Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Link Group calls it as they see it over SuperStream
(Pictured: Suzanne Holden)
Suzanne Holden, chief operating officer of the Link Group, didn’t mince her words at last Friday’s (May 9) AIST superannuation administration symposium. She said up-front costs associated with SuperStream have blown out and estimates of longer-term savings of $1 billion a year were “fanciful”.
She was speaking on a panel session with the topic: ‘SuperStream: Where’s the Payback?’ In an interview afterwards, she said: “The regulations are effectively getting us to conform as an industry, but not necessarily introducing better value for members.”
She said that Link, which owns AAS, the big member administration company, was 100 per cent behind the principles of SuperStream – to do with streamlining and automating processes in the industry to, eventually, reduce costs. “But the devil is in the detail,” she said.
Link’s estimate of the total SuperStream cost, made in 2012, was between $900 million and $1.2 billion. The company now believes the cost, due primarily to various delays, will be 10-20 per cent more than that.
The costs include an APRA levy totalling, initially, $467.1 million. This includes $200 million for the ATO from super fund members and another $106 million of new taxpayer money.
“We now have the ATO intervening in an area which market forces should have handled,” Holden said. “We were already well advanced in automating rollovers and contributions – about 80 per cent there. So, we have an enormous investment to automate the last 20 per cent, at a relatively low value.”
SuperStream is probably going to be good for the employer, she said, but “has it been good for the member? I’m not seeing it.” She believes the industry needs to work together more collaboratively to drive the evolution of the super sector and not leave it to the Government to devise and legislate systems that may not work so well in reality.
AAS manages the contributions of 350,000 employers. Unlike eRollovers, which attempts to effectively connect a limited number of funds/administrators, eContributions is trying to intervene in a relationship between employers and funds. Rather than letting the market dictate a solution, the Government has introduced an electronic network of gateways. These gateways have introduced a new layer of costs, charging for their services.
“We still don’t fully understand what this looks like and what it will cost the industry, employers, members and funds on an ongoing basis,” Holden said. “Nor do we understand the ultimate efficiency benefits for members.”
The industry had started the drive towards automating contributions and substantial momentum has already been achieved. For example, for Link fund clients, April 2014 data shows approximately 50 per cent of contributions coming through the web, 15 per cent through other electronic channels and 35 per cent still on paper. Of the 35 per cent paper contributions, approximately 50 per cent were ‘straight through processed’ once scanned. This means any future benefits delivered by eContributions/SuperStream will be on the remaining 18 per cent of today’s volumes.
“So, while there are hoped for long-term efficiency benefits, the incoming regulations around eContributions will impose major costs to implement, as well as embed a new layer of costs via the clearing houses or gateways,” Holden said. “Effectively these large costs will be imposed to mop up the tail end of today’s lagging manual contributions, yet the cost will be borne across the sector.”
Link has invested in a solution for clients called SCH Online – a fund-branded employer portal that enables employers to make contributions in one transaction and with one payment. Default contributions are paid straight to Link funds and choice contributions go through a clearing house supported by Westpac/QuickSuper.
The company is currently communicating with all clients to update them on the options ahead – helping them communicate with their employer members and encouraging funds to use SCH Online to avoid incurring additional gateway costs.
