The challenges ahead for the super industry

Tony Lally
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Tony Lally, the former chief executive of the big Sunsuper industry fund, has witnessed the evolution of the global pensions industry over a period of 40 years, starting in his native Ireland in 1974. After 30 years in Australian superannuation he is now transitioning to take on board positions, both within the industry and in other fields. He spoke to Greg Bright about the super industry’s future, the role of boards and senior management and his own investment philosophies.

Tony Lally has interesting and fairly well formed views, it would seem, on many things. Even on migration, such as his own from Ireland to Australia as a young actuary in 1983. “There was a huge community of Irish people who emigrated to Australia around that time, all business people with good jobs who were fed up with the soaring tax rates and unemployment.”

When he started out with a life company in Ireland, Irish Life, in 1974 he became only the 50th actuary that country had ever produced. It was a very rare profession, with life offices and perhaps the weather bureau as just about the only possible employers. Today, actuaries permeate through the investment landscape. When he joined the old AMP Society that firm used to try to hire at least three actuaries a year. At one stage in the mid-1980s, just as the battle for Award Super was heating up, the Australian industry received Government permission to “import” 30 actuaries from South Africa to relieve a shortfall.

 Lally is well qualified to comment on the super industry, having worked in all three areas – the retail super sector, the industry fund sector and as a consultant actuary, giving him a unique vantage point to consider its evolution. “In some respects, I was there from the beginning of the industry fund movement.  I understood the mechanics, how the whole thing worked, where it came from, what the motivations were.” 

Being an actuary is a strong foundation for investment management.  Lally says: “You learn lots of skills as an actuary which are applicable to investments. You can move around life insurance, superannuation, general insurance and investments. Now they’re moving more and more into investments”

Lally is on the board of the International Centre for Pensions Management, which is a Canadian-based network of the world’s largest fiduciary funds aimed at fostering effective pensions design and management, including governance education for trustees. He retired from the board of ASFA after serving four years as Chair.

He says that the US really represents the “last bastion” of big defined benefit funds and they are mainly in the public sector. In the Netherlands, for instance, they are moving to a “defined promise” type of fund, without the guarantee which has crippled many corporate funds around the world, especially in troubled industries such as motor vehicle manufacture and media.

“The extension of life has been the big impact,” Lally says. “Basically, we’re adding one year to people’s life expectancy every four years. When they retire they don’t make any more contributions so those still working have to pay for them… In Australia [with mainly defined contribution funds] it’s a different problem: it means that many people will just not have enough money.”

Lally views Australia’s super system as “the envy of the pensions world as a result of three key factors:  the system is compulsory, there is an efficient distribution through the workplace, and the use of smart defaults, both at the employer level and at the member investment level, and these contributing factors should not be touched.”

Once these factors are in place, good investment performance then becomes the focus. Lally observes that returns tend to converge over long periods of time, especially among the large industry funds. It is practically impossible to choose between them on investment performance. “You’re less likely to get different results when funds use similar processes, that is board consensus, external advisors, and external fund managers,” he says. “A reason to have internally managed investments is because you want to do it differently, to tailor it to the fund’s needs.  It should be done differently to external management, otherwise what is the point?”

Nevertheless, investment strategies are getting more and more sophisticated. Most funds believe in active management, although it’s not easy to prove it’s better over time.

“It’s far more sophisticated than it used to be, and that requires an increase in skill and expertise at the governance level because there is a lot more risk involved. As a member, you’re trusting your money to these people, and it is important that they really understand what they’re doing.”

He says: “Take absolute returns investing as an example. That came into favour about 10-to-15 years ago promising a return of, say, cash plus 3 per cent. But that didn’t happen when the markets turned down. It’s important that boards are able to challenge new investments concepts.  In addition, the fee system is loaded in the favour of fund managers. Their performance fees are invariably just on the upside, with no penalty for underperformance, or failing to meet benchmarks.”

Although he believes Australia is possibly the most price sensitive market in the world, we’re still paying more than other, bigger, funds. “There hasn’t been a significant decline in fees as funds have gotten bigger… The really big funds in the world are paying an average of 40bps and we’re paying about 60bps.”

As investment strategies get more sophisticated funds tend to go more into unlisted assets, which are also more expensive to manage. For Australian funds, with a big proportion of their assets necessarily offshore, they have to deal with offshore managers, for whom Australia is not a big share of their revenue. Capacity issues also keep management fees up.

The insourcing trend will be a challenge for funds, he says, particularly if they want to attract and keep good fund managers. Nevertheless, there are examples overseas where funds outperform, such as the big Canadian funds, when they are paying the same sort of remuneration to their portfolio managers as the private sector.

Prior to his six-and-a-half years at Sunsuper, Lally worked in Japan for several years, as Head of Retail at Deutsche Asset Management for the APAC region and then as a Partner at Deloitte. He had previously spent ten years at Commonwealth Bank in Sydney, where he was general manager of retail financial services.

At Sunsuper he instituted considerable advances in member services. In addition, the introduction of a new range of group insurances combined to contribute to the fund winning consecutive SuperRatings ‘Fund of the Year’ awards.

With respect to management he says that once a CEO has the right strategy and right team in place, the CEO needs to trust the management, who will know more about their jobs than the CEO. “You have to delegate and you have to have consensus about the strategic vision”.  Lally led the team through the shift from a trust manager that outsourced services, to a fully integrated company following the acquisition of the administration business. In doing so, he challenged the management team to revisit the model from the members end and ask what it is that members really want.    

He also thinks there’s a time limit to every CEO role because “you have something that you’ve built yourself – it’s very difficult to change that but sometimes it needs to be changed”.

Lally questions the value of member education about investments, which are simply “too hard” for most people to understand “You can invest in education until the cows come home with very little impact. It hasn’t worked anywhere in the world. In the US, they’ve spent billions and it’s all pretty much been wasted.”  “It’s more about trust and giving members advice in the years leading up to retirement, a good product at retirement and good service after retirement,” he says.

He is therefore concerned about the introduction of new-style member directed investment options by big funds, as an alternative to prevent more of their members from setting up SMSFs. “Being the trustee of a big super fund is an onerous responsibility and trustees need to ensure that members are offered investment options that have an acceptable level of risk and are understood by the members.”

Lally believes that in the future fund trustees will probably have to have more specific skills than in the past, because of the increasing complexity of investments, increased competition and the importance of predicting the future of member management.

“To some extent, technology is becoming the industry,” he says. “And that’s not just in super – it’s happening in other industries as well…Superstream will modernise super and this will require additional skills: financial modeling; member analytics, marketing and technology.”

He thinks that the current model of having 50:50 employer/employee representation on trustee boards has worked well until now, however, funds need to consider what changes are needed to withstand the new challenges and complexity facing the industry. Based on his observations of the world’s top performing funds in his role at ICPM, trustees need to both understand the members and bring the skills and expertise in critical areas of the business. Independent directors with the right skills will strengthen the governance of super funds but it is important to have a clear picture of what skills are required.

Although he has worked in the industry for 40 years, Lally has no intention of joining the surge of Baby Boomers into retirement any time soon.

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