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Super System Review Submission – Operation & Efficiency Background This submission is made by a group of industry advisers, who regard themselves as completely un- aligned, who have been engaged in most aspects of the industry for many, many years, and who believe they can make an informed, practical non-vested-interest contribution to this phase of the review. The contributors, collectively known as the “Super Fringe Advisers” are: Tom Collins, Anthony Hunt, Paul Resnik & Peter Worcester (brief resumes attached). The submission takes the form of an executive summary, followed by comment on a number of the issues raised. Although in agreement on the executive summary, there are some different views on some of the issues. Where there are different views these are identified by the particular contributor. Contents Executive Summary Fundamental flaws in the operation of the industry Is big better? Default Fund Fund comparison Defining and expressing risk in an understandable way A example of a way to express and define risk Wrap up Appendix 1 - Comments – clause by clause Appendix 2 - Resumes Contact: Tom Collins firstname.lastname@example.org 0419 240 829/02 9291 3920 L 4, 51 Pitt St, Sydney NSW Super Fringe Advisers – Executive summary Page 1 Executive Summary The key issues we see are: 1. Fundamental flaws in the operation of the industry 2. Is big better? 3. Default Fund 4. Fund comparison 5. Defining and expressing risk in an understandable way 6. A way to express and define risk 1. Fundamental flaws in the operation of the industry We argue that many of the problems the industry faces (costs, lost members, duplicate accounts, etc) are caused by a number of fundamental flaws in the operation of the industry, thus leading to inefficiencies and complex, and expensive “after the event” fixes. Many of these have been caused by the industry’s reluctance/opposition to engage in true ecommerce and interconnectivity and some by government rules. These include: Allowing a member to join a fund without sufficient identifying information Not having a universal identifier for each member Not standardising contribution frequency, irrespective of contribution type Not having industry wide standard forms for employers and members Not having electronic interconnectivity between employers and funds, between funds (for rollovers) and between funds and investment managers Any fund allowed to be a default fund Consideration of the issue of a Super Card (ie like a Medicare card) If the above issues were resolved it would minimise; Number of lost members Number of duplicate accounts Mistakes by employers, especially SMEs Amount and time unallocated monies in suspense accounts Transfer issues with rollovers. Transactional and management costs incurred ultimately by members If resolved one could question whether there would be a continuing need for ERFs. To address these structural flaws and achieve these gains for members, we propose the industry and government commit to the operational restructure of superannuation for the specific purpose of Super Fringe Advisers – Executive summary Page 2 reducing complexity and costs for members. The means by which such a restructure could be achieved could include: A review of transactions and processes from the perspective of the member, with the aim being to minimise the inefficiencies identified above, most likely with the development of standardised data capture and management Consideration of development of a transactional solution (gateways) designed to develop effective ecommerce and interconnectivity Agreement on a fixed period in which such a review can be properly undertaken, with the proviso that if industry is not able to reach agreement in that time then government reserves the right to mandate the changes it sees appropriate 2. Is big better? We are of the view not necessarily. While there may be some benefits in terms of greater brand recognition and purchasing power, it can also lead to diseconomies of scale, impersonal service, protection of the status quo and no real competition. Many funds should lead to a vibrant, competitive and member focused industry. Smaller funds can achieve economies of scale through ecommerce, out sourcing, sharing back office/gateway facilities. Investment scale is already achieved by investing in existing investment pools. Modern technology makes the notion “big is better” redundant! The Australian banking industry is both a good and bad example of this. They are not regarded as customer friendly, but have joined together to deliver an efficient payments system, and Bpay and EFTPOS services. 3. Default Fund The establishment of a national default fund would be the start down the road to a (one only for everyone) national fund. An alternate solution we believe has merit would be to define what the key features of a default fund had to be (eg maximum fees, limited investment choices, minimum service levels, etc) and allow competition amongst funds to operate defined default funds. Members would still have the right to opt out and select their own fund. Each year, members would be reminded that they can opt out, and when their balance reached a set amount (eg $25,000) they would especially reminded. 4. Fund comparison Members choose (or have them chosen for them by their employer) funds for a variety of reasons, other than price and performance (eg: it may be for insurance). But if they are to be compared on price and performance, the current methodologies are inaccurate and possibly misleading. The current methodologies do not take into account the many vagaries of funds, such as inconsistent labelling (investment options and fees) pricing (performance) methodologies, tax treatment and a variety of fees and costs that can also vary with: size of balance, number of investments and transaction activity. Super Fringe Advisers – Executive summary Page 3 The member not only wants to know how well the various options for a particular fund have performed, but also wants to know if they put (say) $1,000 in to a fund what would their balance be in (say) 1,3, or 5 years time (in a withdrawal scenario). This sort of modelling can (and has been) done based on a range of fixed and variable assumptions for each fund. A fixed assumption may be the return on each asset class; variable assumptions would include the pricing regimes for each fund. With these two bits of information the member can then make a better informed decision. Further, on the annual statement, the fund should be required to show each member the actual return on their account in the fund. (Some funds already do this and it is common for SMSFs.) 5. Defining and expressing risk in an understandable way We have concerns around how risk is explained in a consistent way and how investment options are labelled and grouped for comparative purposes, eg comparing default options. What is a balanced fund and what does defensive and growth mean? Should a fund that calls itself the XYZ Growth fund, really describe itself as the XYZ Growth/Decline fund? (Don’t laugh, ASIC’s predecessor required a fund manager do that once.) In essence our suggestion is to visually express the risk in a way similar to how efficiency is shown eg on washing machines – a coloured wheel with white/blue the least risky and red/black the most risky. A preliminary example of a way to define and express risk in an understandable way (and make comparisons easier) is set out in an example below – after wrap up. Super Fringe Advisers – Executive summary Page 4 Wrap up In our executive summary and our following comment, we have tried to highlight the key issues, and provide some high level suggestions. At this stage we believe it is more important to get consensus on the key issues and broad agreement on potential solutions (eg: we believe there should be a universal identifier, which would eliminate a lot of the inefficiencies. So let’s get agreement on that first – and then we can discuss what would be the universal identifier. But if we can’t agree on the need for a universal identifier, why debate what it should be?) In particular we wanted to stress that if the fundamental flaws that we have identified are addressed properly, a lot of the irksome, frustrating and costly issues surrounding the operation of Super mainly disappear. We, collectively and separately, have thought deeply about the issues raised by us and how they might be resolved. Therefore, we are more than willing to continue to contribute to the Review. Super Fringe Advisers Tom Collins Anthony Hunt Peter Worcester Paul Resnik Super Fringe Advisers – Executive summary Page 5 6 . An example of a way to express and define risk Sample Portfolios (taken from CFS) Geared High Growth Asset Class Black Swan Fall Cash Defensive Conservative Moderate Balanced Growth Growth Plus Model Shares 30% 5% 13% 27% 31% 36% 40% 10% Global Shares 35% 3% 6% 13% 14% 17% 15% 10% Global Shares-Hedged 30% 4% 8% 10% 11% 15% 0% Emerging Markets 40% 1% 2% 3% 3% 10% 8% Geared Shares 60% 100% Unlisted Property 20% Listed Property 25% 2% 2% 3% 3% 4% Global Listed Property 25% 2% 4% 5% 5% 10% 10% Infrastructure 20% 2% 3% 4% 4% 10% 10% Private Equity 20% Fixed Interest 10% 60% 40% 34% 25% 17% Sub Prime Fixed Interest 20% Cash 0% 100% 30% 30% 6% 5% 3% 42% 100% 100% 100% 100% 100% 100% 100% 100% 90% Possible Portfolio Crash 0% 9% 13% 22% 24% 26% 30% 60% 14% Super Fringe Advisers Page 6 Appendix 1 - Cooper review - comments – clause by clause Key - TC – Tom Collins, AH - Anthony Hunt, PR - Paul Resnik. Clause TC Comments AH Comments PR Comments n/a Overall the paper address the issues from the Agree industry perspective, not from the client perspective ie employer and member – they are expected to fit in with the industry – it should be the other way round! n/a Reasons there is no ownership/interest in Super Plus the level of complexity and general Individuals become engaged when relevancy with new entrants to Super is that in most cases willingness (or lack of) to engage with financial becomes personal. Hence when they come closer they haven’t made the decision or signed a form matters to retiring or are changing jobs. Education must – this is all done by their employer focus on specific life events. n/a Not a lot of thought given to emerging products – eg simple “bank account” products, and there is potentially a huge impact from changes to distribution/commission arrangements Seems to be a general leaning to more government intervention. Govt fiddling has been the bane of super, so if there are changes to be made then there should also be an agreed hiatus (3 years?) in which no further changes will be made. Focusing on the industry for a second, there is also significant potential to grow financial services as an export service, but it is currently constrained by regulatory and tax limitations as well as operating efficiencies (how can you export without a decent clearing house?) 6.1.1 Yes, current systems are in the dark ages. Agree. Many entrenched inefficiencies so part of Need not only “clearing house” type facility to the solution has to be demonstrating a path cover contributions, rollovers and benefit forward, with clear transition points. The carrot payments, but also exchange facility for for the industry will be cost savings, the stick will investment activity. (Gateways) be regulatory requirements and possibly being Super Fringe Advisers Page 7 Clause TC Comments AH Comments PR Comments These gateways should be funded and owned by out of the game the industry (eg Banking industry) One of the issues here is that the funds management industry has never built a clearing house facility (as in USA & UK) and resisted ASX’s attempts to build one (Fund Connect). The government/regulators will have to use a carrot and stick approach 6.1.2 No, frequency of unit pricing depends on the Unit pricing should be at most frequent point Equity between generations of investors in a type of asset eg shares vs real property. available to help maintain transparency and fund is a key concern. This begs the question where the unit pricing liquidity – what if I place a withdrawal order As Members become more involved in their should be at – the fund level, the underlying today and in 2 days the market tanks?. super, particularly when they are older and have investments or both. Some investment types TC’s suggestion to price at underlying larger balances, the consequences of moving don’t lend themselves to unit pricing eg cash investments is interesting but big change – v from one fund to another becomes much accounts, term deposits. expensive to implement greater. I would argue it should only be at the underlying investment level with the super fund being an account balance type, which then takes the calc of the unit pricing away from the Super fund and leaves it only at the investment level. Less chance for errors and allows for a variety of pricing models underneath. 6.1.3 Passed the need for standards – need systems Agree. Standards will be a component of new systems/clearing houses 6.2 Do not agree with 6.2.2 for need for national Not sure how the UK model works, but I think default fund most Aussies would be v suspicious of letting the Alternate is to allow funds which meet defined govt get its hands on their super. Defined criteria criteria to be default funds – still opt out option. funds more sensible options. Limit no of options Investment options should be limited to say, 3 and have fixed lifecycle triggers. Passive options. investment worth considering to reduce employees can opt out of, reminded each year costs/tax they can opt out, and when balance reaches $25,000 (?) are especially reminded they can opt out. 6.3 Introduce a 3 year lock in for regulatory changes to give everyone a level of certainty in which to Super Fringe Advisers Page 8 Clause TC Comments AH Comments PR Comments operate. Reduces costs significantly. 6.4 These problems would disappear if: TFNs as identifiers is a no-brainer, and force TFNs were member identifies, employers to provide all necessary data Frequency of payment of contribution types all electronically, based on form signed by member. allowed to sync with employers pay cycle, Easier for employers to do super run with payroll One or limited number of defined default funds run. All processing to be done via electronic Ecommerce fully implemented, clearing. On entry to fund, process was simplified, and identifier information was collected – at least some type of form used for member/employer to sign. Currently it may take a fund 3 months to find out they have a new member and missing details. 7.1 If use TFNs then ATO/APRA can produce an annual statement for members with more than one fund and advise them to consider consolidating 7.2 Little thought is given to the issues employers Ref 6.4 have with interacting with Super funds. Any solution should be developed from the employers perspective – how to make it easy for them and could include; TFNs as employee identifier Frequency of payment of contribution types all to sync with employers pay cycle On entry to fund, process was simplified, and identifier information was collected – at least some type of form used for member/employer to sign. Standard forms used which super funds have to accept. 7.2.5 Yes, all regulation of conts should be with ATO Agree. Also need to raise 9% progressively including Salary sacrificed and SG should be based on full salary 7.2.6 EFT should apply to APRA and ATO regulated Agree, via clearing house Super Fringe Advisers Page 9 Clause TC Comments AH Comments PR Comments funds 7.3 Argument to mandate investment style in default and ERF funds to passive to reduce costs, but otherwise should be left to trustees 7.4 Administrators should be required to meet Capital and licensing requirements will add to industry agreed standards and use industry administrators’ costs. Need to be clear on gateways. Question whether they should be benefit of doing so when trustees already permitted to do unit pricing – if so must be primarily responsible licensed by ASIC. Possible conflicts if they are the administrator of investment products as well. 7.4.4 Use of TFNs a no-brainer – what privacy issues? Agree 8.1.2 APRA’s predecessor (ISC) used to collect a lot of data but ASIC (and its predecessors) never collected data. Data is critical. 8.1.3 I think the only way to compare funds on an If have more tightly defined default options then investment returns way (which is only one way to is easier to make comparisons compare) is by having notional portfolios at say $5,000, $50,000 & $100,000 with set investment mixes and transaction activities. Looking at underlying investment options may be valid for trustees but not for members – too many other variables eg transaction costs, insurance premiums, tax treatment, etc. 8.1.4 The more data collected the better, but beware Error/rejection rates would be useful of “lies, damn lies and statistics”. 8.1.5 Developing reliable standard for after-tax reporting is crucial to investors making valid comparisons 8.2.1 Current employer-sponsored joining process is Agreed the source of most duplicate and lost accounts – compounded by no universal identifier (TFN) and Super Fringe Advisers Page 10 Clause TC Comments AH Comments PR Comments lack of e-commerce. Need to review joining processes and documentation and come up with one process and one set of documents and one that readily identifies the member. 8.2.2 Subsidy could take the form of tax deductibility. Agreed. Direct govt subsidy unlikely. The member should be able to decide how any advice fee should be paid eg directly by them or out of their fund balance. 8.2.3 By banning certain types of fees would result in Agreed. Could also provide indicative fees in them either being labelled as costs, or being PDSs and statements for (eg) $5k, $50k and buried deeper in the food chain. %100k The better solution is to model outcomes in terms of dollars contributed and looking at withdrawal value say after 1, 3 and 5 years. See comment on 8.1.3 The ACCC single total price would not work – too many variables at the member level. Each fund should be required to disclose to each member their individual performance since joining and for year ended, based on dollar balances. 8.2.4 Forget the motherhood stuff. This should be an industry initiative, paid and maintained by industry, similar to the exchanges. 8.2.5 What does bps mean? What would you be This is silly comparing eg gross or net fees? 8.2.7 Summary should be sent with annual statement. Agreed Copy on web should be available to members and public. 8.2.8 AR should, as is done with listed companies, a Kind of hard to say no to this remuneration report and details of any conflicts and related party transactions. This should apply to any custodian of “peoples” money. Super Fringe Advisers Page 11 Clause TC Comments AH Comments PR Comments 8.2.12 Yes, would help with disclosure and research. More and more funds are making information on their website available only to their members – a retrograde step! 8.2.13 No, but could be done for advice fees. Better way to do this is how outlined in comments on 8.1.3 and 8.2.3 9.3.2 & Commissions/advice/implementation fees should Agreed, but listen for the howls of protest from 9.3.3 be identified separately and be allowed on a the FPA added cost or “dial up basis”, signed off by the member (not the employer). For on-going advice fees, they should be dial up and be re-signed by the member each year. 9.3.4 Agree Agree – too murky 9.3.5 Agree Agree 9.3.6 It should not be charged on the contribution, but if to be paid, only on those monies that are going into that type of investment that is unitised and has a buy/sell spread – even then the need for a buy/sell spread is questionable. Super funds should be account balance -see comment on 6.1.2 9.3.7 Should have express consent of member 9.3.9 Historic, was way for life companies to offer Agree. Still plenty out there super. Now no need for it – but life companies should be provided with relief to transition these old products. 9.5 Separate out commissions from rebates – see comments on 9.2.2. Rebates or caps for higher balances make sense (as minimum fee eg flat fee, does for smaller balances) One price at fund level is misleading, even for simple funds – what do you do with insurance premiums, different expenses and different tax Super Fringe Advisers Page 12 Clause TC Comments AH Comments PR Comments paid. 10.1. Makes sense for DB funds and funds with only one investment option. Otherwise – many funds are just legal/tax structures for the individuals to put in place their own individual investment strategy. 10.3 There is no real competition. Growth is Agreed, but potential changes to distribution government guaranteed. could radically impact the industry – if Any competition is for either the employer or the commissions are banned or regulated then there intermediary (including super consultants) – the is potential for the mass market to only get an gatekeepers to the members. institutional bancassurance service, and the rich Funds appear to want to compete with each to get a fee for service arrangement. other on their size and the extent of their investment menu. No focus on the member. 10.3.3 Outsourcing has its place – the real need is for Agreed the industry cooperation on gateways and ecommerce. 10.3.4 Missing the point – there is no price competition because it is: compulsory, government mandated growth, good returns until recently and the member (unless a reasonable balance) with no ownership no engagement. The group this does not apply to are those who are turning to SMSFs. 10.4.1 Missing the point again. The fear is not losing members (as very few member change funds) but gaining new employers/intermediaries, and standing tall amongst their peers – winning the league tables. 10.4.2 Totally agree, Super funds need to focus. 10.5 Economies of scale are a myth – why has the largest fund put up its fees this year? Large funds become bureaucratic and impersonal and champions of the status quo. Small funds can achieve efficiency through Super Fringe Advisers Page 13 Clause TC Comments AH Comments PR Comments ecommerce and outsourcing. So if scale is required it can be achieved, b not reducing the number of funds, but by gateways, back office sharing and fully utilising ecommerce. 10.6 There has been no need to – no demand, with mandated growth and (until recently) good investment performance there has been no pressure on margins. Need to use carrots and sticks. 11.1.3 Where possible Grandfathering should be eliminated by making one-off payments to those members affected. 11.1.6 What about contributions? Super Fringe Advisers Page 14 Appendix 2 - Resumes Tom Collins Tom is the Principal of The Tom Collins Consultancy, and a director of a number of companies in financial services. The consultancy, which commenced in 1998, specialises in providing strategic assessments and distribution expertise to the financial services industry. It is at the forefront of contemporary thinking on channel, regulatory, product and client management solutions. As a director, Tom is: Chairman of Premium Investors Limited (Listed Investment Company – ASX code PRV), Chairman of Selectus Pty Ltd (salary packaging holding company), and Director of FSP Super Pty Ltd (retail superannuation master trust) Before this, Tom has had a long and varied career in the financial services industry. In his time he has been: a system analyst, designing and implementing superannuation and fixed interest systems, an investment adviser - first authorised in 1978, a state manager for a fund manager, the founder of a financial planning company, and Executive director with Godfrey Pembroke. Tom is a recognised industry commentator, who regularly speaks at industry conferences and who for many years wrote regular articles for various industry magazines. He has presented at three of the last six ASIC Summer Schools. In 2002 the ASSET magazine recognised Tom as one of the top eight innovators in the financial services industry. In 2002 and 2003 the Money Management newspaper, recognised Tom as one of the top ten most influential people in the financial services industry. Subsequently, the Money Management newspaper named Tom as one of the seven Perennials of the industry, commenting: “There are some members of the financial services industry whose authority transcends any year. They are, and always will be, some of the industry’s most influential”. email@example.com 0419 240 829 Super Fringe advisers - Resumes Page 15 Anthony Hunt Profile Anthony is a senior financial services executive with in-depth experience across wealth management and banking. With a combination of direct business leadership experience and the perspective of consulting, he has a keen eye for what does and does not drive success in financial services. Anthony has a proven background as an architect of change, helping determine and then implement strategic change successfully. He is able to achieve clarity and purpose in the complex interaction of functions, people, processes and systems in financial services, always taking the customer’s perspective. He is energetic, not shy about getting on with it and willing to think outside the square. Anthony is highly qualified and well respected. Recent Career Summary Consulting Projects 2009 Westpac Private Bank 2008 – 2009 Chief Operating Officer Hunts’ Group 2003 – 2008 Principal, Financial Services (Strategic and operational consulting) Tower Australia 2001 – 2002 General Manager, Tower Managed Funds Perpetual 1998 – 2001 General Manager, Perpetual Portfolio Services PricewaterhouseCoopers 1996 – 1998 Associate Director, Corporate Advisory Qualifications Diploma of Financial Services (Financial Planning) Tribeca/Kaplan 2007 Grad Dip Applied Finance & Investment Finsia (SIA) 1999 Master of Business Administration Macquarie Uni 1996 Grad Dip Legal Practice UTS 1991 Bachelor of Laws Sydney Uni 1989 Bachelor of Economics Sydney Uni 1987 Professional Associations Fellow of the Financial Services Institute of Australasia (Finsia) Associate Member of the Law Society of NSW firstname.lastname@example.org 0417 210 693 Super Fringe advisers - Resumes Page 16 Peter A. WORCESTER In nearly 20 years with National Mutual, Mr Worcester developed his professional career as an actuary and investment manager. His roles included: Managing $5 billion of investment assets from 1983 to 1988, including all non traditional investments. From 1988 to 1992, he was responsible for the day to day operations of National Mutual Funds Management. Key responsibilities included: Member of Investment Strategy Committee. Overseeing the implementation of agreed investment strategies. Production of Board and Management Reports. Responsibility for the Investment Valuation and Unit Pricing Process. Liaison with the rest of the National Mutual Group on Asset-Liability management. Coordination between Fund Managers and NMFM back office staff on systems and accounting issues. Director of a number of National Mutual subsidiaries, including Advent Management Group, the management company for the Advent Venture Capital Fund. From 1992 to 1994, he was responsible for the product range of the newly created Retail Financial Services Division of National Mutual. After 12 months, this role was expanded to encompass the marketing and communication roles for Retail Financial Services, which is now the key business of AXA Australia. From 1994 to 1996 he was responsible for all aspects of the National Mutual Summit Master Trust, including its development. 13 years later, this product now forms the backbone of the AXA Australia product offering In the past 13 years, Mr Worcester has been a high level consultant within the Australian financial services industry. Sometimes, this has been as an employee in his own company, and at other times, as an executive within a consulting firm or funds management firm. Consulting at this level requires a number of skills, including: Detailed financial and risk assessment of projects, Understanding the needs of all relevant parties, Dealing with all parties to help them understand the needs of other parties, Identifying all relevant matters concerning the issue at hand, Proposing a variety of possible solutions, and identifying the advantages and disadvantages of each solution, Recommending the best solution to all parties, ensuring that this solution complies with all laws and corporate guidelines. Working with the client to implement the solution. email@example.com 0414 303 322 Super Fringe advisers - Resumes Page 17 Paul Resnik Paul Resnik has worked in the Australian financial services industry since 1983 and the superannuation sector since 1970. Paul was the inaugural general manager of both Bankers Trust Life and Norwich Australia Asset Management and was a founding executive of Australia’s first institutionally owned financial planning network FPI. Through the Paul Resnik Consulting Group [founded in 1991], Paul has provided services to all of Australia’s major banks, life companies as well as most of the major funds managers, wrap account suppliers and financial planning groups. The Paul Resnik Consulting Group provides consulting to financial services organisations who are seeking assistance to develop products and strategies for investment, life insurance, superannuation, home equity release, wrap accounts and Separately Managed Accounts [SMAs]. Paul has been a key participant in products and services that have raised in excess of Au$30 billion. Paul was a founding investor of a number of financial services businesses including Transact, the UKs largest privately owned wrap platform, CARM [see www.carm.com.au] which builds web based self directed planning tools and FinaMetrica. He is currently the CEO of FinaMetrica. FinaMetrica’s US patented risk tolerance assessment methodology is now in use in 11 countries including the USA and the UK. More than 330,000 individual profiles have been completed since 1998. Paul commentates on industry issues and trends, writing for an industry audience and speaking on both industry and public podiums. He has spoken at the annual conferences of the Association of Super Funds of Australia, the Investment and Financial Services Association, the Financial Planning Association, the Mortgage Industry Association of Australia and the Association of Financial Advisors amongst others on issues including risk profiling, home equity release, SMAs, superannuation and scalable financial planning. Paul is actively involved in both industry education and public financial literacy. He co-founded Resnik Communications, the financial services industry’s highly regarded conference organiser which was acquired by Kaplan in 2003. firstname.lastname@example.org 0411 039 959 Super Fringe advisers - Resumes Page 18