Apples to apples comparison

Beware ‘apples with apples’ super comparisons

If superannuation funds’ investment performance is to be compared on an “apples with apples” basis there are several key points to consider, according to researcher Rainmaker Information.

This week Australian Prudential Regulation Authority (APRA) member Helen Rowell told an Australian Institute of Superannuation Trustees (AIST) Governance Ideas Exchange Forum that on a number of occasions in the last few years she has “noted that comparisons of investment performance at fund level is not comparing apples with apples.”

Super funds’ investment performance has been a key issue in the debate on proposed changes to super board governance, particularly between retail and industry funds.

Rowell said a more meaningful “apples with apples” comparison is provided if the investment performance for only default assets, or specific similar choice investment options, is considered. She added it is most meaningful to focus on performance against objectives over the long term.

But Rainmaker Information said APRA and other people critical of performance comparisons need to remind themselves what choosing a default MySuper product actually means.

Rainmaker said some critics of performance comparisons use commentary about risk-adjusted returns to explain post-hoc why they underperformed other default funds in the market rather than to explain why they have deliberately chosen very conservative strategies.

For example, the top performing MySuper products in 2014-15 earned 12% but the lowest performing MySuper products earned half that, or 6%.

Rainmaker said that these performance gaps are many times the fee differentials forces the question of whether members are fully aware they are selecting such conservative investment strategies.

This focus on MySuper default products is crucial because the segment accounts for about 33% of the assets held by APRA regulated funds.

In her presentation, Rowell pointed out the proportion of assets in default products versus choice products differs significantly by fund type. She said default assets represent 65% of all assets for industry funds, compared to 17% of all assets for retail funds.

“That means the investment strategy for 83% of the assets of retail funds is chosen by the members, and the asset allocation – and hence investment performance – at fund level substantially reflects the aggregate of the individual decisions made by the choice members,” Rowell said.

Rainmaker Information is part of the Rainmaker Group which owns Financial Standard.

[via Financial Standard]

SMSFs keeping cash for better markets

Self-managed superannuation funds (SMSFs) stored away $56 billion in excess cash during the 12 months to April 2015, the highest amount in seven years.

Billions that would have been invested if it were not for market uncertainty is reflective of a wider trend that saw more SMSFs adopt defensive investment strategies when making asset allocation changes over the past year.

Growth in the number of SMSFs has also been subdued over the last two year, with about 25,000 SMSFs established in the 12 months to March 2015. This is down by about 8,000 from the same period in 2013 and is the lowest annualised growth rate since the introduction of Simpler Super reforms in 2008.

The figures form part of annual SMSF research released jointly by Vanguard and Investment Trends on August 9th. This year’s report is based on a survey of about 4,000 SMSF trustees and 501 financial advisers.

Vanguard head of marketing strategy and communications, Robin Bowerman, said SMSF trustees currently have a bearish outlook and it is having an impact on the investment decisions trustees are making, and in turn their funds’ asset allocation.

“The large portion of assets that SMSFs continue to hold in direct shares, and the increasing levels of excess cash, present a range of issues for SMSF portfolios. The may be building in more concentration risk at a time when trustees are increasingly concerned about financial markets,” Bowerman said.

Investment Trends head of research wealth management, Recep III Peker, said although it looked like the SMSF growth rate had slowed, “it’s just an indication of how the share markets are going and how super funds have been performing.”

“ARPA stats show SMSF assets grew by 10% over the last year, but all other super assets grew by 16%. One of the main drivers behind that gap is that SMSF members are a lot older than the whole population in superannuation,” Peker said.

“Also it is the under exposure of international assets as well. They [SMSFs] have started to recognise this gap but what you’ll find is they’re prioritising diversification in their portfolios a lot more.”

SMSF allocations to listed and unlisted managed funds continued to increase, growing to 18% of total assets, up from 15% in the last year. The allocation to direct shares drifted down from 44% to 41% of total assets but direct shares maintained their position as the dominant asset class among self-managed funds.

The proportion of SMSFs using managed funds has continued to grow, reaching 43% in 2015, a level not seen since 2011. The number of SMSFs holding EFTs grew 53% in the 12 months to April 2015, with growth also reported in the number of SMSFs who intend to invest in EFTs in the coming year, up 20%.

— via the FINANCIAL STANDARD, Aug 15

Member engagement a danger to super savings


Mary Murphy — Chief digital officer, First State Super

A high level of engagement with superannuation savings can lead members to make the wrong move at the wrong time, industry executives have warned.

“The joke is that often if you’re disengaged with your super, ironically it can be good,” State Street Global Advisors (SSGA) head of Investment Solutions Group for Asia Pacific Mark Wills said.

Wills also said that the problem is “when you get to 67 you don’t tend to be disengaged.”

Quoting a study by the Association of Superannuation Funds of Australia (ASFA) on super fund member behaviour during the global financial crisis, he said “in some schemes up to 50% of members either switched or inquired about switching.”

“Education, member engagement, all of that — we think it’s a waste of time,” he said, and explained that members’ real interests are retiring and having a pension.

Behavioural finance shows that “as humans, we tend to focus on overconfidence as opposed to bad parts; and the bad part is often so visceral and so dramatic that it creates all these bad behaviours.”

He said that a key issue is “how do you get people to stay the journey and understand what their money is trying to do.”

This has become a concern in the current low return environment, where members could be switching to riskier investments in a bid to increase their returns.

“The real risk now is that we’re entering a repressed return environment and people will continue to over reach.”

First State Super chief digital officer Mary Murphy also commented on super fund member engagement and said that the super industry can “get trapped by this engagement word. Engagement is about what satisfies me as a consumer.”

— via the FINANCIAL STANDARD, Aug 14

Compulsory super for self-employed

Nearly 10% of Australia’s labour force is self-employed and compulsory superannuation should include at least some of them, the Association of Superannuation Funds of Australia (ASFA) said.

“Only a relatively small number of the self-employed have business assets sufficient to support a comfortable standard of living in retirement,” AFSA’s submission to the government’s tax white paper argued.

Chief executive Pauline Vamos warned that “we cannot ignore the large proportion of self-employed Australians who are putting off planning and saving for their retirement.”

“While many self-employed workers believe their business will serve as their superannuation, this is not always the case” she said.

“Many of the self-employed do not have significant business or financial assets, and they may face problems retaining the standard of living they are accustomed to when they reach retirement age.”

Vamos said that of particular concern are self-employed workers “being forced to move to a contractor, rather than part-time worker model.”

The submission added that any changes to the superannuation system “need to be considered as part of a holistic review of the system and the Tax White Paper process provides such an opportunity.”

— via the FINANCIAL STANDARD, Aug 12

Power in super advertising

Capturing an audience in the superannuation industry remains a challenge and in recent months several funds have rolled out new marketing campaigns to attract the biggest possible market.

The question is, which Australians are paying attention?

Breakfast television viewers would have noticed a flood of superannuation and pension products being advertised by companies such as IOOF, Sunsuper, MLC and Challenger Annuities among others.

Speaking at a recent executive roundtable hosted by Bravura Solutions, Colonial First State head of customer marketing Todd Stevenson, said a lot depends on the objective of the advertising — is it to acquire new customers or build brand recognition?

“Superannuation is, typically, not a directly purchased product. It is typically either ‘sold’ or acquired by default when you join an employer. A lot of the advertising we see today in the superannuation space is about brand recognition and loyalty,” Stevenson said.

“And industry funds have done a brilliant job at that. We have conducted research recently and found that people love their industry fund. When you ask them why, they do not know or can’t really tell you but the perception the advertising creates for this is that their industry fund is great value — perception is reality in the eyes of the individual.”

— via the FINANCIAL STANDARD, Aug 11

SMSF direct property investment

SMSF direct property investment jumps 60%

The value of self-managed super fund (SMSF) investment in residential real estate has jumped 60% in the last four years, according to figures from the Australian Securities and Investments Commission (ASIC).

In its submission to the Parliamentary Inquiry into Home Ownership, the primary financial markets regulator revealed that as of March 2015, the value of residential real property investments through SMSFs was $21.78 billion, or 3.7% of total Australian and overseas assets.

This is up from $19.49 billion, or 3.6% of total Australian and overseas assets, in March 2014.

Albeit from a relatively low base, there has been an increase in the value of investment in residential real property through SMSFs of 11.78% in the 12 months to March 2015, and an increase of 58.69% since March 2011.

While it is feared that SMSFs ability to borrow money to buy residential property via limited recourse borrowing arrangements (LRBAs) is helping to fuel the housing bubble, SMSF Association technical and professional standards director Graeme Colley said it is misleading to use these figures to conclude that SMSF investment in residential property is rapidly expanding.

“I’d be interested to see the whether there’s been much of an increase in the actual numbers of properties that have been bought. The rise in market value of residential property is likely to account for most of the increase,” Mr Colley said.

Colley also accused ASIC of stepping outside of its remit in drawing attention to the numbers.

“ASIC’s responsibility is to look at the provision of advice for SMSFs rather than these sorts of figures. I’m surprised to see them commenting”

The Financial System Inquiry (FSI) has recommended banning LRBAs, a move which was drawn criticism from industry quarters.

The Association of Financial Advisers dubbed a potential ban “draconian” at the SMSF Association Annual Conference back in February.

At the same conference, AMP SMSF head of policy Peter Burgess said: “So few funds use LRBAs, the effect is immaterial. Any problems should be addressed with legislation, and the effects measured before we scrap them off hand.”

[via Financial Standard]

Organised criminals

Organised criminals eye super

The Australian Crime Commission believes Stronger Super reforms implemented from 2013 have reduced illegal early release schemes run through self-managed super funds (SMSFs).

In the latest report, Organised Crime in Australia 2015, the commission explains SMSFs have traditionally been more attractive to exploitation than prudentially regulated funds. The report said because SMSFs generally hold the largest balance of superannuation assets it provides an opportunity for low-volume, high-impact fraud on individuals’ funds “that may be managed by financially inexperienced individuals.”

The commission said allowing the Australian Tax Office (ATO) to address wrongdoing and non-compliance by SMSF trustees; capturing rollovers to SMSFs as a designated service under the Anti-Money Laundering and Counter Terrorism Financing Act 2006; and established a register of SMSF auditors have all helped to reduce organised crime in the space.

Australian Crime Commission chief executive, Chris Dawson, said organised crime affects everyone.

“Whether it’s the ripple effect of illicit drug use on families and the community, the significant financial loss from investment scams or having your identity stolen by cyber-criminals — everyone is at risk,” Dawson said.

“But the fight against organised crime, we must recognise and build on the critical role the private sector, industry and the public play in this matter.”

As Australia’s superannuation pool is in excess of $2 trillion and expanding exponentially, the commission said infiltration of the system by organised crime — and associated losses through fraud — would result in more people relying on the social security system in their retirement.

[via Financial Standard]

Punitive excess contributions tax removed

SMSF-ValuationThe bill to remove punitive tax rates on access non-concessional contributions made to superannuation funds has passed through the Senate.

Asst. Treasurer Josh Frydenberg has said the Tax and Superannuation Laws Amended (2014 Measures No.7) Bill will make the ” taxation of excess after tax superannuation contributions fairer.”

Under the former regime, taxpayers could pay up to 94% on excess non-concessional contributions.  The new legislation allows superannuation fund members to withdraw the non-concessional contributions that exceed the non-concessional cap from their superannuation.

Investment earnings associated with a fund members excess non-concessional contribution will be included in their assessable income and taxed at their marginal tax rate.

The investment earnings are calculated through a proxy earnings rate by applying the ATO’s General Interest Charge rate to the access non-concessional contribution.  At 15% tax offset is then passed on to the superannuation fund member as compensation for tax paid on the investment earnings.

SMSF Assoc. Chief executive and managing director Andrea Slattery was among the first to welcome the result, describing it as an important victory for SMSF members.

Slattery said the Senate vote ends a “draconian” system that “severely punished” trustees for infractions that were rarely intentional.

— Mark Smith via the FINANCIAL STANDARD

SMSF growth driven by investor satisfaction

e5a04b4b0a0d02b701b0bf9ae24a6631The relative level of satisfaction with self managed super fund (SMSF) performance is a likely drive up for SMSF’s continued growth and significant market share, according to Roy Morgan Research.

Roy Morgan’s findings are based on a survey of 15,084 superannuation holders conducted in the half year to January 2015.

Satisfaction with super performance was measured across retail, industry and self managed funds. SMSF’s scored the highest with a satisfaction rating of 77.3%; industry and retail funds scored 59% and 56.3% respectively.

Overall satisfaction has increased by 4.5% to 58%.

Although the report notes that performance satisfaction generally increases with balance, SMSF’s steel have the highest satisfaction rating for all balances over $5000 in fact, at balances over $700,000, SMSF’s lead on industry and retail funds narrows to 3.2% and 6.3% respectively.

It is not difficult to see why SMSF’s have been so successful in achieving such rapid growth over the last decade or more,” said Roy Morgan Research industry Communications Dir Norman Morris.

“With satisfaction levels higher than Industry and Retail funds since 2002, they continue to pose a major threat to them, particularly for the higher balance members where a disproportionate level of superannuation balances are held.”

— Alex Burke via the FINANCIAL STANDARD