Home / As fatigue sets in: markets and demographics add to gloom

The word that springs readily to Graeme Miller’s mind when asked about the impact of regulatory change on super fund investments is “fatigue”. “MySuper is on top of Stronger Super, on top of SuperStream… it doesn’t seem to stop,” the director of investment services at Towers Watson told the annual AIST end-of-financial-year breakfast last week.

The MySuper regulations had been tabled at 7pm on Friday June 28 and were scheduled to take effect Monday July 1. “Thankfully, most of it has been postponed,” Miller observed. Leeanne Turner, the chief executive of MTAA Super, pointed out, however, that some of her team had to work into Sunday night, June 30, writing to APRA to detail the aspects of the regulations the fund would not be complying with the following day. The postponement is for six months.

The AIST end-of-financial-year breakfast in Sydney is always a full house. It includes speakers representing the industry’s spectrum giving short speeches about current challenges followed by discussion and questions from the floor. AIST hosts a similar lunch in Melbourne. This year’s event chair was Gerard Noonan, chair of Media Super and deputy chair of AIST.

Miller said that the two pieces of legislation which could cause further concern for funds were the “Product Dashboard”, whereby funds had to provide a risk and return profile on every investment option, and the “look through” disclosure of all underlying individual investments of a fund, including those held in unit trusts. The Dashboard was postponed with other aspects of MySuper to December, while the look-through rules take effect in July next year.

There was still a lack of clarity around the Dashboard, Miller said, but APRA had recently promised to provide further explanation. With the look-through rule, there were also a number of issues, not the least being the increased burden and costs – “custodians are not going to do this for free”.

How funds disclose their derivatives exposures would be particularly tricky because looking at them out of context was dangerous, Miller said. With unlisted assets, disclosing the carried value might be inconvenient to a sale process. Funds also enter into many confidentiality agreements with their managers. Would extra disclosure give away a competitive edge?

Finally on the look-through rule, he asked: “What will the information be used for? If a fund has 10-15 investment options and they each have, say, 5,000 underlying securities, you could have 50,000-75,000 lines of data. And will trustees be called upon to justify every holding.”

He noted it was very difficult to argue against the principal of disclosure, however. Once again, the Government has said ASIC would be issuing more information.

If Miller had a wish for 2014, he said,  “I’d like it to be a year where there wasn’t much change”. But a possible new government had already promised another inquiry into the financial services industry.

MTAA’s Leeanne Turner said she had never seen such a pace with which funds were expected to comply with legislative reforms. She hoped that the regulators would take a pragmatic approach in their assessments. The two other main challenges which funds were facing, she said, were keeping members’ faith in the system and coming to terms with the aging population.

“It’s important that we restore confidence for (members) in the system. It’s a fantastic system. You might think of members as being disengaged but what is engagement? … Arguably they are engaged, although they may not be making the right decisions.”

On the demographic issue of an aging population, she said funds had to adapt their thinking away from the accumulation phase to the retirement phase and needed to adapt their product suite.

Looking ahead she said she wanted to see “a whole lot more thought about costs”. MySuper was supposed to address the issue of costs, “but this could not be further from the truth,” she said. Compliance costs had gone through the roof, and there were new regulatory levies. “Constant tinkering comes with a cost.”

The two funds managers who spoke were similarly downbeat about their respective areas. Brian Redican, senior economist at Macquarie Investment Management, and Victor Rodriguez, head of Australian fixed income for Aberdeen Asset Management, both thought the outlook for Australia was bearish.

Redican said: “I’d certainly prefer to be in Australia than Europe… but looking at the next five years we are certainly not going to get back to the growth rates of the 1990s or first half of the 2000s.”

Rodriguez said: “In Australia the outlook is somewhat bearish. We need another rate cut. Unemployment looks like it is heading higher and savings rates have reverted to the norm.”

Macquarie is forecasting an A$1 of US88c at the end of 2014 and “maybe long term at around US80c”.