Jun 26, 2011

The great super debate

One must-read article:

The great super debate

John Collett | September 9 2009 | The Sydney Morning Herald & The Age
After seeing a quarter of their retirement nest egg wiped out between November 2007 and March this year, super fund members were jolted out of their complacency. Funds had sustained their biggest losses since compulsory super was introduced in 1992 and bewildered members were forced to pay attention.
And while some of the losses have since been clawed back, it has been a massive blow for those near the end of their working life.
How, then, do ordinary members of the public judge whether their super fund is any good?
Most of the information and comparison tables that consumers see are the work of a few research houses. But consumers only get half the story because bad performers are seldom mentioned. Researchers generally prefer to deal in the good news.
Currently, there are only voluntary industry standards as to how funds should report their returns and fees. There is no single way laid down as to how funds should value, and how frequently they should value, their unlisted investments, such as infrastructure and property.
The regulator, the Australian Prudential Regulation Authority (APRA), offers guidelines on best practice but there are no regulations forcing funds to report the data in the same way. And, each of the researchers takes a different view of how performances should be measured.

On top of this, research firms cannot compel funds to provide their figures.

Biggest losers lost
How research is paid for is at the heart of the matter. The tables of the best performers and most highly-rated funds tend to see the light of day, while the others seldom do. A super fund might decide against being rated if the outcome is likely to be poor.
So if your fund has the dubious distinction of being the worst performer, it’s rare you will see it anywhere. This means there’s a skew towards the positive reports.
Last month, APRA issued tables of super fund performance data, which sent shock waves through the industry. Its tables highlight the poor-performing, high-fee funds in a way the researchers are not doing.
APRA produced a table of the biggest 200 funds, covering performance for the five financial years to 2008. It brought to light many big brand names of the retail sector that performed less than satisfactorily, such as AMP Eligible Rollover, Challenger Retirement Fund and Suncorp Master Trust.
The top performers were dominated by the not-for-profit sector, such as industry funds and corporate funds, including those available to the employees of banks.
APRA slammed
But what has prompted the Government to jump into this space?
Fees on Australian super funds are high by international standards. The hoped-for reduction and improved performance that super choice was meant to deliver when it was introduced four years ago has not eventuated.
Last year, the Government instructed APRA to begin producing funds’ performance data.
A director of Rice Warner Actuaries, Michael Rice, says the APRA data is good but is more useful to researchers than consumers. Most of it has significant time lags. As well as performance, APRA has collected an unprecedented amount of detailed data on funds, which means the regulator is quickly coming to a much better understanding of how the funds work.
But APRA’s initial attempt for greater transparency has been criticised by much of the industry.
“Irrelevant at best, misleading at worst,” is the verdict of Warren Chant, the co-founder of superannuation researcher Chant West. He says performances in the table bear little relation to the investment options in which people actually invest. Instead of providing the performance of the large default options, where most people are invested, the regulator showed only “whole of fund” data.
That means each fund’s 10 or 100 investment options were combined and the performance for the whole fund given in the five years to June 2008.
Of a typical fund with 10 investment options, about half will be diversified investment options, where the money is spread between asset classes. Among these diversified investment options will be the default option, where most people have their money. The other five investment options will invest in only one asset class, such as Australian shares or property.
Fees targeted
The chief executive of the Industry Super Network, David Whiteley, says the APRA data is an “effective proxy” for the performance of the default, or large balanced investment options, that most people invest in and shows that “industry funds are on top and that makes sense”.
One of the biggest factors in the difference in funds’ performances is fees. And one of the aims of the APRA table is to put pressure on funds with high fees to reduce them.
The Government’s stated policy objective is to have fees fall to below 1 per cent, from about 1.25 per cent. Consumers don’t understand that even a small differences in returns can make a big difference in retirement incomes over the long term. By some estimates, each 1 percentage point in net return increases retirement savings by 20 per cent over 30 years.
One of the main contributors to high fees is the millions of dollars a year being taken as commissions from retail super accounts, often when members are not receiving any advice.
It is expected the regulator will eventually publish the returns of all the larger investment options and get the data out faster. But it is likely to take the regulator several years to get the systems in place to do that.
The level of fees is also on the agenda of the Cooper review of super, which is due to report its finding and make recommendations by mid next year.
Sins of omission
Of the private firms that research the funds, three stand out as having the biggest presence – SuperRatings, Rainmaker and Chant West.
Their views appear to be reasonably independent. Most of their revenue comes from selling performance data and ratings to super funds, financial institutions and financial advisers; consulting to the funds; and consulting to employers in selecting their default fund provider.
But consumers are unlikely to hear too much about the bad funds from the researchers. The fund ratings they make public are mostly positive. In part, that’s because Australians are generally well served by their funds. The big funds, where most people are invested, tend to have competitive offerings. Those available through large workplaces, especially, tend to have low fees.
The reason the researchers give for only publishing the top 10 or 50 funds is the risk that fund members will switch out of the poorer funds without understanding the reasons for the underperformance.
The researchers categorise the investment options differently, or give the same options different names. For example, what Superratings calls “balanced” is called “growth” by Chant West.
Different methods
The researchers’ views are not always easily reconcilable with each other. That’s partly because super funds do not report their performances in exactly the same way but also because the researchers have their own views on how performance is best measured.
The biggest bone of contention among researchers is what to do about the commissions that many members of retail funds pay for financial advice, whether they receive the advice or not.
Rainmaker and SuperRatings report returns with the commission payments deducted from the returns, as does APRA. Chant West takes a different view. It reports returns with the trail commissions added to the returns. The effect of that is the outperformance of industry funds (which do not pay adviser commissions) over the retail funds is smaller with Chant West than with Rainmaker and SuperRatings.
Warren Chant says his company does that because many people get valuable financial advice for the commissions.
The chief executive at SuperRatings, Jason Clarke, says his company reports only what the funds report to its members. “We try to mirror what funds actually report,” he says.
Warren Chant says these differences are only fairly minor. He says the most pressing reform needed in the industry is consistency in terminology. There needs to be agreement on whether assets such as direct property, infrastructure and hedge funds, for example, should be categorised as “growth” or “defensive” assets.
He says this is where APRA could play a valuable role, rather than publishing tables of little value. He says, with consistent terminology, consumers could have greater confidence that only investment options with the same risk versus reward trade-offs are being compared in each category of a performance table.
Superratings
More data is available from the researchers for those willing to pay for it. SuperRatings has an “investors club” called SuperSavvy, which for an annual fee of $80 allows members to access all of SuperRatings’ research. The service only started late last year and has about 2500 members, says Clarke, of SuperRatings.
SuperRatings makes the top-10 performing “balanced” default investment options freely available on its website. These are the options with between 60 per cent and 76 per cent of money invested in growth assets such as shares and property and are where most people have their money invested. SuperRatings also provides a set of indices, for each type of investment option, against which members can compare the performance of their investment option. It also ranks the top 10 funds by fees and gives the top 10 by insurance.
SuperSavvy members get the performance data on many more funds and as many reports on individual funds as they like. The report, called Fundamentals, evaluates and compares key features, investment options, fees and charges, insurance and the strengths and weaknesses of a super fund relative to other funds, or the industry as a whole.
The research houses have been recording record numbers of hits to their websites since the onset of the global financial crisis.
Chant West
Chant says the Chant West website is receiving about 7500 hits a week from the general public and about 6500 from its subscribers, the super funds and financial institutions and their financial advisory networks.
Chant West provides performance tables for growth options and conservative growth options available in the super phase and retirement (pension) phase, with the data being updated quarterly.
Chant West’s AppleCheck delivers funds either five apples (highest), four apples or a three-apple rating. Chant says his company does not research a fund if it was likely to get a one- or two-apple rating. He says of the 200 funds, a “fairly high percentage would have five apples”.
The report costs $55 but is available free to anyone who is a member of one of 10 industry super funds, including HostPlus and Sunsuper. Up to three funds can be compared and one of the funds must be the fund of the website through which the consumer is assessing the report.
Rainmaker
Rainmaker, and its SelectingSuper division, provides the “most comprehensive performance analysis in the marketplace”, says Alex Dunnin, the research director at Rainmaker.
The website lists the top 50 default options available though workplaces by returns and the top 50 retirement fund default options. It also offers the top 50 of all other major categories of investment options. The data is updated monthly.
The website also lists all the funds that so far have been awarded the SelectingSuper AAA Fund Quality Rating, its only rating. Rainmaker also has a report card on funds. Its SelectingSuper Comparative Report Card, which costs $69, compares any two funds in detail. Rainmaker does not have an automated comparative service for consumers, as the other two researchers have, and the report is written by a Rainmaker analyst.
Further, here is the APRA report of Quarterly Superannuation Performance.
Take care of your super. It is your money of future; at least, part of.

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