Average Super Fund Return Was 13% In 2014 – APRA

APRA just released their Superannuation Fund-level Profiles and Financial Performance (interim edition). Superannuation funds included in this publication represent the vast majority of superannuation assets regulated by APRA. It contains data for all APRA-regulated superannuation funds with more than four members. Pooled superannuation trusts (PSTs) have been excluded from the publication publications as their assets are captured in other superannuation funds. Exempt public sector superannuation schemes (EPSSS) have also been excluded.

The fund by fund data tells an interesting story. The average across retail, corporate, public sector and industry funds was 13%. This is calculated by taking the returns and costs at a fund level to create a net fund return. Individual members within a fund will see different true returns, based on the options they choose and other elements. However, it gets interesting if we look across the nearly 2oo funds.  Several funds are returning below 5%, and a few above 14%.

SuperReturnsAll2014What is even more interesting is that the size of the fund is not a good predictor of performance. We can see this by mapping returns to number of members.  The biggest fund returned under 10%, the next two between 12% and 14%. But we see some smaller funds out performing, and others languishing. That said, one year’s performance is not necessarily a good indicator of longer term performance anyhow.

MemberMapAll2014What is clear, is that Industry Funds, on average, still return more than retail funds. Corporate (private) funds do even better.

AveragePerSuper2014So, we can then look across each of the main types of fund. First, retail. There are about 100 retail funds. The average returns varies widely. Not all individual funds are listed here, but the graph includes all data points.

RetailFundsReturns2014If we look across the membership, and return map, we see wide variations again. Some smaller funds outperformed the larger ones in 2014.

MemberMapRetail2014The industry funds, of which there are more than 40, did better, with no funds below 8%, even if their peak performance was 14%.

IndustryFunds2014We also see that larger industry funds did better than the smaller ones, on average in 2014.

MemberMapIndustry2014Finally, we look at public sector funds. The 18 funds here did better than retail funds …

PublicSectorSuper2014… and larger funds (by membership) tended to do better.


High Super Fees Erode Returns By 5% – Grattan Institute

The latest report from the Grattan Institute – an independent think tank dedicated to developing high quality public policy for Australia’s future – is on superannuation. It reconfirms fees are too high, savers are getting lower returns than they should, and further reforms are needed urgently. We concur. You can read DFA analysis on super here.  As the balances on super accounts grow ever bigger, the imperative for significant reform builds.

Grattan Institute’s 2014 report, Super Sting, found that Australians are paying far too much for superannuation. We pay about $21 billion a year in fees. That report proposed that government reduce fees by running a tender to select funds to operate the default accounts used by most working Australians.

The Murray Financial System Inquiry came to similar conclusions to those in Super Sting. Its 2014 report finds there is not strong competition based on fees in the superannuation sector. It recommends a “competitive mechanism”, or tender, to select default products, unless a review held by 2020 shows the sector has become much more efficient.

This report analyses superannuation fees and costs in depth. It shows that there are excess costs in both administration and investment management. It evaluates recent policy initiatives to lower fees and recommends further reforms. Our new analysis confirms the conclusions of our previous report. In both default and choice funds, administration fees are too high, and take a toll on net returns. There is little evidence that funds that charge higher fees provide better member services. There are too many accounts, too many funds, and too many of them incur high administrative costs. We pay $4 billion a year above what would be charged by lean funds. Investment fees are also too high. Many funds do not deliver returns that justify their fees. Cutting fees to what high-performing, lean funds charge could save more than $2 billion a year. In sum, superannuation could be run for much less than the $16 billion currently charged by large funds (self-managed super costs another $5 billion).

The superannuation industry argues that its $21 billion costs are not excessive, and will fall over time. It opposes a tender for default accounts based on fees, claiming that it would reduce investment quality and net returns. But current initiatives to reduce costs are not enough. The Stronger Super reforms to reduce administration costs and make default products transparent will cut total default fees by about $1 billion. The Future of Financial Advice reforms could yield benefits for choice account holders. But even if regulators pursue these initiatives with zeal, they will leave billions on the table. If remaining excess costs are not removed, they will drain well over 5 per cent – or $40,000 – out of the average default account holder’s fund by retirement. Excess costs in choice superannuation are even larger.

Government must act to close accounts, merge funds and run a tender to select default products. The tender would save account holders a further $1 billion a year, and create a benchmark to force other funds to lift their game. A high performing superannuation system will take the pressure off taxpayers and give Australians greater confidence in their retirement.

Funds Under Management Now $2.5 Trillion

ABS released their funds management data to December 2014. The managed funds industry had $2,489.9b funds under management (including some changes to the data capture and revisions), an increase of $57.6b (2%) on the September quarter 2014 figure of $2,432.3b. The main valuation effects that occurred during the December quarter 2014 were:

  • the S&P/ASX 200 increased 2.2%
  •  the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 0.8%
  • A$ depreciated 6.7% against the US$.

FundsUnderManagementDec2014At 31 December 2014, the consolidated assets of managed funds institutions were $1,958.5b, an increase of $48.8b (3%) on the September quarter 2014 figure of $1,909.7b. The asset types that increased were:

  • overseas assets, $29.6b (8%)
  • shares, $14.6b (3%)
  • short term securities, $8.6b (10%)
  • bonds, etc., $4.3b (4%)
  • derivatives, $0.8b (65%)
  • other non-financial assets, $0.2b (2%).

These were partially offset by decreases in:

  • other financial assets, $3.4b (11%)
  • deposits, $3.2b (1%)
  • land, buildings and equipment, $1.5b (1%)
  • loans and placements, $1.0b (2%)
  • and units in trusts, $0.2b (0%).

FundsAssetsByTypeDec2014At 31 December 2014, there were $503.9b of assets cross invested between managed funds institutions whilst the unconsolidated assets of superannuation (pension) funds increased $54.4b (3%), public offer (retail) unit trusts increased $4.5b (2%), life insurance corporations increased $4.3b (2%), cash management trusts increased $0.8b (3%), and common funds increased $0.2b (2%). Friendly societies were flat.


Time To Fix Financial Planning Properly

There will, no doubt, be more calls for a Royal Commission into the impact of poor advice provided by financial planners, following the reports of mis-advice at the NAB, which follows on from CBA, and a long list of other firms.

It is clear that there has been significant poor advice provided by some, perhaps influenced by target chasing, commissions, personal gain or errors. Many who received such poor advice will probably be unaware, and simply observe their portfolios are not performing as they expected. On the other hand, poor performance does not necessarily mean poor advice, it could be simply market dynamics, because most investments are inherently risky. That said, it is therefore hard to get a good read on how many people are impacted, but my guess it is into the many thousands, many of these victims do not have deep pockets so cannot fight back.

The superannuation balances of Australians now stand at more than $1.93 trillion so more households will need advice going forward. Much of that could still be conflicted in the current industry structures. Conflicted advice is right in the middle of the current industry problems, and whilst there are many excellent advisors doing the right think by their clients, the reputation of the entire industry is being trashed.

Despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide.

Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here. Any link between the two creates conflict and the risk of poor advice.

So, first we need to fix up the industry going forwards. Personally, I think the architecture of a solution is pretty clear, if unpopular from a market participants perspective. Next we need a mechanism to identify people who have received wrong advice, so it can be rectified. That of course is a complex process, and again will be resisted by the industry.

We do not need another couple of years of inactivity whilst yet more inquiries rake over the coals some more. Rather it is time for action.

NAB Financial Advisors Under The Microscope

According to the Sydney Morning Herald,

“The National Australia Bank has quietly paid millions of dollars in compensation to hundreds of clients given what it considers inappropriate financial planning advice since 2009.

The bank is the latest institution to face disturbing revelations of misconduct in its financial planning division, with a Fairfax Media investigation uncovering instances of forgery, “rogue advisers” and multiple sackings inside its financial advice arm.

A cache of confidential internal documents obtained by Fairfax Media reveals that, according to NAB, 31 of its financial planners were terminated, suspended or had their resignations “ensured” due to conflicts of interest, inappropriate advice, inappropriate practices or repeated compliance breaches

Disturbingly, the document states that these instances were not detected by the bank’s internal controls, but through client complaints or queries by authorities”.

This is further evidence that the financial advice sector is not up to scratch, and that despite the FOFA reforms (which has been subject to various government attempted revisions) we think that there is still room for significant improvement in the regulatory framework, practice and culture relating to providing good financial advice in Australia, with a focus on doing the right thing for clients. The claim that “its just a few bad apples” becomes less credible as more organisations are implicated. Both ASIC and the recent FSI report highlighted significant structural problems.  Remember the superannuation balances of Australians now stand at more than $1.93 trillion.

We think that the concept of general advice should be removed, and advisors should not be able to receive any indirect financial benefit from the advice they provide. Separately, financial products can be sold, provided all relevant facts, and costs are disclosed. The two – advice and product sales, should be separated completely. You can read my earlier discussions here.

Super Now Worth $1.93 Trillion

The Australian Prudential Regulation Authority (APRA) today released its December 2014 Quarterly Superannuation Performance publication and December 2014 Quarterly MySuper Statistics report. At 31 December 2014, total assets, which include the assets of self-managed superannuation funds and the balance of life office statutory funds, rose to $1.93 trillion, an increase of 9.3 per cent from the December 2013 quarter.

Contributions to funds with more than four members over the December 2014 quarter were $26.1 billion, up 15.3 per cent from the December 2013 quarter ($22.7 billion).  Total contributions for the year ending December 2014 were $100.6 billion.

There were $15.2 billion in total benefit payments in the December 2014 quarter, an increase of 9.4 per cent from the December 2013 quarter ($13.9 billion).  Total benefit payments for the year ending December 2014 were $56.4 billion.

Net contribution flows (contributions plus net rollovers less benefit payments) totalled $10 billion in the December 2014 quarter, an increase of 14.9 per cent from the December 2013 quarter ($8.7 billion).  Net contribution flows for the year ending December 2014 were $39.4 billion.

APRA has revised the method of segmentation it uses for these reports.  The segments that APRA most commonly uses for superannuation are fund types. These fund types comprise corporate funds, industry funds, public sector funds, retail funds and small superannuation funds. These segments, based on RSE licensee profit status and the membership base of the funds. These segments, based on RSE licensee profit status and the membership base of the funds, are shown below.

APRA-SuperFund-Segmentation-Dec-2014Corporate funds are RSEs with more than four members under the trusteeship of a ‘not for profit’ RSE licensee and with a corporate membership basis.
Industry funds are RSEs with more than four members under the trusteeship of a ‘not for profit’ RSE licensee and with either an industry or general membership base.
Public sector funds are RSEs with more than four members under the trusteeship of a ‘not for profit’ RSE licensee and with a government base membership base. Public sector funds also include superannuation schemes established by a Commonwealth, State or Territory law (known as exempt public sector superannuation schemes).
Retail funds are RSEs with more than four members under the trusteeship of a ‘for profit’ RSE licensee with a corporate, industry or general membership basis.
Small funds are superannuation entities with fewer than five members and include small APRA funds (SAFs), single-member approved deposit funds and self-managed superannuation funds (SMSFs). SMSFs are regulated by the ATO and have different legislative requirements than APRA regulated funds.

Of the 258 entities in existence at 31 December 2014, there are 45 cases where the fund type is different under the new segmentation methodology. In these cases, APRA analysed the information reported to APRA, the structure of the fund and composition of the RSE licensee as well as other prudential information. APRA also drew on publicly available information and consulted RSE licensees in the cases where the information reported on SRF 001.0 was inconsistent. Following this further analysis, of the 45 entities:

  • 38 entities were re-classified from corporate to retail;
  • four entities were re-classified from industry to retail;
  • one entity was re-classified from retail to industry;
  • one entity was re-classified from corporate to public sector; and
  • one entity was re-classified from industry to public sector.

After the review of fund types, retail funds’ assets increased from $502 billion to $516 billion and account for 39 per cent of total superannuation assets as at 31 December 2014. Industry funds’ assets decreased by $15 billion from $418 billion to $403 billion and account for 31 per cent of total superannuation assets as at 31 December 2014. Public sector funds’ assets increased by $15 billion to $335 billion (to 26 per cent of total superannuation assets), while corporate funds’ assets decreased from $63 billion to $58 billion (to four per cent of total superannuation assets).


ASIC Cancels Registrations of SMSF Auditors

ASIC has cancelled the registration of 440 Self-managed superannuation fund (SMSF) auditors who did not undertake or pass a competency exam necessary to retain their registration. ASIC has also disqualified two SMSF auditors whose application for registration had overstated the number of SMSF audit reports issued by them in the preceding 12 months, thereby avoiding the requirement to sit the competency exam. Of the 440 auditors whose registration was cancelled, 373 did not attempt the exam and 67 did not pass the exam. Auditors were given up to two attempts to pass the exam and ASIC extended the period to pass the exam to 31 August 2014.

Commissioner Greg Tanzer said, ‘As the SMSF sector continues to grow in popularity with Australian investors, it is critical that SMSF auditors play their key gatekeeping role. ASIC will continue to administer the registration process to assure Australians that SMSF auditors at least meet base standards of competency and expertise’.

SMSF auditors who have had their registrations cancelled can re-apply for registration if they have passed the competency exam in no more than two attempts over the preceding 12 months. ASIC Regulatory Guide 243 Registration of self-managed superannuation fund auditors contains more information on how to apply to be an SMSF auditor. ASIC and the Australian Taxation Office (ATO) work closely together as co-regulators of SMSF auditors. The ATO monitors SMSF auditor conduct and may refer matters to ASIC for possible disqualification or suspension of their registration.

SMSF trustees/ members can check whether their auditor is registered by searching ASIC’s SMSF auditor register at connectonline.asic.gov.au. If a member/trustee is concerned that their SMSF auditor is not registered, they can report this to ASIC through our website at www.asic.gov.au.

From 1 July 2013, the Superannuation Industry (Supervision) Act 1993 (the Act) required all auditors of SMSFs to be registered with ASIC.  The objective was to ensure that all SMSF auditors met minimum competency requirements. New SMSF auditors are required to pass a competency exam in order to be registered.  However, SMSF auditors who applied to be registered before 1 July 2013 and were a registered company auditor or had audited 20 or more SMSFs in the preceding 12 months were not required to sit the competency exam. ASIC approved 7,038 of the SMSF auditor registration applications received before 1 July 2013 with 1,421 of these being registered on the condition that they pass the exam by 1 July 2014. The SMSF auditors with an exam condition had audited less than 20 SMSFs in the 12 months prior to their application and were not registered company auditors.

ASIC Class Order Clarifies Fee and Cost Disclosure

ASIC today released a class order clarifying key fee and cost disclosure requirements for Product Disclosure Statements (PDS) and periodic statements for superannuation and managed investment products.

The class order, which ASIC consulted on in September 2014. addresses:

  • Disclosure of costs of investing in interposed vehicles
  • Disclosure of indirect costs
  • Removal of doubt that double counting of some costs for superannuation products is not required, and
  • The appropriate application of the consumer advisory warning.

The class order will apply to all PDS for superannuation and managed investment products from 1 January 2016. It will also apply to periodic statements that must be given for these products by 1 January 2017 or later.

Commissioner Greg Tanzer said, ‘For consumers to make effective decisions about their investments and superannuation they need information they can trust and that allows them to compare across products. These changes will help industry to improve the quality of their disclosure and promote consistency between products.

‘Consumers can have more confidence that industry is disclosing fees and costs more accurately and in the same manner, ensuring comparisons between products are made on the same basis.’

Reflections on FSI

The final report of the Financial Systems Inquiry was released on Sunday. We already provided a summary of the 44 recommendations and discussed some of the specific proposals. It is of course a report to Government, so still a political process will run before we see what translates into policy, though some recommendations – for example changed capital rules – are outside the political processes, being the responsibility of the regulators. However, DFA wanted to reflect on the overall 350 page report.

  1. We think this it is a fine, balanced and independent piece of work. Given the complex task, the various powerful lobbies involved, and the short time frame, this is a landmark study, and should provide direction for the financial services industry in Australia for the next few years.
  2. The underlying philosophy, that the markets should be allowed to work, with regulation used where necessary to balance the various stakeholder capabilities in appropriate. More regulation is not always better. The emphasis on consumers is welcome.
  3. The capital buffer recommendations are appropriate, and should be adopted by APRA. Capital levels need to be brought up to best global practice, and given the likely continued global push to lift capital higher, this process will continue for some time. Clearly there is a cost to do this, and the easy route will be for banks to trim deposit rates and lift loan rates to protect their margins and shareholders. The right course would be to expect the banks to drive greater efficiency to partly offset, at least, the costs of holding more capital. The bail-in bonds route will also provide additional buffers. The extra disclosure recommended is helpful.
  4. The move to lift the capital ratios of banks with advanced IRB capital calculations will help to make the playing field more level than it is, but it will not necessarily be sufficient to fundamentally change the competitive landscape. We will continue to have four large, vertically integrated players dominating the market.
  5. We believe the recommendation to rebalanced the regulatory focus towards competition is appropriate, as until now financial stability was the main game. As a result we have high industry concentration, and limited competition. This has led to super-profitable banks, which costs Australia Inc dear.
  6. The financial services regulatory environment in Australia is complex, with ASIC, APRA, ACCC and RBA all stakeholders. The FSI report has not recommended major changes, though ASIC’s role will be enhanced to focus on products, and enhanced consumer protection. Will this be adequately funded by charging industry participants more? A body to review the Regulators is proposed (another layer of cost?)
  7. The superannuation system was condemned as inefficient, and the proposals to drive fees lower, provide greater choice and have a default income structure on draw-down, are appropriate. We agree that the majority of directors in a super fund should be independent. Lets be clear, mandatory saving for retirement is a good policy, but the industry has been milking this for years, and changes need to be made. MySuper should be given a chance to work, but we like the idea of providers bidding for savings. The prospect of returns rising by 25% or more reflects the powerful impact the annual fees have on performance. Fees need to come down substantially.
  8. The support for SMSF is appropriate, as is the emphasis on saving for retirement, not generic wealth creation. The removal of leverage in SMSF’s makes sense, given the rise in property investment, but it is worth remembering the shares are issued by companies who are often  leveraged, so risk exists here too in a down turn!
  9. The changes to advice are appropriate. Advisers need to declare their alignment to product providers, be better trained, and the concept of general advice should be tuned.
  10. Card surcharging should be brought under control. There is no justification of consumers paying more than the cost of the transaction, yet some businesses are charging a percentage of transactions. We agree there is further work to do on interchange fees, and especially making the use of debit cards easier (thus avoiding card service fees).
  11. The Treasurer will find several ways to lift taxes, including potentially revising the tax treatment of superannuation, and negative gearing. In addition, the report comments on GST in relation to financial services products, leaving the door open for GST to be extended.
  12. The report recognises the impact of new technologies, and the comments on technology neutrality are appropriate. The report recommends a federated digital identity strategy that involves the Government setting up a framework under which private and public sectors compete to supply digital identities to consumers and businesses.  This is needed because of increasing consumer preference for online, fraud concerns and efficiency. We think it understates the importance of P2P.
  13. The main area of weakness relates to the SME sector, which is disadvantaged by the current banking environment. No significant recommendations were made in this important area.

FSI – SMSFs Banned From Leveraged Property Investment

The FSI report recommends the removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds. This would stop property investments via SMSFs, a growing trend, or shares. Other than this, SMSF’s received an endorsement, as a legitimate savings vehicle for retirement (but not necessarily as a broader wealth generating mechanism).

Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) on a prospective basis. This section allows superannuation funds to borrow directly using limited recourse borrowing arrangements (LRBAs). The exception of temporary borrowing by superannuation funds for short-term liquidity management purposes (contained in Section 67 of the SIS Act) should remain. Direct borrowing in this context refers to any arrangement that funds enter into where the borrowing is used to purchase assets directly for the fund.

The rationale for this recommendation is to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly and fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle

Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system. As discussed in the Interim Report, the Inquiry notes an emerging trend of superannuation funds using LRBAs to purchase assets. Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014. The limited recourse nature of these arrangements is intended to alleviate the risk of losses from assets purchased using a loan resulting in claims over other fund assets.

Borrowing, even with LRBAs, magnifies the gains and losses from fluctuations in the prices of assets held in funds and increases the probability of large losses within a fund. Because of the higher risks associated with limited recourse lending, lenders can charge higher interest rates and frequently require personal guarantees from trustees. In a scenario where there has been a significant reduction in the valuation of an asset that was purchased using a loan, trustees are likely to sell other assets of the fund to repay a lender, particularly if a personal guarantee is involved. As a result, LRBAs are generally unlikely to be effective in limiting losses on one asset from flowing through to other assets, either inside or outside the fund. In addition, borrowing by superannuation funds implicitly transfers some of the downside risk to taxpayers, who underwrite adverse outcomes in the superannuation system through the provision of the Age Pension.

Superannuation funds use diversification to reduce risk. Selling the fund’s other assets will concentrate the asset mix of the fund — small funds that borrow are already more likely to have a concentrated asset mix.79 This reduces the benefits of diversification and further increases the amount of risk in the fund’s portfolio of assets.

The GFC highlighted the benefits of Australia’s largely unleveraged superannuation system. The absence of leverage in superannuation funds meant that rapid falls in asset prices and losses in funds were neither amplified nor forced to be realised. The absence of borrowing benefited superannuation fund members and enabled the superannuation system to have a stabilising influence on the broader financial system and the economy during the GFC. Although the level of borrowing is currently relatively small, if direct borrowing by funds continues to grow at high rates, it could, over time, pose a risk to the financial system. The RBA states that “The Bank endorses the observation that leverage by superannuation funds may increase vulnerabilities in the financial system and supports the consideration of limiting leverage”. In addition, such direct borrowing could also compromise the retirement incomes of individuals. APRA was of the view that “… the risks associated with direct leverage are incompatible with the objectives of superannuation and cannot adequately be managed within the superannuation prudential framework”. Borrowing by superannuation funds also allows members to circumvent contribution caps and accrue larger assets in the superannuation system in the long run

Direct borrowing by superannuation funds could pose risks to the financial system if it is allowed to grow at high rates. It is also inconsistent with the objectives of superannuation to be a savings vehicle for retirement income. Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy, and limit the risks to taxpayers.

Many submissions support this recommendation. Some propose alternatives to address the risks surrounding borrowing, including imposing a maximum cap on fund assets that can be invested in a single asset other than cash or bonds. These alternatives would limit the risk associated with borrowing by superannuation funds, and provide funds with more flexibility to pursue alternative investment strategies. However, these options would also impose additional regulation, complexity and compliance costs on the superannuation system.

In implementing this recommendation, funds with existing borrowings should be permitted to maintain those borrowings. Funds disposing of assets purchased via direct borrowing would be required to extinguish the associated debt at the same time.