Jeff Bresnahan

The Government is getting most things right. But no one is perfect in the face of a crisis.

For some of the most vulnerable people in society the Government’s message is effectively saying, “Use your own super to tide yourselves over and by the way, you’ll need to take it out at a massive loss, which you can never recoup.” As Chairman of SuperRatings, Jeff Bresnahan says, “There must be a better way.”

Under the current proposal, tens of billions of dollars of assets could need to be dumped into declining markets, meaning that some Australians seeking their $10,000 “tax free” super payment in mid-April, could inadvertently get as little as 70 cents in the dollar against what they would have got just two months ago.

Nearly all of the problems will arise because the eligibility criteria to access your super are way too generous. As Bresnahan says: “This shotgun approach has the potential to come back and bite the Government, hard. The focus absolutely needs to be on those who truly do need access to cash, and fast. Quite simply, those displaced from their jobs due to this horrific COVID-19 virus. In reality, those in hardship. This shouldn’t be a self-assessment process for all Australians”.

SuperRatings also encourages the Government to rethink just how they can get that money to those in need, whilst protecting their retirement nest eggs. Any of the following three options, or preferably a combination thereof, has the potential to protect our most vulnerable as well as retaining their superannuation balances:

1. Allow funds to take a loan out from the RBA, to meet all claims. This loan would be secured against members’ benefits and repayable after say 5 years. This would then allow members to recoup lost investment earnings. The Government is protected, the member gets emergency funding, and the funds don’t have to dump assets into a declining market.
2. A variation on (1) but with the ATO handling all claims, making all payments and retaining the loan register. This is a cleaner payment portal and still protects the Government, the member and the fund.
3. Protect funds against having to sell into declining markets by ensuring that payments are only made to those in genuine hardship (e.g. those who have registered as unemployed, have been stood down, etc. and remain so after 4 weeks). At present, on a self-assessment basis, virtually all Australians, employed or not, could potentially make a claim.

SuperRatings believes the above provides a win/win scenario versus the upcoming lose/lose that Australia’s most vulnerable and those in, or near, retirement are going to cop. By winding back the eligibility criteria, the level of claims will be lower and hence more manageable. This in turn creates more flexibility for the Government on how to best work with the funds to ensure those in need receive assistance as quickly as possible.

Opening the floodgates to allow virtually anyone and everyone to drag up to $20,000 out of their super fund, with the current market volatility, is not the answer. All this after bipartisan governments have spent over 27 years – and half a working lifetime –getting Australians’ retirement savings into shape. As Bresnahan says “These are extraordinary times, but let’s make sure aid reaches those who need it, not everyone who asks”.

Compounding the issue is the loss of future benefits. $20,000 out of a 35 years old’s super account over the next twelve months foregoes around $80,000 in future benefits. As the graph shows, this affects everyone who withdraws money from super.

Impact of super withdrawals on future balances

Assumptions: based on ASIC’s MoneySmart calculator using a Growth option with an assumed investment return of 5.0% before fees and taxes on earnings.

The current potential for rorting the system is significant. If, as a result of unnecessary claiming, some funds are forced to consider freezing withdrawals to protect their remaining members, what will the Government do then? This is not new. Every financial crisis has resulted in a small number of investment funds being frozen, although this might be a first for super funds.

Bresnahan concluded: “The Government has less than three weeks to tweak what is a valid and morally sound strategy to protect, as best they can, the financial stability of those who have been displaced due to COVID-19 consequences. The idea is sound – the execution not the greatest.”

So, with some quick and effective decisions, SuperRatings believes the Government can protect those in most need, by providing emergency funding; whilst simultaneously retaining many Australians’ super for their retirement; and ultimately maintaining the integrity and confidence of the superannuation system overall.

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Jeff Bresnahan

The question no-one wants to ask is – Why are APRA collecting, interpreting and then publishing information in the public domain? The answer is simple – They shouldn’t be!

Instead of regulating, APRA are now trying to play the shame game through their just released heatmaps. But there is a real risk that some of those shamed will be the wrong funds. As the founder of SuperRatings, Jeff Bresnahan says, “The problem is that no one in the industry wants to tell the regulator that they have got it wrong.”

Effectively, APRA is putting into circulation data which analyses just parts of a super fund, not the whole. By ignoring things like Governance, Advice, Insurance and Member servicing structures, consumers are not being provided with the whole picture.

As Bresnahan says, “While conflicts of interest were identified as a major issue in superannuation during the Royal Commission, it seems ironic that APRA has deliberately avoided reporting any measurement of a Fund’s Governance structure”.

In an industry which carries inherently conflicted Directors, it would appear that Governance is ignored in favour of more easily assessable information. Whether such omissions create any legal liabilities for APRA in the future remains debatable.

As a result, APRA continues its foray into uncharted territory. This is not the first time APRA have got it wrong. They have been producing performance tables for over a decade. Unfortunately, the performance tables were flawed from a usefulness perspective, in that they don’t reflect the performance of a super fund’s investment options. However, they continue to produce them and in doing so confuse and possibly mislead Australians.

And so it continues with the heatmaps. Having reviewed the heatmap methodology, SuperRatings is of the opinion that their release into the public domain may create more questions than they answer and that consumers could well be influenced into products that are inappropriate for them.

Aside from the bigger question of why APRA is publishing such data, there remain a number of problems with the methodology adopted. Critically, APRA appears to ignore implicit asset fees when measuring net investment performance.  As Bresnahan says, “This methodology can easily overstate the net benefit a member receives. Similarly, a low-cost investment option with high administration fees creates the very real possibility of consumers investing monies in cheap investment options that have no chance of outperforming the relevant index over any time period, whilst getting slugged high administration fees.”

Investment analysis since the onset of the Superannuation Guarantee in 1992 has shown that all implicit fees and performance must be analysed together on an actual net of fees basis. Many leading funds, in terms of balanced option performance, have had higher allocations than the average fund to traditionally more expensive asset classes such as infrastructure, private equity and unlisted property. These asset classes have continually outperformed cheaper alternatives.

It’s only when all actual fees and returns are combined that the range of results is clearly evident in dollar terms, as the following graph indicates. The graph shows the disparity of net earnings on a $50,000 starting balance (and $50,000 salary) with SGC contributions mapped over both the last 3 and 10 years. Notably, many of the funds that added the most value, over both the short and long term, invested into the more expensive asset classes. Driving people into low-cost options will come at the expense of future earnings, something that taxpayers will ultimately have to bear.

Net benefit trend analysis (over 3 and 10 years)

Source: SuperRatings

And the anomalies continue. The heatmaps are judging funds on short term performance over just 3 and 5 years. Whilst it will be claimed this is necessary due to the limited performance history of MySuper products, it should be noted that most funds have been around for over 25 years and that their default option provides an accurate MySuper proxy.

As Bresnahan said, “Given super is a key plank of Australia’s economic future, it seems counter-intuitive for the Government’s regulator to not measure funds over a more realistic period. Certainly, it is commonly accepted that 7, 10 and 15 year performance analysis is best practice given the long term (60 years plus) nature of superannuation membership.”

Again, a consumer moving funds due to seeing a 3-year performance gap, mid-way through an economic cycle, will no doubt be moving for the wrong reasons.

The way forward

Bresnahan says, “Australians are not stupid, but they remain frustratingly unengaged with their superannuation.” This problem remains the real challenge for much of the industry. APRA’s endeavours are admirable, but questionable at the same time. He goes on to say, “A regulator should set the structure under which funds need to operate. The morphing of this regulatory process into public comparisons leaves it open to being seen as stepping across the line. One wonders what they are actually trying to achieve by moving into this public domain.”

If APRA must continue down this path, then SuperRatings suggests that they need to concentrate on the whole picture, rather than isolated parts therein. This should, aside from earlier mentioned issues, also include:

1. Regulations to enable consistent fee disclosures, including the inequitable use of tax deductions and transparency to members;
2. The disclosure of risk within portfolios, both via the assumptions within their growth/defensive disclosures and accepted risk measures;
3. Compulsory disclosure of major asset holdings;
4. Moving members into go-forward products and removing legacy structures;
5. Continued rationalisation of member accounts; and
6. Increased focus on the decumulation phase and the optimisation of the alignment with retiree objectives.

Identifying poorly run funds is not difficult and APRA would be well aware of them. A series of simple measures such as the non-public fee analysis shown below, when combined with other key assessments, quickly shows those funds who have spent the past few decades masking conflicts of interest at the expense of members.

When it costs a fund over $1,200 to run every account (versus a median of $300) or a fund’s operating expenses as a percentage of assets are over two and a half times the median, then those funds bear further scrutiny. Similar work can be done across Investments, Governance, Administration and Insurance, to name a few. By putting together the whole picture, the poor funds are very quickly exposed.

Operating expenses versus size and members

Source: SuperRatings

But it’s not all gloom and doom for the process. Importantly, after 14 years of industry debate, APRA has finally made a call on what constitutes a growth asset and what constitutes a defensive asset. The growth/defensive debate remains loud within the industry but with APRA’s call of Australian Unlisted Property and Australian Unlisted Infrastructure being 25% defensive, at least there is a starting point. SuperRatings suspect this will not however be the final position.

Certainly, APRA’s front foot involvement with data will give cause for reflection for all super funds, as the funds review their results and assess whether it has any implications for their future.

SuperRatings continues to watch the evolution of the market and continues to monitor funds on their effectiveness in responding to key challenges. We look forward to seeing whether the heatmaps evolve over time and remain broadly supportive of APRA’s underlying intentions. However, we underline that this remains only part of the picture and that the risk of making providers look alike is real. In an environment where innovation is needed, regulatory settings to support innovation are vital to ensure a vibrant industry that thrives into the future resulting in better outcomes for members.

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These appointments come at a time of continued growth within all parts of the Lonsec Group and are designed to assist in maintaining that growth well into the future. Chairman of Lonsec Holdings, Jeff Bresnahan noted, “Both Charlie and Ian have successful track records in growing businesses. At the same time Charlie is incredibly well respected for his strong client and staff focus as well as proven execution capabilities. These attributes fit perfectly with Lonsec’s strategy”.

Both Ian and Charlie were highly attracted to their respective roles due to Lonsec’s unique market positioning. They have a strong belief that Lonsec has significant opportunities in many parts of the market. Bresnahan added “Their understanding of all the markets Lonsec operate in will allow for the momentum of each of our existing businesses to be continued. Further, it will also allow us to better target potential acquisitions within the industry. We are, as a Group, always on the lookout for acquisitions that are compatible with our long-term strategy.”

Charlie’s experience ranges over some 30 years and includes early exposure to systems, project management and management consulting firms such as Lloyds, Bankers Trust and Worldgroup. In more recent times he was the Australian Manager and Managing Director of the predominately UK based firm FIS-Software, before successfully co-founding the Paragem businesses in Australia. Paragem was created in 2005 and the respective subsidiaries were successfully sold to Netwealth in 2011 and HUB24 in 2014.

Ian has been in the financial services industry for almost 40 years and his experience in both the funds management and financial planning industries is significant. He was also the co-founder of Paragem and is well known in the industry as a thought leader who in more recent times has consistently been able to position financial planning practices as leaders in the industry. Ian’s experience in working with major fund managers and financial planning practices will be invaluable to Lonsec and its growth strategy.

Bresnahan concluded by saying “These appointments are significant for the Group and to have two individuals so highly experienced and regarded, who both have such confidence in Lonsec, speaks volumes on Lonsec’s current market positioning and the opportunities available”.

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Superannuation fund returns were driven higher in March, boosted by continued gains from the Australian share market. The median balanced option posted a return of 1.5%, while the return for Q1 2017 was 2.5%, weighed down by a small negative return in January.

Global markets have generated strong returns on the back of improving economic fundamentals and consistent signs of inflation, which have generally fed back into Australian shares. Overall, the balance of risk appears to be improving, but while investors have every reason to be upbeat, they should not expect clear skies for the rest of the year.

“The rotation into equities has been a consistent theme since October last year, with yields moving off historic lows and shares pushing ever higher,” said SuperRatings Chairman Jeff Bresnahan. “But we saw the market embracing duration again in late March, indicating that investors are questioning whether the reflation trade is sustainable. In short, the market is not convinced that shares will keep rising in perpetuity.”

Global yields were flat in March, and the US currency came under pressure despite the Fed’s recent rate hike. The failure of the White House to pass its healthcare bill in the US House of Representatives put a dent in the reflation story, with the full implementation of tax cuts and promised infrastructure spending now appearing further from political reality.

On the domestic front, manufacturing activity continues to expand and Australia’s trade surplus remains strong. While iron ore took a big hit in March, the price ended the month above the US $80/t mark.

“The main threats to fundamentals come from the interrelated issues of low wage growth and rising house prices, especially in the Melbourne and Sydney markets,” said Mr Bresnahan. “The RBA has noted that households do not appear to be under stress because of repayments, but we may be due for a correction in these markets.

Australian equities lead the charge

The Australian market powered on through March, returning 3.3% during the month with all sectors gaining. The index delivered
4.8% in Q1 2017, with the 12-month return holding at a non-trivial 20.5%. In March, the Healthcare sector (+5.6%) built on solid gains made through the start of the year, led by Ansell (+13.1%) and Sirtex Medical (+12.2%), which is catching up with the sector after disappointing results in December. Heavyweight CSL (+7.1%) continued to push higher after upgrading its guidance in January.

In the US, markets moved slightly higher, with the S&P 500 Index gaining 0.9% in AUD terms, while the Dow Jones Industrial Index was down 0.3%. While the reflation narrative has been reflected in higher equity prices, the market pulled back midmonth. Information Technology (+3.0%) continued to rise, with shares like Micron Technology (+23.8%) benefiting from a favourable pricing environment, while the Health Care sector was dead flat following Congress’s rejection of the repeal and replace legislation.

Global yields generally also ended flat in March, after some movements higher earlier in the month. While rates have been trending higher since October 2016 and yield curves have steepened, investors appeared to embrace duration again in the latter part of the month, reflected in longer-term fund flows. While recent CPI releases in both Europe and the US have been promising, the numbers have moderated in recent months, and core inflation remains well below central bank targets.

While global conditions have improved, especially in the second half of 2016, and higher commodity prices have boosted Australia’s national income, local labour market conditions are still mixed, with considerable variation in employment outcomes across the country.

Central banks take action

Longer-term returns for super funds continue to sit close to inflation targets, with the seven-year return sitting at 7.6% p.a. (above most funds’ CPI targets). The 10-year return has moved slightly higher to 5.2% p.a., although it remains impacted by the Global Financial Crisis, which occurred nearly ten years ago. The point of maximum monetary stimulus has passed, signalled by the US Fed’s March rate hike, although monetary policy remains very accommodative globally, and quantitative easing measures
in Europe have not yet been tapered. Along with tightening labour market conditions, this could create a more challenging environment for super funds attempting to reach the common CPI + 3.5% target, especially if expansion in yields fails to keep pace. However, steady inflation matched with higher rates of growth would be beneficial for super fund performance.

The monthly returns for the year to 31 March 2017 are noted in the table below:

——–

Median Balanced Option refers to ‘Balanced’ options with exposure to growth style assets of between 60% and 76%. Approximately 60% to 70% of Australians in our major funds are invested in their fund’s default investment option, which in most cases is the balanced investment option. Returns are net of investment fees, tax and implicit asset-based administration fees. Returns are based on figures available to SuperRatings at 5.00 pm on 19 April 2017

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Catholic Super and HOSTPLUS were followed by Cbus, CareSuper and Sunsuper, all of which provided well above median performance for their members over the year.

After a sharp fall at the start of 2016, super funds delivered convincing returns through the first half, hitting Brexit-related volatility mid-year.

Funds struggled through the three months to October as shares gradually sold off, but enjoyed a late surge in November and December.

The median balanced option returned 7.3% over the 12 months to 31 December 2016, which is just slightly below the 7.6% p.a. average seen over the last seven years.

“Political upsets were the dominating theme of 2016, and this year we will see whether these trends carry over to the European continent,” said SuperRatings Chairman, Jeff Bresnahan.

“There will be no shortage of political events in 2017, and based on last years’ experience we can expect continued bouts of heightened volatility. However, like 2016, we may be surprised at the resilience of super funds and their ability to perform in a range of market conditions.”

Read the report.

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Super rules must change: SupeRatings

The Government has supposedly weathered the storm and protest over their proposed superannuation changes. So hopefully they won’t suddenly collapse in a heap to appease all of the “NIMBYs”, which in turn will be to the detriment of the large majority of Australians.

SuperRatings has calculated that even after capping assets in the superannuation pension phase at $1.6 million, a couple will be able to generate tax-free earnings from up to $5 million in savings. As Chairman of SuperRatings, Jeff Bresnahan, commented on this finding “If a retired couple can generate over $225,000 in tax free earnings per annum from their existing capital in the current low rate environment, and our elected representatives would consider giving them more, then we have completely lost the plot”.

In the same vein he goes on to say “Any politician who votes against implementing a $1.6 million superannuation cap would surely be committing political suicide. Even worse would be a coalition member who would consider crossing the floor on this part of the legislation”.

After analysing the key proposed superannuation changes, SuperRatings is of the view that:

• The $1.6 million pension cap must be implemented
• The $500,000 lifetime cap on non-concessional contributions cannot be retrospective
• The concessional annual contribution limit of $25,000 is inequitable

The attached Media Release provides additional detail on our review of the proposed changes and the reasons why the Government has got the proposed changes both absolutely correct in some areas and so far wrong in others. This is the Government’s key opportunity to reinforce confidence in superannuation as the preferred savings mechanism. Failure to get the changes right will erode such confidence to the point where middle Australia will look elsewhere to fund their retirement.

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The median Balanced Option recorded a 0.2% gain in December, taking the 2015 calendar year return to 5.6%. While this sits well below the 16.3% and 8.1% returns seen in 2013 and 2014, it is a solid result given volatile market conditions.

International Shares were again the key driver of returns in 2015, with the median International Shares Option increasing by 8.8%. This return was boosted by a 10.9% fall in the Australian Dollar against the US Dollar over the year. Australian Shares experienced modest growth in 2015, with the ASX200 Accumulation Index increasing by 2.6%.

Australian Listed Property was the best performing asset class, rising by 14.4% for the year. Returns on Cash remained low with the median Cash Option increasing by 2.0%, whilst Fixed Interest returns were even more modest, providing a median 1.6% return for the year.

“Subdued levels of growth across most major economies and volatile investment markets have made 2015 a challenging year for super funds, with returns across the main growth asset classes sitting well below what we have experienced in previous years” SuperRatings founder Jeff Bresnahan said.

“Despite tough market conditions, diversification and a falling Australian Dollar have helped superannuation funds cushion the bumpy ride for members and produce a fourth consecutive positive calendar year return” Mr Bresnahan said.

Top performing balanced options for 2015

Whilst the median return for the year was a respectable 5.6%, a number of the best performing funds had an excellent year, with MTAA Super taking out the top spot, providing an outstanding 9.5% return for its members over the calendar year. This was almost 1.0% ahead of the second best placed fund, BUSSQ, which returned 8.6% for the 12-months. The top 10 funds comprised a range of large, medium and small funds, proving that size does not necessarily lead to better investment outcomes. The table below shows the top 10 performing Balanced Options in the SuperRatings SR50 Balanced (60-76) Index over the year to 31 December 2015.

Long-term performance

Returns over the longer term remain solid with the median Balanced Option providing an average return of 5.6% per annum over the 10 years to 31 December 2015. The Median Balanced Option’s return over the 5 and 7 years to 31 December 2015 sits at 7.9% per annum and 8.3% per annum respectively, which is well above most funds’ long-term return targets of inflation plus 3.5% per annum. While long-term performance numbers generally remain strong, SuperRatings continues to observe significant variation in returns between funds. The chart below illustrates this by summarising the accumulation of $100,000 invested 10 years ago across the best and worst performing Balanced Options over a 10-year period as well as comparing this to a cash return over the same period.

$100,000 invested in the worst performing Balanced Option 10 years ago would have accumulated to $131,417 at the end of December, which is $38,350 less than the median Balanced Option and $12,918 less than the median Cash Option.

However, $100,000 invested in the best performing Balanced Option 10 years ago would have accumulated to $195,582, which sits $25,815 above the median Balanced Option and $51,247 above the median Cash Option.

2016 SO FAR…

On the back of turmoil in Chinese markets, Australian markets have experienced sharp falls with the ASX 200 Index down 7.4% during the month of January so far. International markets have also experienced steep falls, however, a 5.9% fall in the Australian Dollar against the US Dollar has helped offset some of these losses. Overall, SuperRatings estimates that the median Balanced Option has fallen by 3.8% during the month of January to date. “While Balanced

Options have experienced reasonable losses in January, which have wiped out most of the 2015 calendar year return, these declines remain well below those experienced across share markets, once again highlighting the benefits of diversification across asset classes within Balanced Options”. “In spite of short-term losses across many asset classes, super fund members are encouraged to take a long-term view of their superannuation investments” Mr Bresnahan said.

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Joanna Davison

FEAL has partnered with La Trobe Financial for the next three years in operating the CIO & COO Awards and has announced the date for this year’s Awards ceremony.

Tuesday, 11 November 2014 is set for the industry’s Annual National Awards for Chief Investment Officer (CIO) and Chief Operating Officer (COO). The Awards, established in 2011 by La Trobe Financial, a leading credit specialist Fund Manager, aim at recognising excellence and continued professional development in the superannuation industry.

The Awards are the only one of their kind and have proved to be very popular with industry participants, because they are personal and reward recipients with a study grant of $10,000 each. “The two of us working together felt like a natural fit” said FEAL CEO Joanna Davison, …”like the FEAL Fund Executive of the year Awards, the La Trobe Financial FEAL CIO & COO Awards will complement our current recognition of industry leaders”. These Awards recognise the important achievements of key executives responsible for the retirement savings of our fellow Australians.

FEAL will now takeover the running of the Awards with La Trobe Financial as lead Sponsor. The Awards cocktail format will be retained and will continue to benefit from the independent Awards Judging panel which includes Greg Bright as Awards panel Chair, Greg O’Neill (La Trobe Financial), Chris Page (Rainmaker), Jeff Bresnahan (SuperRatings), David Coogan (PwC), and Neil Cochrane (Chairman of FEAL).

Applications will open at the end of June and can be accessed through the FEAL website or www.CIOCOOAwards.com.au.

The La Trobe Financial FEAL CIO & COO Awards are open to staff in like positions at fiduciary funds, including superannuation funds, government funds, statutory insurance funds, and multi-managers funds.

Last year’s winners were Gerald Parlevliet, the CIO of the big corporate superannuation fund for Commonwealth Bank staff, Commonwealth Bank Group Super, who won Chief Investment Officer of the Year.

The Chief Operating Officer of the Year was won by Graeme Arnott, the COO of the NSW Government fund, First State Super. The award ceremony was attended by over 150 industry participants. Joanna Davison, CEO of FEAL said the FEAL Board is excited to be taking on the CIO & COO Awards as they believe these Awards are very important for industry. Davison stated “FEAL is proud to be able to take on these important Awards with La Trobe Financial and to see the Awards move to the next level. The Awards encourage decision makers to continue to pursue world’s best practice investment and operational strategies and processes in our superannuation industry. The continually changing regulatory and investment environment present challenges for investment professionals, and the La Trobe Financial FEAL CIO & COO Awards recognise the important responsibility placed on CIOs and COOs in our industry.”

La Trobe Financial as lead Sponsor, will also sponsor the prize money of $20,000. Greg O’Neill, La Trobe Financial’s President & CEO stated “joining forces with FEAL was the right partnership for us, as FEAL has a special focus on recognising efforts made by decision makers looking after our retirement savings. It is clear to us that our retirement savings are in good hands, and from what we have seen over the past decade their performance has been exemplary and deserves recognition.”

The Awards will continue the same format and the winners will be announced at a cocktail party scheduled for Tuesday, 11 November 2014.

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