taylor, Super Review: Well David Hartley, what’s your take on it?

David Hartley, Sunsuper: I think part of the issue looking forward is whether or not you’re getting — you know, you’ve got a compulsory superannuation system, there may actually be a requirement to be a health fund that you have a cap on the amount of profit that you can make from that line of business, and that would seem to be fair.

And if commercial operators are willing to operate on the same profit margin as industry funds then it’s probably fair enough. I don’t know whether they’re going to, but that’s another question.

Richard Gilbert, Rule of Law Institute: But markets set that. And when I gave evidence to that Fair Work Bill I actually showed the committee tenders that the retail, or the corporate market trust made at 60 and 70 basis points.

David Hartley, Sunsuper: Yeah, that’s the quoted fee. That’s the quoted — there’s no requirement for a trustee of a superannuation fund in Australia to say how much money that particular body is taking out for the purposes of the trustee, and how much they’re taking out for related parties.

And if you get to fee disclosure which gives you those numbers, then fine. But I was speaking to someone about this issue and they said there’s all sorts of ways that you could effectively quote a zero fee and still make a bucket load of money out of the whole system.

And they’re talking about volume discounts on spot contracts; they’re talking about a whole bunch of different things that I’d never even thought of. And until you can get to the bottom of how much you’re taking — how much you’re ripping out of the system, then you don’t really have a fair comparison.

And I suspect there’s a whole lot of people who are just — their job is “How do I hide these fees?”, “How do I make this thing profitable without looking as if I’m taking a lot of money out?”.

So if you can get to the bottom of that and find out exactly how much the trustee is taking out, the responsible entity is taking out for themselves, and for the related entities, then I think you’ve got a fair comparison, then you’ve got a basis for which those commercial guys can operate as a default fund.

Richard Gilbert, Rule of Law Institute: So PDSs aren’t representations of the market?

David Hartley, Sunsuper: No. I could arrange — our investments in our particular fund, I could arrange them so that I could quote a negative fee and have exactly the same investments as I’ve got now, under the current rules. It’s ridiculous.

David Graus, ASFA: Won’t sort of performance reporting, and you know, the new APRA disclosure sort out the maintenance on that?

David Hartley, Sunsuper: Well it depends on what they ask — as to what questions they ask. But no, I don’t think so. I had a lunch with Wayne Swan last week and he sort of asked if there’s different ways people are quoting fees. I said “Oh you bet”. Absolutely.

There’s plenty of ways you can quote fees, plenty of ways you can extract profit out of compulsory superannuation without the members even knowing about it.

So if you can get to the bottom of that and restrict the profit margin that the commercial guys can take out of that, because the profit for members, I mean, you basically can pretty much see what’s going there, but if you can restrict the profit margin on the compulsory side of things from the commercial operators then I don’t see any reason why you would favour one over the other.

Richard Gilbert, Rule of Law Institute: Well wouldn’t you restrict the costs that non-commercial operators are taking as well? Wouldn’t that be an issue? Why do you just focus on…?

David Hartley, Sunsuper: Yeah, so you’d quote it. You’d quote how much you take. I can tell you how much we take, five basis points.

Pierre Jond, chief executive officer, BNP Paribas, (PJ): You know your industry markets, at the end of the day your unit holders or pension holders are buying a performance. And in the end, whether it is one basis point, ten basis points, or cents…

David Hartley, Sunsuper: And industry super funds as a whole have outperformed commercial operators for 10, five, 20 years, whatever. So there should be no commercial operators in that sense, but they still exist.

Richard Gilbert, Rule of Law Institute: And some industry funds or corporate funds have done very well.

David Hartley, Sunsuper: Yeah, absolutely.

Richard Gilbert, Rule of Law Institute:  I think it’s very difficult to generalise.

David Hartley, Sunsuper: Yeah, that’s right. But I mean take the industry as a whole; the industry funds have out performed the commercial operators. Now maybe there’s something to do with that, I don’t know.

You know Warren Chant has done a lot of surveys, a lot of analysis on that sort of stuff.

Richard Gilbert, Rule of Law Institute: So is that the reason why you’d never allow commercial funds to be entering the default competition?

David Hartley, Sunsuper: No. I’m just happy for commercial funds to do it on the basis of — you know, as long as there’s absolute clarity on what they’re taking out.

And you look at the accounts of the major banks — they’re taking lots of money out of the wealth management industry, and I’ve got no idea, because the quoted fees aren’t all that much in a lot of cases, but they’re still ripping a lot of money out.

Richard Gilbert, Rule of Law Institute: Well, so what’s disappointing I think — from the part of the industry — there doesn’t seem to be any competition.

When these default funds came in I think the industry was advised by the Government that Fair Work Australia would be talking to APRA to get information about which funds it could put on the list, and I think in the Senate Estimate’s answers there has been no such discussion.

So your point might be valid, but the organisation which has the facts has never been in the loop.

Russell Mason, Deloitte: In theory, it shouldn’t be hard to do the comparison if there was a requirement across the board that applied equally to not for profits as well as commercial organisations that said rebates — any sort of payment — back from the service provider no matter how that’s structured, admin’ fees on group life contracts, whatever it’s disclosed and subject to audits.

Then you could easily have a level playing field.

Richard Gilbert, Rule of Law Institute: Isn’t there an Australian accounting standard for presentation of those accounts and what’s in, what’s out?

Russell Mason, Deloitte: Well I’m not an accountant, so I’m not sure, but certainly, I know there are certain payments that don’t have to be disclosed as part of the MER.

They may be disclosed near accounts when people quote management expense ratios, certain things are excluded that are payments that somehow just miss the cut, and can add up to quite a sizeable amount of money. So the MER …

David Hartley, Sunsuper: For example, you can put a spot in place, right? You can put a spot in place so you have all your investments; you sell them to someone, and then enter into a total returns box so you get what you get for return on those assets back to you. Now under the rules, the spot fee and all the underlying stuff does not have to be completed.

So you can actually bury all of your fees under the total returns box.

David Graus, ASFA: Well all your external fees.

David Hartley, Sunsuper: Well actually, you can bury everything if you really wanted. If you really wanted to, you can bury everything.

Russell Mason, Deloitte: So that’s not in anybody’s interest. No one’s interest.

David Hartley, Sunsuper: Basically, what you’re doing is you’re encouraging people to add an extra layer of fees on to make it look as if you’ve got lower fees, and that’s just a joke.

Russell Mason, Deloitte: Well worse still, it’s encouraging, misleading and deceptive behaviour as far as the member’s concerned. If a member cannot tell what the true costs of his fund are. And I need to know; I should be able to tell.

David Hartley, Sunsuper: You think about what you’re doing, as a member of a superannuation fund you are asking — you are employing the trustee or the responsible entity, or whatever you call it, you’re asking that particular group of people to act as your fiduciary agent.

And you’re saying to them “I want you to access all of these different services, and I want you to do it on a basis that’s in my interest as a member”.

That’s what you’re asking them to do. It is fair for you to know how much your fiduciary agent is taking out for their own purposes to provide that service, how much profit they’re making, and how much money they’re making out of related third parties.

And that’s a reasonable basis. Now if the trustee is acting — I mean, the opportunity available to industry funds and commercial funds is all the same opportunity.

I want to be sure that the trustee of my responsible entity, if they’re putting in passive management I’m quite happy to accept that passive management is a valid way of managing money.

But I want to be sure, I want to be convinced the main motivation for my responsible entity, my fiduciary agent to put in passive management is because they think that’s going to get me a better net return, not because it’s going to make them look better.

So if you’re charging 70 basis points and you’ve got a lot of passive management under there, fine.

But are you doing that because you think it’s going to get a better return for me, or are you doing that because it’s going to allow you to compete in the market and get a bigger profit margin for yourself?

When you think about AMP — you talked about AMP before, they’ve got their product, but it’s basically all passive management. And the fee level which is similar to industry funds, but they’re basically getting their profit margin at a high level by putting in passive management at the same fee level that you’d have for active management.

Russell Mason, Deloitte: David, is this driving the debate in the right direction? If I’m a member of a fund what is really important to me?

David Hartley, Sunsuper: Net return.

Russell Mason, Deloitte: What is net returns subject to an acceptable level of risk for me? So as long as I’m happy with the level of risk and the type of investment, in some ways the fees should be irrelevant, it’s the net return.

David Hartley, Sunsuper: The fee that should be relevant is the money that’s paid to unrelated third parties. Because what you want [is] to get to a situation where your fiduciary agent is only putting in things that they think are going to get a better net return.

If they go into hedge funds and they pay exorbitant fees for hedge funds, but they finish up with 150 per cent return for me net, they might get a 200 per cent gross return and a 150 per cent net, okay I’m still 150 per cent better off, thanks very much.

So the trustee, the responsible entity, should not be discouraged from putting that sort of stuff in if they think it’s in my interest.

Now it’s another question as to whether they think it’s in my interest, but at least you sort of take that part aside and you say, 'Okay, they’re only going to put this fund in that if they think it’s in my interest', then that’s something you can test.

David Graus, ASFA: The last thing we want the debate to be driven by is the cheapest possible options or passive — simply because that produces the lowest fees.

David Hartley, Sunsuper: Yep, absolutely. I mean, you can put in ETFs, you can put in a whole bunch of stuff to make fees look lower, but underlying. Another example I’ve used in the past is Macquarie Bank.

Now Macquarie Bank’s salary, its remuneration objective is to pay 55 per cent of operating income to staff in the form of bonuses and salaries. You think about Macquarie Bank, underneath it all, it’s a little bit like a multi-strategy hedge fund. But if they make 20 per cent return, I’m only going to get nine as an investor.

But if I go to a multi-strategy hedge fund and they make 20 per cent return, well I’ll get 15. It’s a better deal, better economics for me. Despite the fact that hedge funds are seen as being expensive, I’m better off going to hedge funds than going to Macquarie Bank.

David Graus, ASFA: But the net return is really going to be 15 per cent?

David Hartley, Sunsuper: Yep, absolutely.

Richard Gilbert, Rule of Law Institute: And so if there [are] all fees included, you need to report in the return figures.

David Hartley, Sunsuper: What do you mean by all fees though?

Richard Gilbert, Rule of Law Institute: All fees. So it’s really only the net return…

David Hartley, Sunsuper: After all those fees?

Richard Gilbert, Rule of Law Institute: Yeah.

David Hartley, Sunsuper: That’s right. That’s the first thing I’m interested in. The second thing I’m interested in is how much my responsible entity is taking out to provide that service. If they’re charging me $100,000 I’d just as soon do it myself. If they’re charging me $100, I’m happy to pay my $100.

Richard Gilbert, Rule of Law Institute: But we’re talking about default funds here.

David Hartley, Sunsuper: Yep.

Richard Gilbert, Rule of Law Institute: I think it’s not the net return, it’s the net risk adjusted rate of return, because some people like their money with a shareholder backed company. And that’s another reason why the default system should be far more pluralistic than it is.

David Hartley, Sunsuper: Shareholder backed company…

Richard Gilbert, Rule of Law Institute: Well shareholder capital does mean something to some people.

David Hartley, Sunsuper: Yeah, but a lot of times it’s isolated, it’s segregated so you can’t actually — I mean, sometimes the responsible entity, even though it’s part of a big group, it’s actually the capital available for that particular trustee.

Richard Gilbert, Rule of Law Institute: Well yeah, but I agree with that, but if you look at the One Life company, it got into trouble on unit pricing, and $70 million went from the shareholder backed entity to compensate those investors, and I think that sort of action does give people some comfort.

Now I’m not saying that everyone should have their money in those sorts of funds, but for investors it is a sucker sometimes. Not sucker, but it is a comfort to know that there is an entity standing behind it with capital.

David Hartley, Sunsuper: Yeah, and I think that’s a good thing, that’s the reason why Sunsuper has $200 million of free reserves, we think it’s an important thing to have.

Pierre Jond, chief executive, BNP Paribas: We seem to be focusing the discussion around the pure cost dimension of the superannuation industry, because we’re talking about fees, we’re essentially focusing all the attention on the cost side, isn’t that making the case for self-managed super funds? Which is a bit of a paradox?

David Hartley, Sunsuper: Sorry, I’ve sort of missed the point. But self-managed funds have certainly grown, and I think — this is another thing I was talking to Wayne Swan about last week, and he said there are some issues there.

But anyway, so the point I was making, I guess, was that self-managed funds are actually pretty good, to tell you the truth, for the right person. Because you can structure your self-managed fund so you pay no tax ever on superannuation.

So basically it’s a system that’s become where taxation is optional for the rich people and it’s compulsory for the poor people.

And if the Labor Party wants to continue with that system, that’s fine.

But that’s what it is at the moment — particularly because they allow negative gearing in those things, so you can wipe out all of your contributions tax, you can wipe out all your income tax all the way through, get the thing pregnant with capital gains, and then at the point of retirement you flip it over to the pension phase, pay no tax on the other side.

It’s a great system. It’s perfect for people who want to pay no tax.

Mike Taylor, Super Review: Eric, you’ve been very quiet there, what’s your take on what you’ve heard?

Eric Riesenwitz, chief marketing and distribution officer, MetLife: I think the issue that I come back to, and focusing on the insurance side, and when I see the opportunity that could be out there with prospective insurance, using MySuper automatically gets me a little nervous.

If I think about it in terms of in today’s world we know — it’s well documented the under insurance issue across Australia, you ask a lot of people who have their money invested in their choice of super fund — they’ll tell you they’ve got insurance because they are in a fund.

We all know from an industry perspective that’s not enough insurance. When you start moving people into an environment where there is an opportunity for them to go somewhere else, and that somewhere else is labelled a default, it also gives a sense of comfort that I’m being covered, that that’s enough.

They almost stop looking at what more they have to do.

Beyond the returns, I think you’re always going to have that as the primary reason people pick their choice of what they do with their superannuation funding. At what point will they also start looking at what their insurance options are?

Even though the Government is using the right words around the need for insurance, I see there’s a risk in the more you take away from people in the decision making process, the less they start to think about how much coverage they have, and regardless of whether it’s under a default fund or it’s under their choice, the fact they still probably don’t have enough insurance.

At the same point in time when people are asking for education around their financial security, they don’t want to stop just at “Where should I invest my money?” they want to stop at “What happens if I can’t work anymore?”, “What happens if something happens to my partner, or someone whose income I rely on who is no longer alive?”,

“How do I deal with that?”.

And I get a little nervous that there’s too little attention being paid on the aggregate, and that all the focus on what will be a default or won’t be a default might distract individuals away from thinking about what’s important to them for the financial security of their lives.

Impact of MySuper

Mike Taylor, Super Review: With MySuper, and this was the criticism which was raised right from the get-go, which is that we’ve gone through — about a decade of trying to get people to basically engage with their superannuation and make some hard decisions — I think this is what Eric’s getting at.

But MySuper is basically tacitly saying, or my view, it’s tacitly saying, 'You don’t have to be that engaged, we’re going to take care of you'.

'We’ve got this model that says all things being equal you will earn a fair rate of return without thinking too hard about it.'

Really, given how superannuation has developed in Australia, is this appropriate? I mean, I know the Government’s adopted it largely as policy, but is it appropriate? David?

David Graus, ASFA: I think in the default space absolutely it’s appropriate.

It’s like a heart tick on a product, that if you don’t have people compulsorily looking for these things, and whether it’s a good thing or not, we know that a number of people are not engaged.

It’s being taken from their wage without any activity of their own, so there has to be a basic safety net around [the] MySuper product. Absolutely.

David Hartley, Sunsuper: Depends how it’s implemented.

Richard Gilbert, Rule of Law Institute: Well I think the other thing is MySuper on its own is not good policy, it needs to be accompanied by very substantial governance reforms, which aren’t in the wind, and the Government refuses to look at governance reforms.

And I think MySuper is taking superannuation to a very public space, which should be accompanied by the same sorts of governance requirements that an ASX listed company has.

And so it’s critical that funds have detailed conflicts of interest disclosure, that director remuneration and CEO remuneration is there, and I think also it’s time for reform of funds which have stodgy boards.

And we need to look at turnover on boards, and representation on boards if we go down that space. And I think doing it on its own is quite dangerous.

Mike Taylor, Super Review: Russell?

Russell Mason, Deloitte: Well just going back to MySuper, I agree with David, it’s an essential basis, but it’s also essential that the trustees remember that their primary duty is to act in the best interest to members, and therefore I think what they should be doing is educating members however they can, as Eric said, about the importance of group insurance, and the death and disability insurance.

To David’s point, the investment returns, the risk, so it’s a good starting point, MySuper. I’d hate to think that a member joined MySuper and was then forgotten about, because while it may suit someone in the early initial phase of their membership, it’s highly unlikely to suit them for their entire length of membership.

So I think the executives of funds, the trustees of funds should view it simply as the entry point into the fund, and then the education phase starts, and I think a very successful one would be one that attracts lots of members into the MySuper, but at any one time very few members are actually in it because they’ve made some active decisions and they’ve moved to other investment options.

So I think that’s important. I think Richard makes a very good point about governance of these funds. And again, let’s not distinguish — be they corporate, commercial, retail, industry funds, are large financial institutions — they’re massive financial; many, many billions of dollars. And they should be subject to the same governance.

I think I agree, it’s a publically listed company. And I think many of them would be happy to be subject to that governance. I’m sure, which David represents, has got nothing to hide, it’s a transparent fund, so with it’s huge size should it be accountable to members in the same way a public company is?

Yes, because these members are the shareholders as far as I can see.

David Hartley, Sunsuper: I’m sure the directors will be looking forward to the same remuneration structure as the directors of other companies too. Well so be it.

Richard Gilbert, Rule of Law Institute: Yeah, that’s right. Now my main concern about MySuper, if it’s implemented the wrong way there will be very little differentiation between one MySuper product and another MySuper product. And in the public’s mind they won’t differentiate.

They’ll say “MySuper, okay, whoever, doesn’t matter, it’s the same thing.” In that market, if the fees are quoted in the current way, what you’ll find is you will find that those trustees will go more and more passive, and you will lose something which is very important for the economy, which is price discovery.

And if you don’t think this is a real issue, have a look at the price between BHP listed in Australia and BHP listed in the UK and Rio.

So there’s something like 20 or 30 per cent difference in the price. And why is it when you’ve got exactly the same rights, exactly the same title cashflows, why is the Australian BHP trading at 20, 30 per cent higher than the UK BHP?

Now one potential reason for this is that you have a lot of superannuation money in Australia, you have a lot of money going to Australian shares — a lot of that’s enhanced capacity or passive, a lot of it goes into those particular shares.

And if that’s a bellwether for what might happen in MySuper and the way it pushes everyone to passive, then it’s a very dangerous system, and you run the risk of having the biggest Ponzi scheme the world has ever seen.

Is that controversial enough for you? [laughter] I don’t think we should necessarily rely on the Government, press the Government’s button — APRA has those powers.

And APRA did this after the GFC with the banks and made them do even more harsh corporate governance arrangements, but it didn’t do it for super. It does have the power.

Helen Coonan put a bill through which clarified that power, showed that clearly, and APRA could be doing something in that space, but it elects not to. I think it’s waiting for Canberra to give it the signal.

But APRA is an independent regulator and it has to look at the market and make sure that it’s protecting investors by making sure that they know about their funds, the salient features.

David Hartley, Sunsuper: The other argument, or my other question of course, is you look at the GFC and of course lots of things happened, not that many Australian superannuation funds got into the same sort of problem as Lehman or Merrill Lynch, who had very professional executives.

So it’s not immediately apparent that the model that we had was severely under what you’d expect to have happen in that sort of environment.

So arguably, maybe the banks should have a few more people who are ordinary — sorry, people who have just been, you know, got the best interests of the constituents at heart as opposed to profits, or whatever.