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  Like-for-like: Russell compares four quarters’ worth of after-tex results for the first time.

  Research validates objective of Stronger Super to compare like-for-like returns.

• Super fund members set to benefit from mandatory focus on after-tax performance. 

Pre-tax performance is not the most effective means to evaluate investment returns, often materially understating the real value of franking credits to investors, according to new research by global asset manager, Russell Investments.

The Russell’s After-Tax Survey – produced quarterly – polled Australian equities managers with a range of strategies and styles, comparing returns on an after-tax basis for institutional and retail investors. This is the first time four quarters’ worth of results have been made available, highlighting investment trends and themes over a longer-term.

Russell Investment’s director of after-tax strategies, Raewyn Williams, said the research reinforces the benefit of the recently introduced Stronger Super reforms, which require the mandatory consideration of after-tax investment returns.

“For both advisers and the end investor, the results support the need to be mindful that the after-tax performance of investments can be materially different to pre-tax returns. The assumption that pre-tax performance measures are good enough is misguided – investors need a more complete picture of investment performance” she said.

The survey results suggest a move to an after-tax investment focus for Australian equities can generate additional returns annually on taxable accumulation options – around 45 basis points for conservative fund members, 65 basis points for balanced option members, and 80 basis points for growth option members. Further, with investors enduring a volatile market environment, the consideration of franking credits supplies a relatively reliable return stream. Ms Williams said while focusing on after-tax performance is now mandatory for superannuation investors, after-tax investing is not standard practice amongst fund managers. The fund managers who have elected to participate in the survey should be applauded for their efforts to promote after-tax measurement and management as a valuable part of the investment process.

“The survey results demonstrate there is value for funds – and their members – by using after-tax strategies within their Australian equities portfolio. Focusing on the end goals that matter to members – after tax returns – portfolios can be holistically designed, constructed and managed to take into account the impact of tax. Ultimately it’s the members of super funds who are going to reap the rewards via larger super fund balances.” she said.

Highlights from the survey include:

• Large cap managers generated additional alpha from franking of 27-53 basis points over the full year (on average)
• Franking added 1.1% to superannuation accumulation and 2.2% for pension returns (on average)
• Russell Investments RDV ETF ranked first for the income category and its After-Tax Australian Shares
• In some instances, active managers appeared to be underperforming the market based on pre-tax measures but in fact returned or beat the market.

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Employees may have some benefits cut.

Employers may be forced to reduce the benefits they provide for their employees as a result of Stronger Super legislation, as certain super funds change their structure to comply with the new rules.

Gareth Hall, Treasurer of the Corporate Super Specialist Alliance (CSSA) said that the CSSA was aware that certain superannuation funds were in the process of removing the ability for employers to pay administration fees and insurance premiums on behalf of their staff.

“It seems that some funds are using the MySuper compliance rules as an excuse to withdraw their employer sponsored fund offering; simplifying their service to now only deal directly with the individual fund members,” Mr Hall said. “This can have a detrimental effect on employee’s retirement savings.”

The result being that workers, who have previously had their fees paid by their employer, are now paying all these fees themselves, out of their own superannuation monies.

“The changes seem to result from the funds’ interpretation of MySuper guidelines, which insist that MySuper products provide the ‘same offering for all members’,” Mr Hall said.

This is a direct consequence of the Stronger Super regulations that were supposed to provide simplification and a reduction in fees.

“This loss of additional benefits may, in some cases, cost members more than the recent increase in Superannuation Guarantee (SG) payments (from 9% to 9.25%). The lower contribution limits have also slashed the ability of employers to provide more generous contributions for staff.”

Mr Hall said, “These restrictions may force employers who have previously been providing superannuation benefits in excess of the legislated minimums to either stop making these additional payments or to pay them as taxable salary.”

Employers and their employees should be aware of the finer points of the Federal Labor Government’s legislation, including some outcomes which are not necessarily in everyone’s best interest.

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This is despite the fact that, for many organisations, the new regime is likely to change key aspects of their business, including remuneration packaging, how much superannuation they intend to pay and selection of a default MySuper fund.

The survey, the first to directly address the effect of the Stronger Super reforms on employers, was conducted by Aon Hewitt, and its findings compiled in the Australian Superannuation Pulse Survey Report. This looks at how over 160 small, medium and large Australian companies plan to respond to the Stronger Super reforms.

The report findings were discussed in detail at Sydney and Melbourne seminars hosted by Aon Hewitt, subject matter experts across superannuation, reward and insurances. The focus of the session was how employers can be both compliant and market competitive under the new rules. Further seminars will be held throughout Australia in the coming weeks.

Topics for discussion included how to fund the mandated increases in the Superannuation Guarantee, the introduction of MySuper default funds, employee reward structures, insurances and changes to concessional limits.  Attendees were given the opportunity to ask questions and have them answered by Aon Hewitt’s panel of experts.

According to Aon Hewitt Senior Consultant and Actuary, Ashley Palmer, from an employer perspective, superannuation is an expensive and highly regulated component of an employee’s benefits package. As such, whenever changes are introduced employers need to make a number of often complex decisions.

“The results of the Australian Superannuation Pulse Survey Report give a snapshot of the challenges that many companies are facing and the strategies that they have in place to manage them,” he said.

Mr Palmer explained that the objective of the seminar was to share the results of the survey in order to help Australian employers understand and prepare for what lies ahead.

“On one level, employers understand the need for compliance, but at the same time don’t have all the information they need to make informed decisions. They also don’t necessarily know what other organisations are doing and thinking,” he said.  “We wanted to share our insights into this, as well as to highlight current trends.”

Mr Palmer continued by pointing to some of the specific challenges for employers.

“Just one example is how employers intend to approach the increases in Superannuation Guarantee starting from 1 July 2013 and eventually reaching 12% in 2019. The effect will be different depending on a company’s particular remuneration approach. Broadly speaking, those who use a Remuneration Packaging method may be passing the cost on to employees, while employers who use the Base Plus approach will be bearing the increase themselves,” he explained.

“In addition, of the almost 30% of organisations currently paying over the Superannuation Guarantee, only 11% say they intend to stay the same amount ahead of the minimum when the increase hits. The approach taken this year may set a precedent for future increases.”

Mr Palmer went on to explain that, due to the introduction of the ‘MySuper’ default superannuation regime later this year, companies need to make an active decision on their default fund.

“The surprising finding here,” he said, “is that over 50% of companies surveyed have not yet decided what to do about choosing a default fund, compared with only 12% that intend to conduct a review to determine which fund to choose.  That’s concerning, considering that companies will need to be able to contribute to their chosen default MySuper fund from 1 January 2014. Our experts at Aon Hewitt are increasingly being asked by organisations to undertake independent reviews of their arrangements focusing on compliance and competitiveness.”

Mr Palmer concluded by saying that legislative changes to the superannuation regime can cause headaches or worse, such as financial penalties, for companies that don’t have a plan to address them.

“The Australian Superannuation Pulse Survey Report was conceived to pinpoint the issues and provide information on its practical effects to help employers prepare,” he said.

Australian Superannuation Pulse Report key findings:

• Of the 29% of organisations currently paying above the Superannuation Guarantee (SG), only 11% intend to stay the same amount ahead of the minimum when the SG goes up, whereas 32% will absorb the increase by foregoing the above-market position they currently maintain.
• Employers using a Base Plus approach to remuneration are more likely (40%) to set aside additional funds to finance the Superannuation Guarantee increase in 2013 compared with only 12% of employers using a Remuneration Packaging approach.
• 58% of organisations say they are yet to determine their response to the Superannuation Guarantee increases beyond 2013.
• Only 12% of organisations intend to commence a review to determine which MySuper fund to use as their default fund. Over half (52%) are still deciding what to do.
• Almost three-quarters (74%) are yet to consider an early transition strategy to transfer existing default super balances to MySuper.

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The information is provided in responses to questions ASIC has received from participants in the super industry, including trustees.

ASIC’s involvement in Stronger Super focuses on disclosure requirements.

Commissioner Greg Tanzer said: ‘We hope people find this guidance, in a short Q and A format, timely, easy to follow and useful in understanding their obligations.

‘We’ll be adding to these FAQs on an as needs basis. We encourage people to contact us if they have issues they want to raise.’

To read the FAQs, click here.

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ASIC’s announcement includes:

• a new superannuation page on the ASIC website
• a timeline of regulatory documents. 

As one of the regulators of superannuation, ASIC has developed a program to inform, educate and help industry through the implementation of the Stronger Super regime.

‘The new Stronger Super reforms are a major focus for ASIC, and our close interaction with industry through this process will help drive better outcomes for industry and their clients’, ASIC Commissioner, Greg Tanzer said.

ASIC’s new dedicated super webpage will help industry and others understand ASIC’s role in superannuation, provide information about the reforms and detail new requirements. This is in addition to extensive information available on ASIC’s MoneySmart website.

Regulatory guidance timeline

ASIC is proposing to release guidance to help industry to comply with the Stronger Super reforms. ASIC will consult directly with stakeholders at this time as well as seeking industry feedback through its usual formal consultation process.

Depending on the final passage of legislation, ASIC expects to consult by the end of 2012 on a range of issues including guidance on disclosure requirements for MySuper, on self-managed super fund (SMSF) reforms and, where appropriate, on governance reforms and SuperStream changes.

ASIC will amend existing regulatory guidance and ASIC relief to reflect the Stronger Super reforms where necessary. These consequential amendments to existing regulatory guidance may not all occur before commencement of the Stronger Super reforms.

Industry roadshows

Roadshows to discuss, face to face, the Stronger Super reforms with industry are being planned for 2012/2013. This will allow people to hear from ASIC experts about the reform’s regulatory requirements. It is anticipated the roadshows will focus on the reform’s central issue of disclosure changes. Importantly, it will also allow people to ask questions directly to the ASIC staff responsible for implementation.

Details about the dates, venues and RSVP process will be announced in coming months.

30 July 2012

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In‐Specie Asset Transfers
Announced last year under the Stronger Super reform, (although yet to be legislated) from 1 July 2012 SMSFs will be prohibited from conducting ‘off‐market’ transfers of assets between themselves and related parties. The prohibition will apply to assets where an underlying market exists for transacting the asset – most notably ASX listed shares and units in managed funds.

Up until 30 June 2012, a SMSF member can transfer personally owned shares to their SMSF via an off‐market transfer. The SMSF acquires the shares at market value on the date of the transfer, and the total amount is counted as a contribution…so contribution caps still apply. The SMSF can also purchase such investments from a member off‐market.

From 1 July, a member would need to sell their personally owned shares, wait for the sale to settle, contribute the cash to their SMSF, and then re‐purchase their shares in the SMSF. Given the T+3 settlement period of the ASX, a member could potentially be a non‐owner of their shares for up to a full week. With the volatility of share markets, particularly now, this could prove an expensive wait…especially if we are looking at the maximum Non‐concessional cap of $450,000.

For those using the current rules pre 30 June, current weakness in share markets may have the secondary benefit of a lower personal Capital Gains Tax bill.

Double Deduction
The recent publication of ATOID 2012/16 has given rise to a bit of excitement in SMSF land. In this ATOID, the ATO has addressed the timing issue of when a concessional contribution is made on behalf of a member in one financial year but is allocated in the following financial year for the purposes of the contribution caps.

ATO ID 2012/16 confirms that a contribution made in June is not necessarily counted as a concessional contribution in the financial year it is made. If it is only allocated to the members account in the following year then:

• For cap threshold purposes it is only contributed in the year it is allocated.

But the deduction for the taxpayer is available in the year the contribution is made.

• In addition, the concessional contribution is subject to contributions tax in the year the payment is made.
• The allocation of the contribution for member reporting purposes is reported in the following financial year.

For a self employed SMSF member, they could contribute $25,000 now and then a further $25,000 in June. The June contribution is held in reserve until July, at which time it is allocated to the member’s account – this must occur before 28th July. On the basis they qualify to do so, the member can claim a tax deduction for the full $50,000 contribution in the current financial year.

Key Issues that must be considered:

• The trust deed must permit the above practice.
• The sum of the concessional caps for both the current and following year are not exceeded.
• The contribution to be allocated must be made at a different time to the contribution to be unallocated and the unallocated contribution must be made in June and allocated within 28 days of month end.
• The unallocated amount is not a reserve and does not need to be dealt with separately in the investment strategy.

For those operating SMSFs or in the SMSF arena, this is a key decision and one you should be considering using for clients…particularly with the reduction in contribution caps in the coming financial year.

Regulation Update for SMSFs
Submissions close on Friday 1 June (this Friday) for the most recent Exposure Draft relating to the Stronger Super reforms. This exposure draft provides details of proposed Regulations to amend the SIS Regulations to require:

• Trustees of SMSFs to consider insurance for their members as part of their fund’s investment strategy;
• Money and other assets of an SMSF be kept separate from those held by a trustee personally and by a standard employer‐sponsor or an associate of a standard employersponsor;
• SMSFs to value assets of the fund at their net market value for reporting purposes.

Under the proposed regulations, trustees will be required to evidence they have considered the insurance requirements of their members “…when they formulate, regularly review and give effect to the fund’s investment strategy.”

Trustees must evidence this requirement by way of trustee minutes of meetings held during the year. In practice, this just seems like more red tape. I would have thought this increased regulation of the SMSF sector strikes to the heart of the term “Self Managed”. It is quite probably that most SMSF members don’t actually need insurance, and those that do would usually have alternative arrangements in place. In any case, comprehensive financial advice to a SMSF client should include their need for insurance.

From the trustees perspective, the issue is a little more concerning. What would be their personal liability if a member does not have insurance having been deemed by the trustees not to require it?

The proposed update to regulations also requires trustees to document decisions in relation to the regular review of the investment strategy of their SMSF. Trustees will need to review the way in which they document their investment decisions to ensure they include references to the Investment Policy of the SMSF.

It may seem obvious to most competent advisers that a SMSF must keep its assets separate to those of its members or related parties…yet contraventions of the existing covenant prohibiting such action are one of the most reported to the ATO. The changes to the Act will allow the ATO to enforce compliance with this requirement.

The final proposed regulation defines net market value “…as the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting the costs expected to be incurred in realizing the proceeds of such a disposal.”

Currently, SMSFs can choose between valuing assets at historical cost or market valuation. This has obvious connotations when considering the minimum pension that must be paid annually to those SMSF members in pension phase. Another issue will be the cost of obtaining valuations for assets where a ready market does not exist. Trustees would do well to consider the future cash flow position of their SMSF to ensure any revaluation of assets does not impact the ability of the SMSF to meet ongoing minimum pension requirements.

If you are interested in these changes, or more importantly wish to lodge comments in relation to these changes, you have to be quick. The deadline for submissions to the Exposure Draft close on Friday 1 June 2012. For more information, refer to the Stronger Super website:
http://strongersuper.treasury.gov.au.

1 June 2012

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BT Financial Group’s Head of Superannuation & Platforms, Melanie Evans, said the Cooper Review findings announced last year recommended a framework that may have led to a “one-size fits all” approach to superannuation. 

“The Government’s announcement today has recognised the need for flexibility in super. In a compulsory system which at its core should be tasked with maximising the retirement savings of every Australian worker, it’s imperative there are a range of solutions to meet a wide range of needs. 

“Superannuation is currently $1.3 trillion and is expected to more than double to $3 trillion by 2020. With those numbers, it’s essential we get these far-reaching reforms right. After a number of reviews and a lengthy and deep consultation process between industry and Government, we’re pleased there is clarity about the future of Australia’s superannuation system.” 

Simple and efficient system
BT Financial Group has long advocated for a system that is easier for Australians to understand and engage with. 

“Our view has always been that the simpler the system, the more likely Australians are to take an active interest in their retirement savings. We’ve also invested a lot in helping Australians find their lost super and consolidating their accounts. 

“Too many Australian lose tens of thousands of dollars over a life time in unnecessary fees and charges through having multiple accounts. Anything that can be done to make this less likely will have an immediate and positive impact on the average working Australian’s super balance,” Ms Evans said. 

“We also welcome the Government’s acknowledgement that employees of organisations which transition to an electronic and low-cost way of administering super contributions will benefit from lower admin fees.”

Investment for life stages
Ms Evans said the Government’s announcement reflected the responsibility of funds to appropriately manage investment risk over a member’s lifetime. 

“It’s not appropriate for any Australian to have the same asset allocation and risk profile from the time they enter the workforce to the time they leave it. That’s why we have life stage funds as the default in BT Super for Life. 

“We’ve long been advocates for life stage investing and in recent times have noted the increased interest of investors in our life stage funds.” 

Governance
Ms Evans said the Government’s focus on governance was particularly reassuring. 

“We support the move of clearly setting out the duties and obligations of trustees. Superannuation is a fundamental part of the Australian economy and governance is a fundamental way to protect consumers. Improvements to governance are critical to the ongoing confidence of Australians in their superannuation.

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The FPA particularly welcomes the clarification of timelines including the commencement and implementation of certain MySuper measures. “Irrespective of our position on MySuper the FPA is pleased that industry is been granted adequate time to transition,” said FPA CEO Mark Rantall.

“The FPA is very pleased with Super Stream and believe this will deliver not only savings and efficiency but help to effectively ‘future proof’ the superannuation system.

“However we need to remember that the original remit of the Cooper Review was to ensure that Australia’s superannuation system was operating in the most efficient manner and in the best interests of fund members.

“The latest MySuper reforms may not necessarily meet those lofty standards.”

Mr Rantall said while the FPA acknowledges the revised MySuper rules mark an improvement on the original proposals – especially in dealing with unnecessary costs and boosting efficiency – it remains unconvinced about certain key aspects, including:

• MySuper may allow superannuation funds to charge indiscriminately and invisibly for their intra-fund advice. The FPA believes any fees for intra-fund advice must be transparent to fund members
• Existing corporate superannuation schemes that already meet the low-cost and efficiency standards MySuper is supposed to achieve will be unfairly forced to close
• Compulsory consolidation of superannuation accounts under $1,000 will be on an ‘opt-out’ requirement rather than an ‘opt-in’ – which is being required in the financial advice space. This is particularly concerning in respect to insurance cover being cancelled without  member consent. This would be further exacerbated if the proposal to increase this measure to apply to accounts under $10,000 from 2014 goes ahead.

“We are concerned that MySuper will deliver a false sense of security to many ordinary Australians. It is obvious that MySuper, with a potential benefit of $40,000 at retirement, will not meet the retirement income needs of the majority of Australians,” Mr Rantall said.

“Retirement income adequacy is the real issue in superannuation, which MySuper fails to address and could, in fact, damage.”

Whilst acknowledging that the proposed increase in the Super Guarantee from 9% to 12% will go some way to improving retirement income adequacy, Mr Rantall said professional financial advice and education will make an enduring difference.

“It would be unfortunate if MySuper causes consumers to lose interest in seeking help to manage their retirement savings. Professional financial advice is critical to producing better superannuation outcomes,” Mr Rantall said.     

“To this end we are very pleased that fund choice has not been restricted and remains a legitimate option for those Australians who are engaged and want to take control of their financial future”.

Mr Rantall said the FPA was pleased to see changes announced for SMSFs especially rules governing auditor independence and registration.

“The FPA looks forward to seeing the detail along with the replacement to the accountant’s exemption as part of FOFA tranche II. SMSFs deserve to be serviced by highly competent, experienced and qualified professionals – which include Financial Planners, Accountants and Auditors. These changes will bring greater confidence to the SMSF sector”, he said.

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