Home / Why the ATO is interested in big super funds

(pictured: Graeme Arnott)

The Australian Taxation Office is becoming increasingly interested in the strategies and operations of big super funds as they impact, for the first time, on the Government’s revenue base. Four out of the top 10 Australian taxpayers are now super funds and two are in the top five.

Graeme Arnott, the deputy chief executive officer at First State Super, one of the funds in the top five taxpayer list, told the My Platform Rules conference on the Gold Coast last week that his fund had regular and “non-regular” meetings with the ATO.

He said it was “shocking to me” to find out that big funds paid as much tax, proportionately, as they did. The ATO’s interest in them, though, is about more than their total contributions to consolidated revenue; it’s also about the volatility of payments and the demographic trend.

Arnott said: “Never before has tax revenue fluctuated so much with the investment markets… And every time someone buys an annuity, the Tax Office loses money.”

Arnott spoke at a conference session alongside the head of investment operations of three other big funds, each of whom, like him, are former custodians: Jonathan Green of TCorp, Peter Curtis of AustralianSuper and Lounarda David of Sunsuper. Together, their funds manage about $270 billion.

Paul Khoury, the chief executive of State Street Global Services in Australia and New Zealand, who moderated the session, said there were several key themes facing service providers to big funds, such as securities servicing firms, and most client funds were looking for some level of customization of service.

“How do you deal with that [customisation] when it’s not your friend?” he asked, meaning that service providers have to take on extra costs due to bespoke work done at a time when their clients are providing downward pressure on fees and charges.

“We are in a low-return environment and therefore every dollar counts. There’s the importance of the difference between operational cash and ‘excess’ cash [in a fund’s portfolio], especially for a bank,” he said. By this he meant that not all cash is equal in terms of its value as a deposit for a super fund’s bank or custodian. Thanks to Basel III, retail cash is more valuable than institutional cash.

Khoury said: “It’s important to understand, from the perspective of all stakeholders, that there are fee pressures, there’s increased competition and there are member retention concerns. We have to keep on making investments in our processes and we have to work with our clients on how we can innovate.”

First State Super’s Arnott said the superannuation market would become bigger than the banking sector within the next few years and members were only just starting to become interested in their super fund data.

Reporting that data to them is an issue. For instance, the ongoing discussions with APRA concerning proposed “look-through” regulation to portfolio holdings, which keeps on being postponed, Arnott said, raises the question of “what should go on their websites… What’s in the members’ best interests?”

He said that he did not believe that the industry had developed the best measures to gauge risk or to display it to members. “We have to work on how we represent risk and reward to non-professionals,” he said.

Arnott also suggested that MySuper options could be developed to include some form of member involvement, such as investment choice options.

Peter Curtis from AustralianSuper described the transition from the traditional model of securities servicing (“where the only disruptive force was Pat Liddy”) to the current one with greater segmentation, customisation and value-add services alongside potentially major shifts in fundamental technology drivers, such as distributed ledger technology or Blockchain usage.

In dealing with counterparties, Curtis said: “We need better information and data to understand the risks. Blockchain sounds quite attractive…”

A particular worry for him at AustralianSuper is when “everyone has gone into pension phase and we have mainly long-dated assets”. AustralianSuper has more than 9,000 line items in all its investment options.

Lounarda David of Sunsuper said that retailisation was a big trend such that super funds were trying to improve their engagement with members to counter the effects of the outflow to SMSFs. According to ATO figures, more than $16 billion was redeemed from large, mainly industry, funds in 2014 and transferred to an SMSF.

In order to improve engagement with members, big funds needed to gather “information rather than data”. “We need flexible data that can be transformed into tailored information,” she said.

On the question as to whether a super fund requires a ‘service provider’ or a ‘solutions provider’ David said that moving onto an integrated model required a different culture for the fund. She said that funds did not want to be forced into a particular model. “We want a solutions provider,” she said.

Jonathan Green, general manager of investment implementation and operations at the $80 billion TCorp investment platform, described the lingering inefficiencies in the investment operations industry, including a surprisingly high use of faxes.

Green said that he requested information from Computershare on proxy voting and other corporate actions and discovered that 49 per cent of all client instructions were still being received by fax. He described this as a “goat track” whereby an automated transaction is interrupted by a manual process.

With daily transactions between fund manager san their platforms, which end up with the custodian, if a manager is not properly connected to the platform provider “off goes the fax”.

With the popular online voting service Proxy Edge, Green said, about 50 per cent of the instructions end up as faxes.

NOTE: Investor Strategy News will publish a special edition covering the My Platform Rules conference – in PDF format – later this week. Meantime, presentations from the conference are available to see on: www.www.ioandc.com