Home / Analysis / Is this the most successful financial services firm ever?

(pictured: Ian Silk)

Comment by Greg Bright

Quite possibly. AustralianSuper, the bellwether go-to and surprisingly innovative super fund, Australia’s largest and, arguably, best across a range of metrics, proved to all and sundry this week what can be achieved when you try. But maybe this is the time to also worry a little about the future while we celebrate the past.

Aussie Super has passed the $100 billion mark for assets under management a year or so earlier than was expected. Cashflow from existing and new members and earnings is such that one of the fund’s biggest investment challenges is to keep its operational cash levels as low as possible. Its major investment challenge is finding opportunities.

Aussie Super does not have the Future Fund’s luxurious mandate of having no redemptions. It has to weather all the super industry’s bufferings, from leakage of high-balance members to SMSFs, through to political changes to the rules and to the costs of low-balance members’ insurance. And, famously, due to its investments insourcing program, it has to weather the problems associated with fund manager and market capacity constraints.

Aussie Super was formed in July 2006 with the merger of the former Australian Retirement Fund, of which Ian Silk was chief executive, and Superannuation Trust of Australia, of which Mark Delaney was chief executive. Combined they had $21 billion managed on behalf of 1.2 million members. Ten years later they have $100 billion under management for two million members. And Silk and Delaney are still there, as chief executive and chief investment officer respectively. If Aussie Super was a public company you’d have to think those two would be a lot wealthier than they probably are.

When the fund announced its investment insourcing program in 2012 it envisaged it would be managing in-house about 30 per cent of its projected $100 billion by 2017-2018. As it’s turned out the fund is only up to 20 per cent insourced at the moment. Just like the cash it struggles to invest in a timely fashion, the insourcing program is struggling to keep up with the fund’s overall growth. Not that it matters much because asset growth is not a target for the fund – it is a forecast. In so many respects the Aussie Super story is a remarkable one.

So what’s to worry about? Here are a few things:

• Culture. It is often said that big super funds are starting to look a bit like the old mutual life offices. That is not a compliment. Ian Silk said in an interview in 2013: “We have to be conscious that we don’t suffer the same fate as AMP. I’m not talking about AMP of today… but before it de-mutualised where it seemed to be captured by forces not focused on their policy holders – with management at the front of the queue.”

Maintaining a genuine member/customer focus is not easy for a business with more than 500 employees. With an expanded internal investment team, recruited largely from the well-paid commercial investment sector, that will be more difficult still.

• Governance. Since its beginnings with Award Super in 1986, the not-for-profit super sector has not had one major scandal. Even the one big attempt of fraud – on the former Commonwealth fund ARIA – failed. Given the money at stake, that is extraordinary. Whether it has been luck or good management (probably a bit of both) the big super funds have steered a steady course through market ructions, demographic shifts, political change and the competitive pressure of incentive-driven fund managers and financial advisors.

However, super funds are not as transparent as they could be. The boards do not face elections (except for a couple of funds), they do not hold annual meetings of members and trustees have a tendency to hang around past their use-by date. The trustees are not always chosen on merit, either, but rather on who they represent and how they are likely to vote on certain issues. Members don’t even get a say in fund mergers. This is the one area super funds could learn from the corporate sector, which they are so quick to criticise on similar governance grounds.

And, it has to be said, the big funds are frustratingly slow to act in a lot of situations. Small fintech businesses, for instance, are reluctant to engage with big super funds because of all the hoops they are made to jump through. With the uptake of new technology the bank-controlled commercial super funds are way ahead of the not-for-profits.

• Demographics. The baby-boomer retirement bubble is a major challenge for super funds which have spent the last 30-odd years focusing on accumulation. With just over 90 per cent of all super funds’ assets being defined contribution rather than defined benefit, Australia is unique in the pension fund world. Funds have been slow to build their own retirement products to retain members, not helped by our tax system. They are attending to this now but need to do much more than they have.

• Markets. The phrase “lower for longer” says it all. In a low interest rate environment big super funds will have to redouble their efforts to continue to outperform their commercial counterparts. Thanks to their early adoption of alternatives, such as infrastructure and private equity, and their willingness to go international, you can be reasonably confident most big not-for-profits will remain near or at the top of the performance charts.

• Politics. Frequently moving goal posts are not good for any business, let alone one which involves people saving for their long-term future. Big super funds have to be aware they represent the bulk of working Australians and therefore have a responsibility to aggressively argue their position before the government and regulators.

With the regulators, more could be done. For instance, big super funds could more forcefully argue against APRA’s silly focus on headline costs, rather than net returns, which is likely to cost members money over the long term. In fact, more public scrutiny by and criticism of both APRA and ASIC from the big super funds on a whole range of issues should be encouraged and supported by the industry associations.

The industry has its own politics too. At least the main buy-side associations – ASFA, AIST and FEAL – present a reasonably united front on most issues. The sell-side, though, represented primarily by the FSC, seems to be drifting out to the right. FSC chief executive Sally Loane is not as politically accommodating or adept as her predecessor, John Brogden. Perhaps Jeremy Cooper, if he becomes the next ASFA chief executive, as has been tipped, can rebuild some bridges between the two sides.