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.
Super funds torched by regulators for slow progress on retirement income covenant
Superannuation funds have been lambasted by ASIC and APRA for not doing enough to accommodate the needs of retirees, with a new report from the combined regulators highlighting “a lack of progress and insufficient urgency” from RSE licensees in “embracing” their legal obligation to help fund members plan for retirement.
In a dire warning to funds, the regulators said it expects all APRA-regulated funds to consider its findings and the better practice examples outlined, then “address, with urgency, the gaps in their approach”.
Since the Superannuation Industry (Supervision) Act was amended in 2022 to include a retirement income covenant, funds have been obliged to formulate a strategy to assist members “in or approaching retirement”.
In compiling the report the regulators reviewed how 16 APRA-regulated funds covering about half the accounts and benefits of members aged 45 and above were implementing their new obligations under the covenant.
The regulators’ report observed that RSE licensees were successful in expanding the assistance and support available to members in or approaching retirement, yet there was “variability” in the approach taken. “Overall, there was a lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant to improve members’ retirement outcomes,” the report stated.
No concrete plans
Funds are failing their primary duty to conduct analysis of members’ income retirement needs, the regulators found, with most just referencing a fixed income target based on external data and research by the Australian Bureau of Statistics or a Household, Income and Labour Dynamics in Australia survey.
“Only a small number of RSE licensees analysed drawdown patterns of their retired members, or considered how members’ retirement income needs may correlate to their retirement income.”
Funds freely identified the data gaps they needed to fill in order to better understand member needs, the report noted – including the superannuation balance of partners, and financial assets outside of the fund – yet they aren’t proactively finding ways to address those gaps.
“We found that, despite 12 out of 15 RSE licensees explicitly acknowledging that they had data gaps, only four had concrete plans to address those gaps,” the report stated.
Some licensees were worried about extracting further information from members due to concern that they would be inadvertently give financial advice, the report noted. The government has agreed to draft legislation this year as part of the Quality of Advice Review that will provide scope for funds to provide financial advice beyond superannuation which should allay these concerns, with financial services minister Steven Jones yesterday saying he’d do more than just “fiddle around the edges” of current provisions.
The majority of funds had adequately segmented members into sub-classes according to financial position and income needs, the report found, yet fared poorly in designing fit-for purpose assistance for members.
Super funds are generally satisfying the requirement to inform their members about retirement income strategies, it noted, but need to get better at highlighting the important elements using tables and graphs.
The regulators urged funds to “think beyond as to what is possible” to glean information about member needs, and have a “strong framework” in place to drive implementation of retirement income strategy. Establishing management and governance structures will be key to satisfying obligations, the report stated, as will be integrating the strategy into the business planning process.
