Managing Director of The SMSF Academy, Aaron Dunn, said the topic was decided in response to continuing Australian Taxation Office (ATO) concerns about whether trustees and/or the professionals advising them, are correctly calculating and applying tax exemption on income generated by the fund, as members move from the accumulation fund to retirement.

“With an aging population and a focus on maximising tax exemption within SMSFs, it is critical that advisers have a better understanding of actuarial requirements and strategies to obtain fantastic outcomes for their clients,” Mr Dunn said.

The one-hour interactive webinar, which will run on Wednesday 22 June, 2011 from 12:30pm, will be co-hosted by Mr Dunn and Senior Actuary at Bendzulla Actuarial, Geoff Morley, who will discuss and provide examples on:

• Understanding the unsegregated method for SMSFs
• Common mistakes and tips when using the unsegregated method
• How segregation works within a SMSF

Time will also be made available at the end of the session for questions from the webinar audience, including discussing current ATO issues.
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Mr Dunn said he is delighted to be joined by someone of Mr Morley’s calibre.
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“Bendzulla Actuarial specialises in providing practical solutions for SMSF trustees and their professional advisers and has won every BRW Client Choice Award for Best Actuarial Firm since 2007,” he said. “Geoff is an acknowledged expert in his field and has over 19 years experience in actuarial consulting in Australia and the UK.”

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The Institute, whose member actuaries work for insurers rating risks and setting premiums, notes that the lack of adequate insurance coverage for floods and/or its prohibitive cost, are key issues which must be addressed in any national funding solution.

“One positive outcome of the Queensland events is that flood has finally become a serious subject of debate after many years of being ‘out of sight, out of mind’ or ‘too hard,” according to Peter McCarthy, chairman of the Institute’s General Insurance Practice Committee.

“While flooding and severe rain events have always been common in Australia, compared to say, cyclones or earthquakes, getting insurance can be very difficult or prohibitively expensive. Furthermore, a distinction is often drawn by insurers between flood types, such as riverine versus storm, which can elude consumers,” Mr McCarthy said.

“The issues with flood are that, unlike other disasters, the same properties flood again and again, many high risk areas are known by residents, business owners, governments and insurers, and the scale of damage is greater than for other disasters,” Mr McCarthy said. Flood premiums insurers must charge to provide full flood cover are also extremely expensive. As a simple illustration, a $500,000 property which floods every 30 years may require a premium for flood of up to tens of thousands of dollars.”

The Institute believes that any national solution for flood must begin with an agreed policy goal and an understanding that the issues are broader than insurance. “For example, is the objective to fully compensate everyone affected for their losses or to partially compensate a proportion of those affected?” Mr McCarthy said.

“There’s also a need to decide what property will be covered and to what limits. Will there be compulsory cover? Will private residence and commercial properties be covered? Will government infrastructure be covered?

Defining what ‘flood’ events are covered is also key, Mr McCarthy said.

“There are complexities regarding interaction of flood with other natural hazard covers. For example, flood damage which occurs when rain is still falling creates an overlap between ‘storm’ and ‘flood’ covers. Or, in the case of Cyclone Yasi, damage caused by wind is likely covered but damage from a river flooding caused by rain from a cyclone may not be covered and storm surge is normally not covered.”

A realistic assessment must also be made about whether it’s affordable to implement the solution long-term. The collection mechanism (tax, levy, or premium), level of compulsion to contribute and amount required to reinstate damaged assets, may also limit options.

“To manage affordability, options must address the level of cross-subsidies from owners of properties that are not in flood prone areas to owners of properties which are,” Mr McCarthy said.

And, to estimate costs and address issues associated with a funding solution, modelling of flood impacts is required, but the limitations of this must also be recognised, he said.

“Floods referred to as a ‘1-in-100 year’ or similar event may be more like 1-in-25 levels.  And, changes in land use (eg increased urbanisation leading to concrete covering land that was formerly grassland or forest) changes future flood impacts.”

It’s also important that a solution does not discourage research into flood prevention and mitigation, Mr McCarthy said. Changes may reduce the likelihood of flood damage, through changes to building codes or zoning, or reduce incidence or severity of damage through levees, dams or other structures.

Governance and oversight is also important and includes relevant legislation, public reporting and dispute resolution. This includes whose responsibility it will be to ensure property at risk is covered – whether this is individuals, government or both. Any funding solution should also address what relief should be provided to those with no insurance or those who are underinsured,” Mr McCarthy said.

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Bozenna Hinton, Institute President, said the Institute supports the concept of an identifiable risk reserve for superannuation funds held separately from member account balances. She said the minimum level for this should be set on a risk assessed basis consistent with other financial services industries.

“We are pleased that the Government will consider a risk based system for all APRA regulated super funds requiring them to hold financial resources against operational risk, as we recommended this in our submissions to the Cooper Review,” Ms Hinton said. “We note that the Government will consult with relevant stakeholders on whether such a system should require resources to be held in the form of trustee capital or an operational risk reserve in the fund.”

The Institute confirms that as part of this process, a Financial Condition Report for accumulation super funds should eventually become compulsory, but in the meantime should be considered best practice. Such a report would allow trustees to stress test a super fund under different market conditions.

Support for idea that super funds consider longevity risk but more work needed The Institute also supports the recommendation that both MySuper and choice super funds be explicitly required to consider longevity and inflation risk. However, Ms Hinton said more concrete measures were needed.

“As a next step, we encourage the Government to remove the roadblocks preventing innovation and product development in the post retirement product market including social security and tax barriers.

Development of new post retirement products will better equip Australians to protect themselves against their own longevity risk,” Ms Hinton said.

The Government has also indicated that while it does not support mandatory retirement forecasts for MySuper products, it will ask the Australian Securities and Investments Commission to continue working on developments in this area.

“The Institute strongly supports the idea of retirement forecasts being provided to super fund members so is disappointed about this outcome. However, we look forward to working with ASIC particularly in relation to the assumptions used for such forecasts and how the results could be presented,” Ms Hinton said.

“Similarly, we look forward to working with APRA and ASIC regarding the publication of superannuation data designed to improve transparency and comparability in relation to net investment performance fees and costs,” Ms Hinton said.

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Melinda Howes, CEO of The Institute, speaking at the Risk Management Institution of Australasia conference in Sydney this week, said that risk management teams can be strengthened by a diversity of skill sets from different professional backgrounds.

“We see actuaries as having different and complementary skills to other risk professionals: a different way of thinking about risk, advanced risk analysis skills and experience in dealing with boards.”

The Institute of Actuaries considers that, as a matter of best practice, there should be at at least one relevantly qualified, skilled and experienced risk management professional on the board of every insurance company (including life, general and health insurers), bank and defined benefit superannuation fund. Such a board member would have risk management skills that are recognised by a professional body. There are a number of key professional groups, including the actuarial profession, from which an enterprise risk management professional may be drawn. Actuaries’ core professional skills are in the area of financial risk management – with financial risk being by far the largest risk for the abovementioned entities. Importantly, the actuarial profession also has a global qualification in respect of Enterprise Risk Management – CERA (Certified Enterprise Risk Actuary).

“It is vitally important that risk managers have business experience, and high quality training and certification,” Ms Howes said.

“As a professional group, actuaries are supported by strong standards to ensure the quality of their analysis and advice. These skills have been recognised by the regulatory requirement for life insurers, general insurers and health insurers to appoint an actuary to advise on their financial condition and to sign off on their risk management frameworks,” Ms Howes said.

Ms Howes said Australian actuaries have worked for more than 100 years to manage the financial risks of insurers and super funds and were now extending their influence.

“The specialised modelling techniques actuaries use for financial risks are now being applied to non-financial risks such as operational risk,” she said.

“There are already a number of Chief Risk Officers of financial services organisations who are actuaries. We predict that in future many more actuaries will specialise in risk management and work as risk managers in financial services organisations and beyond.”

“An enormous amount of time and money is being spent on improving the quality of risk management in financial services businesses. The case should continue to be argued that risk management is an extremely effective and business critical value-add to management and boards, not a compliance cost,” Ms Howes concluded.

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Of the survey respondents (comprising super fund CEOs, senior management and actuaries), approximately 80% agreed that superannuation funds should include member projections in annual member statements. A further 85% agreed projections would have the effect of increasing voluntary superannuation contributions, as members could see how they were tracking and respond accordingly.

Melinda Howes, CEO of the Institute of Actuaries, said she was encouraged by the Institute survey results which indicated broad agreement on the idea of standardised projections.

“Superannuation benefit projections, if done properly, have the potential to provide meaningful benefit to super fund members by allowing them to track their progress towards their retirement goals, and to encourage them to make added voluntary contributions where appropriate,” said Ms Howes.

“The Institute of Actuaries survey shows that among the best ways to produce meaningful projections is to have standardised assumptions, to include both a lump sum and annual income estimate, and to include Age Pension entitlements.”

Three quarters of respondents believed that a projected retirement benefit for a member should be shown as a lump sum amount with a corresponding annual income amount. And, more than half (62%) of respondents also believed the superannuation benefit projection calculations should include Aged Pension entitlements.

“With 75% of the population expected to receive a full or part Age Pension, the Institute of Actuaries believes member projections should allow for the estimated pension amounts to give people a better idea of their standard of living in retirement,” Ms Howes said.

On how to calculate investment returns, an overwhelming majority of respondents (91%) said assumptions for these should be standardised across the industry. Interestingly when it came to setting fee assumptions, slightly more than half the survey respondents (55%) believed fees should be specific to the super fund, rather than a standardised fee assumption.

Some 60% of respondents agreed that a projection should be provided to individual members based on the investment strategy that they have chosen such as conservative, balanced or growth. Projections should also show a range of outcomes for different investment options or different contribution rates (68%). Respondents who disagreed with the extra detail believed keeping the projection as simple as possible was the best way to go.

“There is a need to balance the amount of information provided in a superannuation benefit projection with the goal of providing a useful tool for members. Make it too simple and the projection may be inaccurate or misleading. Make it too complex and people may throw it in the too hard basket and not even read the projections,” Ms Howes said.

“Most of the industry agrees that projection statements can be a good thing. The form that these should take and how they are calculated is a matter for debate but the most important factor should be that it helps people save for retirement,” she concluded.

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