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Time is Money….and Money is Time:
What conflicted superannuation governance is costing fund members
Presentation to Conference of Major Super Funds (CMSF) 24th March 2014
Chris Angus, Nigel Douglas, Mike Rafferty
10 things you already knew about Super…… but just didn’t realise how important they were
What we know - Superannuation funds have different characteristics Many of these differences are aesthetic or insignificant. But superannuation is an
industry rather than a market.
Therefore some of these internal fund differences turn out to be very important. The important differences can be thought of in 3 dimensions: 1. Governance and business models 2. Distribution 3. Performance
Differences in these areas mean that people in different funds will have very different retirement outcomes.
What we didn’t know
Members of Not For Profit Representative Trustee funds will save much more and be able to retire much earlier than members of For Profit Appointed Trustee funds.
You may be surprised to learn just how much difference in time and money we are talking about
(hint its big).
1. Fund Governance & Business Models*
*Source for governance data: APRA 2008
Two basic superannuation fund types: 1. Derived from the old insurance industry business model
- Vertically integrated financial firms - For Profit - Sales/Advice product distribution driven distribution - Appointed Trustees
2. Derived from industrial agreements
- Free standing fund, contracts out most services - Co-operative/Not for profit - Industrial Agreement and award-based - Representative Trustees
These two fund types behave differently in important ways
Key Governance differences - Representative NFP Trustees have:
1. more diverse backgrounds 2. much less likely to be employed by the fund or a service provider 3. hold fewer additional directorships 4. spend more time on individual board matters 5. have fewer direct relationships to the fund or related service
providers 6. direct fewer service contracts with parent or closely related
providers 7. invest more of their retirement savings in the fund they are a board
member
Primary Employer of Trustee/Director
0% 10% 20% 30% 40% 50% 60% 70%
Retail
Industry
Public
CorporateA fund service providerCurrent fund
Method of board appointment
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Corporate
Public
Industry
Retail
Member elected Employer elected Government appointedUnion appointed Appointed internally Appointed through executive searchAppointed through personal contact
Trustee/Director- Type of board representation
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Corporate
Public
Industry
Retail
Fund member Industry union Employer sponsor Government Professional advisor None of the above
Number of other Trustee/Directorships currently held
0
50
100
150
200
250
300
350
400
450
500
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Morethan15
RetailIndustryPublicCorporate
Skin in the Game ? - Per cent of trustee/director super invested in this fund
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 1-10% 11-50% 51-90% 91-100%
As %
of D
irect
ors
sect
or
Corporate Public Industry Retail
Average number of trustee director hours spent per fund per year
0 200 400 600 800 1000 1200 1400
Retail
Industry
Public
Corporate
Service providers to fund & their relationship to the fund
0 200 400 600 800 1000 1200 1400
Corporate
Public
Industry
Retail
No relationship Provider is the parent company of the trusteeProvider and trustee have common parent company Provider is a wholly owned subsidiary of the trusteeTwo of the above Other relationship
Service Provider relationship with trustee directors
0% 20% 40% 60% 80% 100%
Corporate
Public
Industry
Retail
Provider has trustee director(s) in paid employment Provider and trustee have common director(s)Shareholders of the provider include trustee director(s) Two of the aboveAll of the above None of the above
0 50 100 150 200
Corporate
Public
Industry
Retail
Frequency of relationship where there is 1 or more
2. Fund Distribution Methods*
*Source for governance data: Rainmaker Information and APRA 2008
Distribution models
Retail Funds currently anchored in the old insurance distribution (sales/advice) product distribution model - Currently own 72% of the advice industry
Industry funds remain anchored in the industrial award and agreement benefit management system - Not-for-profit super fund owned adviser groups account for 2% of the industry Source: Rainmaker 2014
3. Fund Performance*
*Source for fund performance data: Rainmaker Information 2013
A couple more things you already knew:
For profit (FP) or retail funds tend to be part of large vertically integrated financial conglomerates, and as a consequence:
8. NFP Representative funds are lower cost than FP (Retail) funds
9. NFP Representative funds have consistently outperformed FP funds in returns to members
Annual cost of balanced funds by fund type
Fund Type Balanced fund cost ($) Balanced fund cost (%)
2006 2008 2006 2008 Retail (Employer sponsored)
$988 $1,015 1.88% 1.93%
Retail (Personal funds)
$1,121 $1,113 2.13% 2.12%
Industry funds $387 $447 0.74% 0.85% Public sector funds $340 $473 0.65% 0.90% Corporate funds na $400 na 0.76% Source: Credit Suisse estimates 2008,
Note: based on scenario of Balanced Fund with $50,000 AuM and $5,000 of contribution during the year, fees are before tax rebates as disclosed in sample PDSs
The Retail Fund Management Value (extraction) Chain
Source: Credit Suisse 2011
Superannuation Fund Performance by Business model Type – Crediting rates by market segment 1988 to 2013 & average over total period
8.45% 6.61%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13Not-for-profit super funds Retail balanced super NFP Average FP Average
Sector Performance Averages from 1987 – 1999, 2000 – 2013 & 1987-2013
10.97%
5.92%
8.45%
9.19%
4.02%
6.61%
1.78% 1.90% 1.84%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
1987 - 1999 2000 - 2013 1987 - 2013
NFP Averages FP Averages Difference
4. Outcomes for member retirement*
*Source for outcome modelling: Rainmaker Information 2013
One last thing you already knew:
10. Better performance by NFP funds means more retirement savings for members
But …these differences are much larger than we have
generally understood (e.g. ‘ISNs compare the pair’ Mk I or II)
These differences are very costly in terms of foregone savings
They are also very costly in terms of extra time required to save for retirement
4.1 Difference in final amount
Scenario 1: Initial investment of $1000 in 1987, Annual crediting rates compounded, balanced & default funds - 1988 to 2013
$7,774.01
$4,967.63
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
NFP
FP
Scenario 1: Initial investment of $1000 in 1987, Annual crediting rates compounded, balanced & default funds - 1988 to 2013
$2,806.38
36%
0%
5%
10%
15%
20%
25%
30%
35%
40%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
$ Difference -NFP vs FP% Difference -NFP vs FP
Scenario 2: Initial investment of $1000 in 1987 +$1000 added each year, Annual crediting rates compounded, balanced & default funds - 1988 to 2013
$76,444.02
$57,981.75
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
NFP
FP
Scenario 2: Initial investment of $1000 in 1987 +$1000 added each year, Annual crediting rates compounded, balanced & default funds - 1988 to 2013
$18,462.27
24%
0%
5%
10%
15%
20%
25%
30%
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
87-8888-8989-9090-9191-9292-9393-9494-9595-9696-9797-9898-9999-0000-0101-0202-0303-0404-0505-0606-0707-0808-0909-1010-1111-1212-13
$ Difference -NFP vs FP% Difference -NFP vs FP
4.2 Difference in time taken to save
Scenario 1 - Initial $1000 lump sum plus crediting rates compounded, 1987-2013
$7,774.01
$4,967.63
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
NFP FP
Point at which NFP reaches the same value as FP at term end (8 years earlier)
Scenario 2 - Initial $1000 + $1000 yearly plus crediting rates from 1987-2013
$76,444.02
$57,981.75
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
87-88
88-89
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
NFP FP
Point at which NFP reaches the same value as FP at term end (6 years earlier)
$62,619.18
$26,134.59
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Age
21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69
NFP FP
Point at which NFP reaches the same value as FP at term end (11 years earlier)
Initial $1000 lump sum over 50 years using average crediting rates from 1987-2013
Initial $1000 + $1000 yearly over 50 years using average crediting rates from 1987-2013
$790,840.24
$405,518.35
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
Age21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69
NFP FP
Point at which NFP reaches the same value as FP at term end (8 years earlier)