During the Great Moderation, the mantra was “be long and don’t touch”. But with a wave of transformation sweeping through markets, BlackRock thinks it’s time for investors to switch things up.
Australia’s sovereign wealth fund’s prediction of a tough year for investors didn’t come to pass, but they’re not the only well-resourced manager that missed the mark. For investors, this period is a reminder that investment patterns may exist, but markets certainly aren’t beholden to them.
Up in the air: The end of AvSuper
Earlier this year, one of the last small funds disappeared in a successor fund transfer into the gargantuan Australian Retirement Trust. Founded in 1990, the $2.4 billion AvSuper was set up as an alternative to Public Sector Superannuation and Commonwealth Super Scheme and provided superannuation services to the Civil Aviation Authority, which was later split into Air Services Australia and Civil Aviation Safety Australia. Though it eventually became a public offer fund, its members were largely air traffic controllers and airport firefighters.
This story is a condensed oral history of not just AvSuper but, in many ways, the superannuation industry itself. From humble origins, super funds now move on the world stage, with international offices and growing internal asset management teams. But beyond the arguments about scale, there is a feeling among some of its old hands that with the disappearance of the small funds something essential has been lost.
(Ed: A recent story in ISN covered Commonwealth Superannuation Corporation’s ambition to become a public offer fund in a merger with AvSuper that ultimately fell through. All AvSuper personnel quoted here declined to comment for that story.)
1. The end of Av
It was to a fund that was “more like a small business” that AvSuper’s last CEO Michael Sykes arrived in April 2021, but one that was also agile and – in Sykes estimation – still capable of growing. He’d just overseen MTAA’s tie-up with Tasplan and didn’t anticipate that his new role would see him repeat the experience, but he did arrive as Covid disruption was still rolling through the industry AvSuper served.
“It was a challenge for the fund,” Sykes said. “One of the first things I did was meet with Airservices and get an understanding of where the organisation was at; they’d been through a really tough time because their revenue was directly linked to flight volumes, and they’d seen a 90 per cent fall in revenue over the Covid period.
“They were looking at their business and the structure of their business at that point… It looked to me that the traditional demographics of the fund were going to change; it wasn’t entirely a Covid issue, but it had been driven by Covid.”
While the fund was public offer, a significant chunk of its membership still came to it through Airservices Australia – the government corporation responsible for providing air traffic control, rescue and firefighting services (among other things), the employees of which Av was created to serve – and there was “unlikely to be a whole lot of growth in their workforce going forward”. It was already offering employees voluntary retirement, and the introduction of stapling meant Av could no longer expect new members to default into the fund. Sykes initiated a business sustainability review in May 2021 to inform AvSuper’s October strategy day. Inbetween, it was one of the 13 funds that failed the controversial first round of the Your Future, Your Super (YFYS) performance test.
“Our strategy day effectively became a discussion of whether we continue on our existing course or turn on our contingency plan,” Sykes says. “The board ultimately decided to explore a merger.”
As many as sixteen funds crowded into AvSuper’s cattle call, but it had very specific criteria. Defined benefit capability was obviously vital, but member servicing, investment performance and cultural alignment were high on the list. Av fielded a number of strong proposals, but Commonwealth Superannuation Corporation (CSC) – the fund for current and former public service employees, and the defence force – was at the top of the shortlist: it had DB capability, and the funds shared an administrator and had come out of the same pool of Commonwealth funds, which also included Telstra Super and Australia Post (Super). For CSC, the merger would have diversified its member base and helped it become a public offer fund.
“It’s been a challenging experience, to be honest. I wasn’t expecting to go in and within three months have to deal with the performance test failure and another merger process. But it’s still been satisfying; to face those challenges and manage through them and get a good outcome.”
Michael Sykes
But it wasn’t to be. At the outset of discussions both AvSuper and CSC acknowledged that the merger would require government approval and new legislation, though both sides of politics had agreed in principle to the process. But the merger was time sensitive; AvSuper wasn’t sure that it would pass round two of the performance test, which would’ve had an existential impact on the fund.
“The current government had won the election in May 22; we were looking at the second half of 2022, and there wasn’t a lot of opportunity for them to put forward their legislative agenda. The legislation wasn’t going to be a priority, and that was the feedback we’d received; there was a fair bit of uncertainty around when it would be delivered… That uncertainty wasn’t great, and it wasn’t great for our membership.”
The fund pivoted to ART instead; its corporate offering and experience with DB was strong, and it also had a committed transition team who other AvSuper personnel described as “being like a machine”. And then, a sudden ray of sunshine:
“Passing that performance test in 2022 as a fund that was close to failure was one of the more satisfying days for the whole team and the board. There was a better understanding of the way the test worked; we looked to make some adjustments. The fund was quite committed to active management across all asset classes, and those managers performed really well in 2022. Taking some costs off the table helped us, and that was on the back of a review of the value chain and where we were spending our dollars, including in investment management.”
AvSuper’s staff didn’t go into ART with the merger, and when Sykes spoke with ISN the fund was still winding down its operations.
“It’s been a challenging experience, to be honest. I wasn’t expecting to go in and within three months have to deal with the performance test failure and another merger process. But it’s still been satisfying; to face those challenges and manage through them and get a good outcome.”
2. ‘That sort of stuff needs to be stopped’
“We had a fund that we thought was fairly unique,” Lawrie Cox, a trustee director of AvSuper, tells ISN. “It was high balance and small membership… And we had a great connection. They could pick up the phone and ring the office, and anybody in the office would be able to answer that question – and if they couldn’t answer that question they would get them to somebody who would.”
Coming to superannuation from the union movement, Cox has been a super trustee for 34 years, starting in 1990 with The Aviation Industry Super Trust (TAIST) – a “lean and mean fund” that didn’t like the bells and whistles, but which “got a lot of respect from the pilots”. In 2010, it merged into AustralianSuper.
“When we closed TAIST and it went into AusSuper – I got on very well with Ian Silk and Paul (Schroder), but I said to them ‘you have to understand, these guys have a connection to the industry and know the trustees’. I know that when it merged across, they’d ring up the call centre and hear ‘Aviation what?’. I think that’s the danger, and that’s what’s being lost with all these mergers. TelstraSuper and Qantas Super are now facing it too.”
“That sort of stuff needs to be stopped and brought back under control… I think those packages are obnoxious, and they do more damage to your member base than a lot of people realise. You get professional directors who have no background or understanding but are in there to do a director’s job of (overseeing) governance and ethics – at the end of the day, they miss the boat when they don’t look at that.”
Lawrie Cox
Cox recalls a time when mass meetings of thousands would be held about superannuation,
and getting people involved and making decisions about it was the number one priority. Now, he says, the industry is starting to resemble the banking sector’s four pillars, and members are “missing out on that connection”.
“The problem with where the industry is going – in terms of the performance test, the levies, the regulation – it’s all aimed at pressuring people out. APRA denies that, but they’re effectively doing a cleanout. I think that will damage the industry; if we’re not careful, we’ll fall back to the bad old days… where there’s no connection. I’ve been very critical of trustees not having enough connection with what super grew from, and from the management perspective I’ve been critical of the salary and bonus structures for CIOs and CEOs.”
AvSuper paid a good salary, Cox concedes (it often topped salary surveys), but there were no bonuses or hidden benefits.
“That sort of stuff needs to be stopped and brought back under control… I think those packages are obnoxious, and they do more damage to your member base than a lot of people realise. You get professional directors who have no background or understanding but are in there to do a director’s job of (overseeing) governance and ethics – at the end of the day, they miss the boat when they don’t look at that.”
3. The backbone of goodwill
According to George Fishlock, a former chair of the fund (1999, AvSuper had “the perfect membership for a superannuation fund”: firefighters and air traffic controllers, specialised professionals who stayed in one job for decades and got paid well to do it.
“The industry feeling is that once (members) get to about $100,000, they suddenly get interested. Our guys were well and truly interested – they developed a lifestyle around high salaries, and they wanted to continue that into retirement.”
Fishlock was an air traffic controller, and a qualified accountant and financial adviser to boot – which was probably why he was treasurer for the air traffic controllers union and was appointed to the fund through it.
“When I was given the job of treasurer, the president said ‘Congratulations – and by the way, you’re on the superannuation board’. And I said ‘what’s that?’ and he said ‘I’ve got no idea, off you go’.”
AvSuper had few staff, and everybody had to get their hands dirty – even the board, which, at some larger funds, tends to occupy the same role as a trophy cabinet.
“From a board perspective, we had to be much more active around investments,” Fishlock says. “AustralianSuper doesn’t get out of bed for anything less than a billion dollars. And a lot of fund managers don’t want funds like AustralianSuper because it completely takes over their whole fund with their investments. We were able to focus on a lot more smaller, targeted fund managers across the board. We’d get in, quite literally, where they couldn’t; we couldn’t get into a lot of the really big funds, but that didn’t worry us.”
“But as a board we had to be more focussed on where our money was going. If you talked to somebody on the AustralianSuper board they wouldn’t have any idea where it’s going, quite frankly.”
“We talked to them about their experiences, the problems they went through when they set up, things to look out for, things to avoid. Because we wanted to build the best fund we could, the best up-to-date fund we could. And I was amazed at the contributions and suggestions and advice given by other people in the industry.”
Denis Carroll
Denis Carroll was the first CEO of AvSuper and held the job from 1990 to 2004.Pretty much the first thing he did – after setting the fund up with a trust deed that would’ve made it almost impossible for the Commonwealth to stick its nose in (the fund was a “breakaway” from the Commonwealth’s public servants fund, and the Department of Finance was difficult to deal with) – was visit with funds like Qantas and Ansett, which already had “profile and presence”.
“We talked to them about their experiences, the problems they went through when they set up, things to look out for, things to avoid,” Carroll tells ISN. “Because we wanted to build the best fund we could, the best up-to-date fund we could. And I was amazed at the contributions and suggestions and advice given by other people in the industry.”
“The industry was born out of a desire to do something for members with the ultimate backbone of goodwill. It was so collaborative. You could reach out to anybody and get help… I was amazed at the camaraderie and the standard of ethics in the industry on the part of the super funds. The industry funds can take a big credit for it.”
That camaraderie wasn’t just an outcropping of the industry’s union heritage, Carrol says. The industry funds were small, the corporate funds were big; to be successful, they had to work together. Over the years, that camaraderie began to drop away. It was an inevitability; as the industry funds got bigger, they were competing against each other for members, and that competition has become more intense as the pool of funds continues to shrink.
“I’m fascinated by this, because I’m wondering why superannuation is one of the only industries that’s been singled out for having to meet a minimum size to be ‘successful’. To me, the whole notion of a free market economy and private enterprise is that you encourage seed participants in any sector, and the strong will survive and the weak will perish. But over time the net benefit will produce more competition, more innovation and a better client experience.
“It’s been driven by APRA for years, for reasons I know not why… we got rid of all that old behaviour where getting on a super fund board would get you invited to events and on overseas trips. That’s all gone, or most of it is. So I’m fascinated by that whole doctrine. Some smaller funds are very successful and very innovative.”
4. ‘We put the risk on’
Sue Field came to AvSuper from CSC in 2015. She was previously with Military Super, which merged with ARIA to become CSC. At AvSuper she was a generalist, handling everything from investments to custody.That broad spectrum responsibility – and knowledge – is something she thinks the industry is now losing. At a time when super funds are bigger and more complex than ever, there are no generalists who understand the whole business – and “that’s scary”.
“If you’ve got a CEO up there I don’t think there’s any way they could understand the whole business,” Field tells ISN. “Whereas Michael understood the whole business; he was across everything. That’s the difference between a small organisation and a large one. You know everybody in the business and you know what’s going on.
“(The team) knew who they were talking to and there were some members who they knew were troublemakers but they also knew how to deal with them. They knew how to handle problem members. But we also had really lovely members who even sent us messages after we’d merged.”
For that reason, the YFYS test failure was “absolutely horrific to go through” – to have to tell members with whom they were on a first name basis that AvSuper was a poorly performing fund and that they should go elsewhere.
“We were part of them, then… It’s sad for members, to be honest; if members want to be associated with one of those small funds and they have that niche service, they’re not going to get it with a big fund. They’re not. That’s what’s been lost.”
Sue Field
“Our returns were not that bad compared to others; we were measured on implementation of our SAA, nothing to do with what our actual returns were. That’s the bit that really irked us. And when we got into it and figured out what was wrong with our returns, it was to do with our APRA reporting requirements – and when we relodged everything, we ended up being only a small margin below the threshold. In the next two years, we made it up.”
“We pulled all levers; everybody else took the risk off, and we put the risk on. We’ve got nothing to lose. We changed our SAA, put on more growthy managers. We did not go passive – that was the big thing. Our investment committee was of the belief that active management pays off in the end… though we did eventually go passive. We bowed to pressure.”
But the culture was excellent, Field says; the fund was a “social, friendly place” and when the board would come to town everybody in the fund would be involved in their discussions. That culture was deliberate, built up under former CEO Michelle Wade; board meetings would be held at air traffic control sites, and members appreciated the closeness.
“We were part of them, then… It’s sad for members, to be honest; if members want to be associated with one of those small funds and they have that niche service, they’re not going to get it with a big fund. They’re not. That’s what’s been lost.”
What’s it going to take to bring that back?
“You know how we’ve had globalisation and now we’re going back to deglobalisation?” Field says. “It’s the same sort of thing.”
Something is going to have to break.
