News & Insights Archives - Page 8 of 10

Teaming up for the members’ best interests

Back in the 1980s, the administration of the newly-created Australian Football League (AFL) believed that eleven Victorian clubs were unsustainable in a national competition. Victorian clubs, many of which were in a poor financial state, were offered incentive packages of up to $6 million to merge. One of the proposed mergers was to have been between Fitzroy and Footscray in 1989, but Footscray members rallied to raise enough money to retain their Club as a separate identity, and Fitzroy eventually relocated to Queensland in 1996 to transform the Brisbane Bears into the Brisbane Lions.

What does this have to do with Superannuation?

On 4 April 2019, APRA (the Australian Prudential Regulation Authority) issued a media release, quoting Deputy Chair Helen Rowell: ‘In some instances, acting in the best interests of members will require underperforming funds to merge or exit the industry. If trustees and trustee directors are not willing or able to meet their best interests duties to members, they should be prepared to face serious consequences.’.

The catalyst for this media release was the passing of new legislation granting APRA stronger powers to take action against the trustees of underperforming superannuation funds. The Treasury Laws Amendment legislation requires trustees to conduct an annual Outcomes Assessment against a series of prescribed benchmarks, covering all of their fund’s MySuper and Choice superannuation product options, and enhances APRA’s power to refuse, or to cancel, a MySuper authorisation.

Previously, APRA had been pushing for more super fund mergers, based on the earlier ‘scale test’, which many in the industry argued focused unfairly on ‘sub-scale’ funds, some of which were delivering perfectly satisfactory returns and services to their members. In her Opening Statement to the House of Representatives Standing Committee on Economics on 10 October 2017, Helen Rowell stated that ‘The metrics considered under the existing scale test are insufficient to indicate whether a trustee is promoting the financial interests of, and providing quality, value-for-money outcomes for, fund members’.

Just as the AFL has made numerous, almost annual changes to the rules governing the world’s oldest major football code, Prudential Standard SPS 515 has gone through multiple revisions in this tumultuous environment, with the latest draft version bearing little resemblance to the original.

In the first version released in December 2017, strategic and business planning and member outcomes were contained in separate prudential standards. The strategic planning requirements sat rather unwieldy as part of the prudential standard on risk management. The member outcomes requirements appeared to be somewhat more business operations focused, requiring funds to design a member Outcomes Assessment by segmenting its business so that ‘all parts of its business operations… are captured; and the assessment considers the outcomes provided to beneficiaries in each segment’. The way to assess each outcome was also unnecessarily rigid, requiring assessment with reference to both ‘objective benchmarks and targets, both internal and external’ and ‘outcomes provided to beneficiaries of other [funds]’.

It was pleasing to see that the December 2018 version of SPS 515 fixed both of the above issues. Strategic planning and member outcomes requirements were amalgamated into the same prudential standard. Outcomes Assessments became member cohort-focused and there was no longer an explicit requirement to compare every single outcome metric to other funds. This version of SPS 515 was much more logically structured, and also struck a better balance between being prescriptive and permitting flexibility for funds to determine their own member outcomes assessment framework to suit their particular circumstances.

However, the passage of legislation to require an annual Outcomes Assessment under the SIS Act in early April 2019 necessitated further revisions to SPS 515. The legislated requirements are more prescriptive, requiring comparison of a fund’s MySuper products to other MySuper products offered by other funds. For Choice products, funds are required to determine comparable Choice products for comparison purposes.

On 30 April, APRA issued the revised SPS 515 for industry consultation. The revised SPS 515 introduced a new ‘business performance review’ requirement that covers both monitoring of business plans and the Outcomes Assessment. The Outcomes Assessment encompasses two parts, the outcomes assessment as required under SIS and outcomes achieved for different cohorts of beneficiaries.

It is not immediately clear what specific outcomes are envisaged to be covered in the latter, nor is it clear whether APRA requires assessment by cohorts to apply to the Outcomes Assessment under SIS. Additionally, APRA requires funds to specify relative weights to different areas in making an overall assessment. As APRA issued only the revised Prudential Standard for consultation without the relevant Prudential Guidance, it is not 100% clear how APRA envisages the new requirements to work.

There is also uncertainty about the timing of the first annual Outcomes Assessment. As the relevant legislation became effective in April 2019, arguably the first annual assessment needs to be completed within a year, so by April 2020.

Meanwhile, the prospective commencement date of 1 January 2020 for SPS 515 draws ever nearer. The latest legislative and prudential requirements have changed significantly from the earlier versions. Trustees need to review their assessment framework to cater for these changes, including how to determine the comparable Choice products and what summary results of the outcomes assessment to make publicly available as required by the legislation.

Whatever final form the Outcomes Assessment takes, both regulators and trustees need to be flexible enough to recognise that not everything that makes an organisation successful can be captured in calculable metrics.

After Footscray’s members saved their Club from extinction in 1989, they became the Western Bulldogs and stumbled from moderate success to financial crisis over the following 25 years. However, in 2016 they memorably won the ultimate AFL prize, the premiership flag, paid off a multi-million-dollar debt and consolidated their position as a permanent community focus for Melbourne’s Western suburbs. Definitely a favourable outcome for their members!

Prepared by Minjie Shen – Manager, Consulting and Bill Buttler – Senior Manager, Consulting

June 24, 2019/by Bill Buttler

News & Insights

Miracle May is over, but don’t expect celebrations to continue

In what has since been touted as ‘Miracle May’, investors welcomed the shock federal election outcome, which saw the Morrison government returned to power for another three years. The Monday following the election weekend saw the S&P/ASX 200 Index surge in a post-poll relief rally, adding approximately $33 billion to its market capitalisation in what was the single largest gain this year. Much to the embarrassment of the political pundits who had boldly claimed a Labor victory was inevitable, the Coalition managed to secure a majority government in the face of pessimistic opinion polls and betting markets.

Investors have experienced a mild reprieve from some of the recent negativity, while the more pessimistic scenarios have been tempered by upcoming tax cuts—equivalent to around 0.5% of GDP—along with the prospect of further rate cuts from the RBA, APRA’s move to lower the serviceability buffer for home loans, and the removal of downside risk associated with Labor’s tax policy. At the same time, strong commodity prices are boosting export receipts and the government’s fiscal position. However, global risks remain, highlighted by the RBA’s concern about the US-China trade war, and some not-so-subtle indications that the Australian economy is in need of some real structural reform to take the pressure off monetary policy.

Period returns to end May 2019 (% p.a.)

Source: FE, Lonsec

Leading up to the election, equity markets had fully priced in a Labor victory, which had placed significant downward pressure on valuations, in part due to the proposed overhaul of the current taxation laws. As such, when the ‘Messiah from the Shire’ was safely returned to the lodge, investors reacted with exuberance, which saw the S&P/ASX 200 TR Index generate a 1.7% return for the month of May. While in isolation this may seem uninspiring, contrast this with the MSCI World ex Australia NR Index (AUD Hedged), which fell -6.0% over growing concerns of a synchronised global slowdown in concert with the on-again, off-again escalating US-China trade war. Resultingly, Australia was the only advanced economy able to buck the trend during the month of May and enjoy gains in its equity market.

Broadly speaking, investors had shifted their asset allocation away from domestic equities in anticipation of the abolition of excess franking credit refunds. The reason for this was two-fold. Returns on fully-franked securities were anticipated to decline, which in conjunction with a static equity-risk premium necessitated a lower entry price to entice prospective investors. Furthermore, the existing system favours an overweight allocation to domestic equities due to the favorable taxation treatment for those in a zero-tax environment.

Logically, once this incentive is removed, capital outflows overseas will likely ensue. In tandem with this was the proposed halving of the capital-gains tax concession which would have significantly dinted the value proposition associated with investing in property and shares. As such, simply maintaining the status quo was enough to see an extensive re-rate across the market throughout May.

The Financials sector was one of the largest beneficiaries of the election outcome, with the ‘big four’ surging 6–10% on the Monday following the election. Once the animal spirits had subsided, this translated into a 2.6% gain for the S&P/ASX 200 Financials TR Index for the month. Labor’s proposed negative gearing limitations, CGT amendments, increased bank levies and more onerous restrictions on mortgage brokers had all coalesced into an unfriendly environment for future bank earnings. This is in stark contrast to the reform-shy Coalition, which was rewarded for sticking with the status quo. Given then Treasurer Morrison was opposed to a Royal Commission into Financial Services, it is perhaps unsurprising that this sector received a healthy post-election bump.

Likewise, A-REITs enjoyed a surge with the S&P/ASX 200 A-REIT TR Index achieving a 2.5% return for the month of May. This was again attributable to more sanguine housing market sentiment with the threat of proposed changes to negative gearing and CGT discounts now ameliorated. Specifically, Stockland, which is one of Australia’s largest diversified property developers, has since rallied 14% due to its large residential property exposure. The subsequent dovish pivot by the RBA, which cut interest rates to historic lows at its June meeting, has since provided additional tailwinds for the sector too.

Source: FE, Lonsec

Similarly, the Coalition government and health insurers are singing from the same hymn sheet, which saw the S&P/ASX 200 Health Care TR Index deliver 3.3% for the month of May. As above, the prospect of a Labor government mandating capped health insurance premiums and increased regulatory scrutiny had seen the likes of Medibank and NIB de-rate significantly prior to the election. However, following the surprise election announcement, Medibank and NIB subsequently shot the lights out and returned 11.5% and 15.8% at the close on Monday 17 May, respectively. More broadly, the perceived ability for the Coalition to demonstrate fiscal responsibility in the face of gathering economic storm clouds ushered in a 2.0% return for the S&P/ASX 300 Consumer Discretionary TR Index.

While it may have been ‘Miracle May’ for the Coalition and equity investors, unfortunately you can’t have winners without losers. Shareholders invested in Sportsbet’s parent company, Flutter Entertainment, were left aghast at the election result, given Sportsbet had presciently paid out on a Labor win. Equally, Clive Palmer has been left questioning his return on investment, following a $55 million advertising blitz that failed to deliver his party a single seat in parliament.

While miracles are always welcome by investors, unfortunately they are often unreliable when it comes to long-term, sustainable growth. While markets have received a nice boost, the weakness in Australia’s underlying position is difficult to ignore. The latest National Accounts data highlighted the extent of the slowdown, with quarterly growth just 0.4% and annual growth a meagre 1.8%. Households contributed just 0.1% to growth in the March quarter as heightened uncertainty, subdued confidence, and weakness in housing combined with still weak wages growth to constrain household spending. A miracle may have saved us in May, but we have to get through the rest of 2019 and beyond.

June 21, 2019/by Calvin Richardson

News & Insights

Cracking the advice gap

When industry funds first came on the scene in the 1990s, the member contribution rate was three percent of wages and there was one investment strategy that applied for all members. The last thing trustees were thinking about was the need to cater to the increasingly complex advice needs of their members before and after retirement. Fast forward to today and the situation is very different. As fund membership grows and average account balances rise, the need to support advice is becoming critical.

To get a sense of how significant the advice challenge is across the whole super industry, consider how membership has changed over the past decade. As the chart below shows, there has been a steady decline in the proportion of benefits accruing to members under 65, while the proportion accruing to older members, including those over retirement age, has been rising.

Proportion of member benefits by age group – all fund types

Source: SuperRatings

For industry funds this means there is a need to adapt to the increasingly sophisticated needs of their members in retirement. Industry funds are now keeping more post-retirement members in their fund, rather than seeing them shift to a retail fund or SMSF. The larger the member account, the more likely the member is to consider leaving their money in the fund during the retirement phase. While the average account balance across all industry funds is not incredibly high, there is significant variation across individual funds.

Average accounts – industry funds 2018

Source: SuperRatings

In the 70-74 age bracket, the average account balance is well under $200,000, but there are funds out there with significantly higher average balances, with the largest ranging as high as $600,000. This gives rise to a range of different product and advice needs depending on the member’s situation. For members with relatively low account balances, the age pension can be used to manage investment risk. For members with larger account balances, their advice requirements will be closer to those in an SMSF.

The reality is that member advice needs are moving well beyond the capacity of the inhouse advice provided by the funds themselves. To meet the advice challenge, funds are increasingly turning to third party advice, but there is still some reluctance to support members in accessing advice outside the fund.

In the past there has been an element of tension between super funds and financial advisers. From the super fund’s perspective, the adviser is a possible threat to member retention and can disrupt the fund’s engagement process. For the adviser, the super fund can sometimes seem like a closed shop, unwilling to give up control of the advice experience or shed any real light on its investment process, structures and strategy.

Third party advice networks facilitate greater reach through their advice channels, while concerns over quality control can be managed through the delivery of accurate and timely information to advisers and dedicated monitoring. While funds must be prepared to give up some control, advisers will need to work harder to ensure their advice is in their clients’ best interest. The limitations of many advice businesses have been laid bare by the Royal Commission and there will likely be significant turnover in coming years, with more advisers distancing themselves from aligned groups. This provides an opportunity to support and build traction within the new advice landscape.

Many funds are already recognising this opportunity, but generally industry funds still have a way to go in embracing third party advice. According to SuperRatings’ data, only 59% of Not for Profit (NFP) funds have formal relationships with advisers, which have traditionally been the domain of retail funds through vertically integrated business functions. Even fewer NFPs have a dedicated servicing team for third party advisers – only 46% compared to 68% of Retail Master Trusts (RMTs) – which is essential for enabling advisers to provide a competitive service.

Industry fund support for third party advisers is lagging

Third party adviser servicing	Not for profit	Retail master trust	All funds
Formal relationships	59%	84%	69%
Third party adviser panel	15%	15%	15%
Dedicated servicing team	46%	68%	55%
Adviser portal	12%	57%	29%
Ability to transact	15%	73%	38%
Access to client reports	38%	92%	60%
Facilition of fee payments	67%	92%	77%
Provision of data feeds	8%	81%	37%

Source: SuperRatings

Funds and advisers need each other, but how can they go about creating mutually beneficial and trusting relationships? The answer is by sharing information and being transparent about members’ needs. For advisers, this means having access to high quality investment product research that enables them to efficiently assess a wide range of NFP, retail and corporate funds, and ensures they have an in-depth understanding of how each fund stacks up.

Equally, super funds need to support this process by giving advisers the information they need to make decisions in their client’s best interest. Transparency is no longer a radical strategy for super funds – it not only reduces friction for the adviser and their client by making it easier to do business, it means that the adviser is in a position to assess the product and consider it for their client. Communicating third party assessments, such as Lonsec’s well recognised investment option ratings, also helps advisers to easily identify and justify high quality superannuation offerings.

We expect to see significant changes in funds’ external advice offerings in coming years, particularly as funds continue to report growing success in this area. SuperRatings is supporting this evolution by making its specialised superannuation research available to financial advisers via Lonsec’s market leading iRate platform, giving advisers the tools to make in-depth fund comparisons and ensure that they can fully justify their fund decision on a best interest basis.

With potential risks over default models and concerns about the sustainability of the old model, it is impossible for funds to ignore these opportunities. While funds and advisers might not always see eye to eye, they can’t afford to allow their differences to get in the way of the vast opportunity staring them in face.

May 27, 2019/by Bill Buttler

Media releases, News & Insights

Super funds enjoy late surge in final FY quarter

Super funds have failed to be rattled by the softening economic outlook, delivering solid returns in April and boosted by market momentum through early May. Despite yesterday’s correction, funds remain on track to beat expectations for the June quarter, which is historically the weakest period of the year.

According to estimates from leading superannuation research house SuperRatings, the typical balanced option return was 1.7% in April, mostly driven by gains in Australian and international share markets. This brings the financial year-to-date return to 5.3%, which remains beaten down due to large market falls in the December quarter.

Members in a growth option have enjoyed an even stronger result, with an estimated median return of 2.1% in April. The typical Australian shares option rose 2.3% while the median international shares option grew by an estimated 3.8%.

Median balanced option returns for April 2019

Period	Accumulation returns	Pension returns
Month of April 2019	1.7%	1.8%
Financial year return to 30 April 2019	5.3%	6.0%
Rolling 1-year return to 30 April 2019	6.5%	7.8%
Rolling 3-year return to 30 April 2019	8.5%	9.4%
Rolling 5-year return to 30 April 2019	7.6%	8.2%
Rolling 7-year return to 30 April 2019	8.8%	10.0%
Rolling 10-year return to 30 April 2019	8.7%	9.7%
Rolling 15-year return to 30 April 2019	7.7%	8.5%
Rolling 20-year return to 30 April 2019	7.1%	–

Interim results only. 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.

It remains to be seen if super funds can maintain their momentum in the final quarter of the 2019 financial year, but there are some dark clouds on the horizon that could dash hopes of a strong finish. Downside risks to the Australian economy, including weak inflation, falling home prices, and tighter credit conditions are taking their toll on consumer confidence, while the return of geopolitical risks in the form of US-China trade negotiations will also contribute to near-term uncertainty.

As the chart below shows, the June quarter has historically been the weakest for superannuation and tends to be a time when investors take profits and rotate out of equities. While markets have been risk-on for the past four months, there are signs pointing to volatility ahead, along with fears that markets have come too far too quickly.

Average option return per FY quarter (2009-2019)

Source: SuperRatings

Based on average per quarter returns over 10 years to March 2019

However, while there are reasons to be cautious, there is no guarantee that history will repeat itself.

“The Australian economy has entered the federal election in a relatively vulnerable position, but it’s not all bad news,” said SuperRatings Executive Director Kirby Rappell.

“We have seen strong performance from super funds since the start of 2019, and there’s no reason why this momentum can’t be sustained through to the second half of the year. But there are certainly risks to the near-term outlook, and members should not expect a bumper year for super returns.”

“Super is a long-term game, and those in the accumulation phase should not be too concerned about market volatility or periods of lower performance.”

Growth of $100,000 balance over 10 years to April 2019

Source: SuperRatings

The positive performance for super funds in April has helped to boost total balances over the ten-year period ending 30 April 2019, with $100,000 invested in the median Balanced option in April 2009 now estimated to have reached an accumulated $220,332. The median Growth option is estimated to be worth $236,587 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,679 and $274,732 respectively. In contrast, $100,000 invested in the median Cash option ten years ago would only be worth $129,835.

Release ends

May 15, 2019/by Kirby Rappell

News & Insights

Superannuation facing grim financial year

Despite a recovery in the March quarter, superannuation funds are heading for a disappointing 2018-19 financial year, with global growth challenges and a loss of market momentum meaning funds will struggle to make up for sharp losses in the December quarter.

According to estimates from leading superannuation research house SuperRatings, balanced option returns were largely flat through March as markets were weighed down by weaker economic data and fears of further falls in home prices.

The typical balanced option (defined as an option holding between 60-76% growth assets) returned an estimated 0.8% in March as the share market recovery came to a halt. The typical growth option also grew at 0.8% following strong gains in January and February of 3.2% and 3.4% respectively.

Estimated median balanced option returns to 31 March 2019

Period	Accumulation returns	Pension returns
Month of March 2019	0.8%	1.0%
Financial year return to 31 March 2019	3.2%	4.2%
Rolling 1-year return to 31 March 2019	6.3%	8.0%
Rolling 3-year return to 31 March 2019	8.4%	9.3%
Rolling 5-year return to 31 March 2019	7.1%	8.1%
Rolling 7-year return to 31 March 2019	8.5%	9.6%
Rolling 10-year return to 31 March 2019	8.8%	9.8%
Rolling 15-year return to 31 March 2019	7.5%	8.2%
Rolling 20-year return to 31 March 2019	7.3%	–

Interim results only. 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.

While funds have recovered from a horror December quarter, a weakening outlook will make it challenging for funds to make up further ground before 30 June. According to SuperRatings, the estimated financial year-to-date return for the median balanced option is 3.2%, which so far ranks as the seventh worst result since the introduction of the super guarantee in 1992.

Median balanced option financial year returns since the
introduction of the Superannuation Guarantee

Median balanced option financial year returns since the introduction of the Superannuation Guarantee

*Financial year-to-date return

Source: SuperRatings

Meanwhile, the federal budget went largely unnoticed by markets, which had already anticipated many of the tax and infrastructure spending measures. Australians will head to the polls on 18 May, and while super is unlikely to be a defining election issue, there will be plenty of debate around Labor’s proposed changes.

“The federal budget delivered no surprises either for markets or for the super industry,” said SuperRatings Executive Director Kirby Rappell. “This is not a bad thing, because often the best thing a government can do is leave super alone.”

“The focus during the election will be on Labor’s proposed changes, which include reductions in contribution caps and the removal of imputation credit cash-outs, which will have a significant impact on SMSFs.”

Mr Rappell said falling home prices combined with weaker share market performance is the biggest challenge currently facing retirees.

“Falling house prices have a negative wealth effect that flows through to consumer spending, but they also throw a spanner in the works for many Australians approaching retirement who may have planned on downsizing and adding the windfall to their nest egg.”

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness.

If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

This media release is subject to the copyright of SuperRatings. Except for the temporary copy held in a computer’s cache and a single permanent copy for your personal reference or other than as permitted under the Copyright Act 1968 (Cth.), no part of this media release may, in any form or by any means (electronic, mechanical, micro-copying, photocopying, recording or otherwise), be reproduced, stored or transmitted without the prior written permission of SuperRatings. This media release may also contain third party supplied material that is subject to copyright. Any such material is the intellectual property of that third party or its content providers. The same restrictions applying above to SuperRatings copyrighted material, applies to such third party content.

April 17, 2019/by Kirby Rappell

News & Insights

Changing Contribution Rates – Potential Impacts

In light of the new KiwiSaver contribution rate changes, which came into effect on 1 April 2019, SuperRatings utilised their Net Benefit model to quantify the actual impact on a member’s KiwiSaver balance.

The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill introduced contribution rates of 6% and 10%, in addition to the 3%, 4% and 8% rates previously offered, providing members with greater flexibility and allowing more tailored financial plans. The 6% rate also bridges the gap for members currently contributing the minimum who don’t have the means of contributing 8%.

SuperRatings analysed the difference in outcomes using their Net Benefit methodology, which aims to show the dollar amount credited to a member’s account. SuperRatings’ Net Benefit methodology models investment returns achieved by each scheme over a seven-year period, as well as the fees charged. The analysis uses a scenario of a member that has a salary of $50,000 and a starting balance of $20,000 and a tax rate of 17.5%.

SuperRatings’ analysis shown in the chart below, indicates that a member contributing 3% into the median Conservative Fund would have generated a balance of $38,261 over the 7 years to 30 June 2018, whereas a member contributing 6% would have a balance of $49,272, a difference of over $11,000.

Source: SuperRatings

Evidently, additional contributions coupled with the benefit of compounding can have a significant impact on members’ account balances over the long term. In addition to supporting members to select an appropriate contribution rate, helping members to choose a suitable fund type continues to be an important determinant of member outcomes.

April 3, 2019/by Kirby Rappell

News & Insights

The cost of ‘sustainable’ super may not match performance

Super members searching for a ‘sustainable’ investment fund are exposed to the same challenges as those in more traditional funds with the sector delivering a wide range of performance outcomes and charging a range of fees, according to new research on the sector by superannuation research house SuperRatings.

The SuperRatings research reveals that the median performance of ‘sustainable’ investment funds is lower than the median performance of the SuperRatings SR50 Balanced (60-76) Index, comprised of traditional balanced super funds. Furthermore, the ‘sustainable’ funds have higher median fees. The combination of the two means a sizeable number of ‘sustainable’ funds produce sub-optimal returns at relatively high fee levels. ‘Sustainable’ funds include funds that select their investments based on environmental, social and governance (ESG) factors.

However, there are a number of ‘sustainable’ funds that outperform the market, while some also have lower fees than many Balanced options. The chart below reveals that the top quartile of sustainable funds charges a total fee of $519 or less per annum on a balance of $50,000, compared to the median SR50 Balanced (60-76) Index fee of $606. Looking at returns, the top quartile of ‘sustainable’ funds has delivered a 10-year return of 8.9% or more per annum, which is in line with the SR50 Balanced (60-76) Index.

Sustainable super fund fees and returns

Source: SuperRatings

The below table shows the top returning super funds that are classified as sustainable due to the fund’s incorporation of ESG and socially responsible investing criteria. HESTA’s Eco Pool balanced option has delivered the top return over 10 years of 11.1% per annum, which is considerably higher than the SR50 Balanced (60-76) Index return of 8.9% per annum.

Top performing sustainable super funds

Fund	Total fee on $50k balance	10-year return (% p.a.)
HESTA – Eco Pool	$670	11.1%
VicSuper FutureSaver – Socially Conscious Option	$463	10.3%
AustralianSuper – Socially Aware	$448	10.0%
WA Super Super Solutions Pers – Sustainable Future	$573	9.5%
UniSuper Accum (1) – Sustainable Balanced	$281	9.3%
Sustainable Balanced option median	$662	8.5%
SR50 Balanced (60-76) Index median	$606	8.9%

Returns over 10 years to 28 February 2019
Source: SuperRatings

There are a range of factors that must be taken into account when assessing the extent to which ESG factors affect a fund’s investment decisions, as well as the cost involved. For example, some funds may apply a simple screen on certain industries, while others may conduct more in-depth analysis on individual businesses, which may justify a higher fee. This makes it difficult to provide a definitive ranking of sustainable fund performance.

When considering sustainable alternatives, it is important to look at each individual fund’s mandate, their process for investing sustainably, and of course the industries and businesses they do and do not invest in,” said Mr Rappell.

“When we speak to financial advisers, they tell us that ESG factors are becoming more and more important for their clients. Advisers need the capability to examine and compare sustainable funds to ensure that the product is the best fit for their client both in terms of their risk and return preferences, as well as their social and environmental values.”

March 25, 2019/by Kirby Rappell

News & Insights

Super funds report first gains in 5 months

Super members have escaped a fifth straight month of negative returns as market volatility turned in their favour over January, helping to claw back losses suffered in late 2018.

The latest data from superannuation research house SuperRatings reveals major fund categories all enjoyed strong growth in the first month of the year. The median return for the Balanced option in January 2019 was 2.5 percent, returning to members more than half of the losses suffered over the prior four months.

Members in the median Growth option enjoyed gains of 3.2 percent for the month, while those in either the median domestic or international equities option had returns of 3.4 percent and 4.5 percent respectively. The effect across all options has been to improve monthly balances after four months of declines, a particularly welcome outcome for those members approaching retirement.

Interim results only. 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.

SuperRatings Executive Director Kirby Rappell believes the latest data is a reminder that it is long-term performance that matters for super members and they should not panic in response to a few months of negative performance.

“Volatility remains the dominant trend across markets at the moment”, said Mr Rappell. “However, this time volatility has delivered gains to super members and is a reminder not to panic in response to short-term market movements.”

“A number of factors worked in members’ favour throughout January, including efforts to diffuse the ticking time bomb of a trade war between the US and China. Markets also improved with the end of the longest US government shut down on record.”

Looking forward, super members are also likely to benefit from improved conditions in February to date. In particular, bank stocks have improved as the final report of the Royal Commission failed to deliver as much pain for the sector as many feared.

Growth in $100,000 invested over 10 years to 31 January 2019

Select index

SR50 Balanced (60-76) Index
SR50 Growth (77-90) Index
SR50 Australian Shares Index
SR50 International Shares Index
SR50 Cash Index

Source: SuperRatings

Interim results only

Source: SuperRatings

Interim results

The positive performance for super funds in January has helped to boost total balances over the ten-year period ending 31 January 2019, with $100,000 invested in the median Balanced option in January 2009 now worth $213,227. The median Growth option is worth $227,393 over the same period, while $100,000 invested in domestic and international shares ten-years ago is now worth $244,722 and $245,403 respectively. Meanwhile, $100,000 invested in the median Cash option ten years ago would only be worth $130,094 today.

Top performing super funds

Release ends

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the merits of the superannuation or pension financial product(s) alone, without taking into account the objectives, financial situation or particular needs (‘financial circumstances’) of any particular person. Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances, or should seek independent financial advice on its appropriateness.

If SuperRatings advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each superannuation or pension financial product before making any decision about whether to acquire a financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s).

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February 21, 2019/by Kirby Rappell

News & Insights

The Royal Commission and the complex task of reforming super

The Royal Commission report will likely be seen as a key fork in the road for the superannuation industry. It highlights a number of issues, many of which have been known to the industry for some time, but more importantly it creates a clear imperative for industry players to take meaningful action to address them. The report and its recommendations cover both historical and structural issues that have been endemic to the industry, such as grandfathered commissions and duplicate accounts, but they also raise potential challenges that if not properly addressed could pose significant risks to sustainability in the future.

The solutions may involve a degree of complexity, and certainly they will not be implemented overnight, but they will be necessary to the future health of the system. Australia’s retirement industry is growing rapidly, and this is bringing greater sophistication but also inevitably additional layers of complexity that is not always easy for funds, members and regulators to navigate. Maintaining as much simplicity as possible while allowing members to benefit from greater innovation and a more dynamic retirement sector is the key challenge. Progress is being made but more needs to be done.

In particular we expect to see structural changes within many retail fund providers as they evolve their models for the future. MySuper product quality filters are expected to be lifted, which should help provide a more effective safety net for disengaged members. At the same time, with the changes in trustee expectations, we will undoubtedly see continued rationalisation in the number of providers in the market through fund mergers.

For consumers, the Royal Commission has highlighted the cost of not being engaged with your super. For many Australians, failing to engage and check in on their retirement savings may already have had an impact on their future retirement outcomes, whether through below-average returns, high fees, duplicate accounts, or inappropriate insurance. For every super member, getting engaged and taking an interest in how your retirement savings are managed is the best thing you can do. Ultimately, the success of superannuation depends on members having a stake in their own retirement.

On the financial advice side, the Royal Commission is proposing some important structural changes that should help create a better deal for advice clients. Combined with new education standards for advisers there should be an ongoing shift in quality, but a key challenge remains the high cost of providing advice, which is ultimately passed on to clients. Will financial advice become a luxury that only the few can afford, or can the industry evolve so that all those exposed to capital markets through their super can access affordable advice? This is a critical question and one that will require a balanced approach to ensure that members can get the certainty and comfort they need in retirement.

With a federal election due this year, and an early budget pegged for early April, the path to implementing these changes should become increasingly clear. The Royal Commission has revealed the deep desire Australians have to fix the system, but it is up to us to work through the changes. We have an opportunity to make real and lasting improvements that will make super more sustainable and hopefully create a better value proposition for members. But we cannot ignore the complexity of the task ahead. Success will mean balancing a number of competing goals – including cost, sophistication, choice and simplicity – while ensuring members understand what they need to do to get the most value from their super.

February 6, 2019/by Kirby Rappell

News & Insights

Superannuation in a post Royal Commission World

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry is mandatory reading for all super funds and their Trustees. It provides clear guidelines about the sale of financial advice and the purpose of MySuper products, as well as the simplification of insurance and more stringent benchmarking of service providers. This will result in a sweeping focus across organisations to ensure that strategic plans and KPIs are appropriately aligned and managed. The report clearly reinforces organisational responsibility as front and centre in the solution.

The impact of the Royal Commission for many in the industry will be lasting. The key takeout for many industry participants should be that most providers face challenges in some shape or form. We believe the true test of an organisation will be; if another commission (hypothetically) were to be held in 5 or 10 years’ time, will providers have had the foresight to seek out the issues of tomorrow and solve them, or will they be doomed to repeat the mistakes of the past.

We have identified three key areas highlighted in the report, which we believe will substantially shape the industry going forward.

1. Greater accountability for Trustees

With further consolidation across the industry inevitable, Trustees will need to have the processes in place to appropriately consider potential merger opportunities and ensure they are making decisions from a position of “best interests” and not “power/control”, or face being held accountable.

Further to this, the issue of appropriately assessing service providers, whether they are related to the entity or not, and holding them to account will also be vital in delivering optimal member outcomes. This will require ongoing uplift and oversight of service providers, to ensure that value is being delivered at all times.

For those Trustees that fail to adhere to their best interest duties, the Commissioner recommends the application of civil penalties. The challenge for funds, and their Trustees, will be on how to structure appropriate KPIs and remuneration structures, especially at Board and senior management levels, and whether they will have the capacity to deliver services with reasonable care and skill.

2. The challenges of assigning one default account

The report highlights the strong need for the industry to converge to its true membership base. SuperRatings remains supportive of one default account being created upon entry into the workforce, which we also highlighted in our submission to the Productivity Commission’s review. However, this is a deceptively complex challenge.

The report does not explicitly state what ‘machinery’ would be developed to ‘staple’ a person to a single default account. We believe there are three main approaches that could eventuate and note that each is not without substantial administrative and implementation challenges. Thus, it is not surprising that despite broad agreement across the industry, this initiative is yet to be executed. We envisage that an:

1. Employee could be defaulted into a fund attached to their first employer, with that becoming their superannuation fund for life. This could result in significant concentration of default flows to a handful of providers;

2. Employee could elect a superannuation fund when they apply for a TFN. Employees at this age may lack the skills to make an appropriate decision, so advice or guidance would be paramount;

3. Employee could continue to be defaulted into a fund attached to their employer, but a rollover of their existing accumulation account to the new super fund would need to occur each time their employment changed. This would increase the administration burden borne by superannuation funds but could expose employees to different superannuation providers throughout their working life.

Options 1 and 3 would still see the corporate play a role in determining a default super fund when arguably they don’t want the burden. Option 2 removes corporates from the decision-making process, but this option could spell the end of corporate super as we know it, and with it, the benefit of tailored solutions which are in the members’ best interest.

3. Key implications for Corporates

The report recommends ‘no treating’ of employers, this is effectively the corporate version of no hawking. As such, funds will need to examine how to appropriately attract and service employers.

If corporates continue to nominate a default fund, the selection of this fund will need to be based on a robust framework. In lieu of set guidelines from the government, an assessment in-line with the member outcomes framework would be a potential minimum standard. We remain focused on the importance of reviewing investments, fees, advice, administration and governance arrangements as the pillars of a strong assessment of any fund.

The pricing models in this area should also give corporates pause for thought. Reflecting on the commentary about the charging models for advice and mortgage broking, a range of pricing structures also exist in the corporate tender management space. Evidently, we believe best practice pricing in this space is an up-front fixed fee model. While this is a cost for corporates, we believe it brings significant long-term benefits for their employees that outweighs the initial cost.

Final thoughts

While the report may have lacked the theatre of the hearings, it has been clearly designed to address key issues identified by the Commission. As noted at the outset, we believe the key takeout for many industry participants should be that most providers face challenges in some shape or form. What providers do about them is the true test.

We are seeing providers act in advance of legislative change wherever practical, which is pleasing to observe. However, the path ahead for some will be more challenging than others. As historical issues are addressed, it will hopefully also provide an industry less divided across historical battlelines. Given the path forward in advice remains one of the most tricky to foresee, we hope that this will provide a key opportunity for these sectors to more effectively work together.

February 6, 2019/by Kirby Rappell