Stronger Super not yet tax efficient

Raewyn Williams

Raewyn Williams

Superannuation funds are largely ignoring the “Stronger Super” reform that embedded after-tax investing obligations into superannuation law, says global implementation specialist manager Parametric.

Raewyn Williams, Managing Director of Research, Parametric Australia, says: “Six years after the Stronger Super reforms were announced, most superannuation funds still have a pre-tax focus.

“This lack of progress with after-tax returns stands in stark contrast to other Stronger Super reforms – launching MySuper and ‘choice’ product architecture, product dashboards and the disciplined annual assessment of a fund’s value proposition – where the industry has invested resources to implement change.”

Williams says: “The 2010 Cooper Report resulted in the Government significantly redesigning the legislative framework for APRA-regulated funds – what we call Stronger Super.

“One issue the report identified – what Cooper has since called a ‘breathtaking misalignment’ – is how the industry’s investment practices were based on pre-tax principles, but retirement outcomes are built on after-tax dollars. Little wonder, then, that the law was amended in 2013 to address this critical issue.”

Parametric entered the Australian market about the time the law was amended with the goal of helping superannuation funds meet the new legal requirements.

“But we quickly realised that what superannuation funds needed was multi-year engagement with Australian research focusing on the impact of investment taxes on superannuation outcomes and patient, fund-by-fund discussions about what after-tax investing means in practice and the options available.”

Since Parametric’s entry into the market, it has won about $10 billion in assets from Australian clients, mostly with its tax-managed indexing, factor and Centralised Portfolio Management equity solutions.

Williams is not surprised by the lack of progress to embed tax considerations into investment thinking. “The industry has undergone massive change in the past six years.  Although after-tax investing has been on the ‘to do’ list for funds for a few years, it never makes it to the top of the pile where the urgent and time-critical deliverables sit.

“My concern now is that, nearly six years since after-tax investing became a legal responsibility for funds, its rationale will be forgotten.”

Williams adds that the legal obligation is the least exciting reason for embracing tax efficiency as a source of value-add in superannuation investment portfolios.

“The real motivators are that you can be a better fiduciary by aligning your investment thinking to what your members care about – after-tax returns – and an expectation of return pick-ups from an after-tax focus.”

Parametric’s published research on the value that can be created on a superannuation fund equity portfolio through an after-tax focus, pre-fees, ranges from 25-30 basis points a year on a passive equity portfolio to 50-90 basis points for multi-manager active portfolios, with tax-managed factor solutions falling somewhere in between.

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