(Pictured: Andrew Fairley (left) and David Miles)
by Greg Bright
SMSFs do not represent the threat to APRA-regulated super funds that many have thought, according to two fund chairs who happen also to be experienced lawyers. But perhaps APRA itself may be a threat.
In a frank and entertaining final session at last Thursday’s Fund Operations Summit in Melbourne, Andrew Fairley, the chair of Equipsuper, and David Miles, the chair of legalsuper, canvassed a range of issues facing the industry and finished with a plea to the Government for better and more equitable public policy around super. The session was chaired by Christine Bartlett, head of National Asset Servicing. Here are some of the points covered:
Equipsuper, a $6.5 billion fund which dates back to the electricity generation industry in the 1930s, has decided to adopt the new ASX principles on board governance. The fund has issued a request for proposals to consultants to devise procedures for the selection of its trustees in the future.
“We will do a skills analysis of the board. There’s a whole raft of skills required, especially in administration,” Fairley said. “We will go through a board workshop and will look at our skills gaps and then how we go about selecting our independent directors. I’m hopeful that the industry settles on ‘a third, a third, a third’ [three independents, three union reps for members and three industry association reps for employers] but there’s still a question about whether the Sinodinas paper will attach itself to the ASX principles of 50 per cent independents [Senator Sinodinas, former assistant Treasurer, having stood down pending an ICAC investigation into other matters]. There’s also the issue of defining ‘independent’. But I’m not sure there are 250-300 people out there who could take up the role that funds may find themselves in.”
Equipsuper, he said, was one of the few “democratic funds”, as it has for a long time held member elections for its directors. “Historically, industry funds as well as retail funds have been more concerned about where you are from and who your represent rather than the skills you have,” Fairley said.
David Miles, of legalsuper, said the proposed changes to board structures would be a significant challenge and take some time to work through. “I have an old-fashioned view that as chair I should have a greater role in choosing the board but I don’t think the chairs of industry funds have that luxury. I don’t think the positions should be a reward for past service to an organization.”
Leakage to SMSFs
About 83 per cent of Equipsuper’s 52,000 members were now in its MySuper default fund, Fairley said. “They are simply not engaged.” The rest, which had chosen one of 13 options, were engaged and interacted with the fund.
The smaller Legalsuper, however, had a lot of high-balance members and about 50 per cent of members were outside the default fund. “We exceed all the norms from all the surveys on engagement,” Miles said. “So the challenge for us is to retain them… We have to have integrity about the way we manage the money.”
He said: “I think we will reach the point where the average Australian will realize that an SMSF is not in their interests. Most people who run their own money in the stock market are not long-term investors; they are stock pickers. This will remain a challenge for us because we have a significant number of high-balance members.” But he added the fund had a number of senior lawyer members who returned to the fund having had an SMSF for a time.
Fairly also believes the SMSF phenomenon is reaching a “zenith”. “I don’t believe what was said at the SPAA conference that the number of SMSFs will quadruple.” He offered a couple of tips on member retention from Equipsuper’s experience: “In the past about 20 per cent of our losses were to SMSFs. We decided to more closely monitor members’ activity on our website. We observed that if they checked their balances four or five times in a week they were probably thinking about moving. So we got one of our financial planners to phone them up and talk about it. The losses to SMSFs are now about 8 per cent of losses.”
The fund at one stage saw that there was a particular financial planner operating in Taralgon (in the Latrobe Valley) who was advising members to move into SMSFs. So Equipsuper put its own planner into the town to offset this.
APRA and regulations
Christine Bartlett introduced the regulatory issue and wondered how much more was to come. In response, Fairley questioned whether the regulators knew what do with all the information they received from super funds. “With our reporting, we have moved from 180 data points to over 4,000… The regulators know everything about us. I think they even know where I go on holidays. There is already very significant regulation of APRA [regulated] funds.”
Miles said: “There needs to be recognition that these are businesses charged with trustee obligations to look after other people’s money. They need to be allowed to function as businesses.”
He said that APRA had recently inquired as to whether legalsuper, which has been through several mergers with other legal funds over the past few years, was contemplating another merger.
“Much to his concern, I said to our CEO: ‘tell them it’s none of their business’.” Miles said APRA wrote the fund a letter which said that if it was going to merge with another fund the regulator wanted to know which one it was and for legalsuper to talk with them first.
“I thought ‘goodness gracious me’,” Miles said, “don’t these people have enough to do?… We wrote them a letter and it took 11 weeks to get a response to it. You can’t run a business like that.”
Pensions and public policy
Miles said legalsuper regarded the pensions aspect of its operation as “crucial to our survival”. “If you get them on a pension you probably have them until the day they die. You can’t say that about the accumulation phase.”
Fairly said that Equipsuper’s account-based pension had historically been built around Australian equities. In the last few months the fund had built a product based on high-yield highly franked stocks which were more appropriate for pension streams.
“You have to be sure you get people to design a strategy which prevents people from having to sell stocks into a falling market,” he said. “It’s about balancing the different buckets.”
Fairley said that good public policy would say that our super system, which allowed lump-sum payments for total balances, needed to be changed.
“The public cost has become so great, yet we still allow people to take all their money out and spend it. We must move to the Canadian system of more modest lump sums [and the majority taken as a pension] because the cost of the system we run is just too great.”
Fairley said that “one would only hope” that the Financial System Inquiry would look at this issue. “I just think it’s obscene that we could have someone with $50 million in a super fund and they could take 6-7 million of that out tax free. It offends my sensibilities.”
Several other sessions at the conference touched on the role of fund trustees and how the industry is evolving. An interesting running theme was this:
Big super funds are looking to make their default option more tailored to the likely circumstances of the individual member, called ‘lifestyle’ funds. They are also providing or looking to provide new-style member directed investment options for higher-balance members.
As one fund executive, who requested anonymity under the conference’s rules, said: this is a philosophical contradiction. On the one hand the fund is being paternalistic and doing the best thing by the member as much as it can, and on the other hand it is allowing the member to potentially shoot him or herself in the foot because some members want that control.
NOTE: Greg Bright, publisher of this newsletter, was a producer of the Fund Operations Summit.