14 August 2014
Mr Greg Tanzer, Commissioner,
Australian Securities & Investments Commission
GPO Box 9827
SYDNEY NSW 2001
Ms Helen Rowell, Member
Australian Prudential Regulation Authority
GPO Box 9836
SYDNEY NSW 2001
Reporting standards
The Institute recommends that RSE Licensees should continue to set investment return and
risk objectives for each investment portfolio having regard to the needs of their members
and to develop investment strategies to achieve these objectives. These return objectives
are the ones that should be stated on the short-form PDS.
The Institute believes that these investment return objectives are not equivalent to “return
target” information required to be provided to APRA for MySuper products.
In your letter of 21 March 2014 to RSE licensees regarding section 29QC of the SIS Act, you
invited interested parties to contact the relevant regulator about any issues regarding the
application of section 29QC and the reporting standards.
We understand that there have been a number of submissions from the industry commenting
on the requirements set out in that letter. ASIC Class Order 14/541 has now been issued. This
defers the operation of section 29QC until 1 July, 2015 and allows further consultation on the
operation of this section.
As part of this further consultation, the Institute would like to comment on the following
requirement set out in your original letter regarding return targets (our emphasis added):
‘SRS 700.0 requires an RSE licensee to calculate a return target for the purpose of
information to be included in a MySuper product dashboard. This methodology requires
the calculation of this return target to represent the mean annualised estimate of the
percentage rate of net return that exceeds the growth in the CPI over ten years. ASIC
considers that "investment return objective" information for an investment option required
to be disclosed in a shorter PDS under Schedule 10D of the Corporations Regulations 2001
is equivalent to "return target" information required to be provided to APRA for a MySuper
product under SRS 700.0. This means that investment return objective information disclosed
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in a shorter PDS will need to be calculated in the same way as the return target
information provided to APRA.’
We believe the statement that the “investment return objective” disclosed in a shorter PDS is
equivalent to the “return target” disclosed on the MySuper dashboard is incorrect.
The return target information included in a product dashboard is intended for a different
purpose, and is not suitable for use as an investment return objective required under SIS and
disclosed in a short-form PDS. Using it for this purpose would create difficulties for RSE
Licensees, and would confuse and possibly mislead investors.
For dashboard purposes, the return target for a product must be presented as a net return
target which will be a ‘per annum estimate of the expected return for the product after
investment and administration fees, costs and taxes, excluding activity and insurance fees
and costs, in excess of the Australian Bureau of Statistics published Consumer Price Index
(CPI) over ten years.’ The stated return is therefore the expected average return (e.g. if
returns were not skewed then it would be expected that only 50% of the returns will exceed
the return disclosed on the dashboard) and it will be achieved over a specific period of time
(i.e. the next ten years from the date the return is calculated). The purpose of this return
target is to allow superannuation fund members to compare the potential return they might
receive from investment options provided by superannuation funds.
APRA has set out in Prudential Standard SPS 530 the requirements relating to Investment
Governance for superannuation funds. In particular, the Standard requires trustees to
establish investment objectives for each investment option offered by the trustee and to
develop and implement investment strategies that are consistent with these objectives.
As part of these objectives, the Standard also requires trustees to establish return objectives
and risk objectives.
In the Prudential Practice Guide SPG 530, APRA provides examples of the types of investment
objectives that can be used. Importantly, the examples included are different to the return
target disclosed on the MySuper Dashboard. Further, the time horizon used for the investment
objective is not specified but has to have regard to the risk objective of the particular
investment option.
Clearly the above guidance from APRA is not consistent with the view that the return target
disclosed on the MySuper Dashboard is “equivalent” to the investment objective determined
by the trustee in accordance with the requirements of SIS Act and disclosed in the PDS of the
Fund.
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In addition to the above, there are a number of reasons why the return target disclosed on
the MySuper Dashboard should not be used as the investment objective required under the
SIS Act. These reasons are discussed below.
1. The return target is set for the Representative Member. Most members are likely to
have account balances that are above or below $50,000. Therefore, an investment
objective set for a member with an account balance of $50,000 will not be
appropriate for an investment option that will have members with a range of account
balances.
2. The return target must allow for administration and advice fees and costs. These fees
and costs relate to services that are completely separate from the selection of the
investments supporting the members’ accounts. It is inappropriate to develop
investment objectives (and the strategy to achieve these objectives) that must take
into account factors that are usually (or completely) independent of the investment
services being provided.
3. An RSE Licensee would not normally want to set an objective with only a 50%
probability of being achieved. The more usual approach would be to target a longterm rate of return consistent with acceptable risk characteristics, with a reasonable
chance (i.e. greater than 50%) of being achieved over the long term (not specifically
the next ten years).
4. As the return target is based on expectations over the next ten years, it may change
as investment markets change. This is likely to require more frequent updates of PDS
documents, incurring additional costs for generally very marginal (if any) benefit.
5. Furthermore, the return target is to be expressed as a percentage relative to CPI. It
would be preferable that the same methodology be used for ‘Choice’ products as for
MySuper products. However, this type of objective is unsuitable for investment
products which are invested in one asset class. With these investment products the
primary aim is to achieve return and risk characteristics that are similar to the return
and risk characteristics of the asset class. In these cases the usual approach is to
establish the investment objective by reference to an index that is specific to that
asset class.
6. Lastly, in our submission of 12 February 2014 in response to the Government’s
Discussion Paper – Better regulation and governance, enhanced transparency and
improved competition in superannuation, we recommended that return targets should
be based on AWOTE rather than CPI. However, since it is impossible to change
investment objectives from CPI to AWOTE ‘overnight’, it might be desirable for the
Government to give notice that this change will not be compulsory for at least, say,
two years.
Our recommendation is that RSE Licensees should continue to set investment return and risk
objectives for each investment portfolio having regard to the needs of their members and to
develop investment strategies to achieve these objectives. These return objectives are the
ones that should be stated on the short-form PDS.
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There is one issue that would need to be addressed: investors comparing the PDS against a
product dashboard will be confused to see two different numbers, one described as ‘Return
objective’ and the other as ‘Return target’. We recommend one of the following
approaches for dealing with this problem:
1. Our preference is that the return target be removed from the dashboard and the
Investment Return Objective set by the trustee be disclosed. We have set out in other
submissions why the return target is an inappropriate measure (most recently in our
submission of 12 February 2014 in response to the Government’s Discussion Paper).
We understand that this is also the view of the Association of Superannuation Funds of
Australia (ASFA).
2. If our preferred approach is not feasible, we recommend that at least the dashboard
return be renamed so it is less likely to be interpreted as an investment objective. Our
preference would be ‘Expected compound average net return over ten years’ rather
than return target.
The Actuaries Institute is the sole professional body for actuaries in Australia. It represents the
interests of over 4,100 members, including more than 2,200 actuaries. Our members have
had significant involvement in the superannuation industry and the development of
superannuation regulation, reporting and disclosure, interpreting financial statistics, risk
management and related practices in Australia for many years
The Institute would be pleased to discuss any of these recommendations in more detail.
Please do not hesitate to contact our Chief Executive Officer, David Bell, on (02) 9239 6106 or
email david.bell@actuaries.asn.au if you wish to discuss the matters raised in this submission.
Yours sincerely
Daniel Smith
President
cc
Pauline Vamos, Chief Executive Officer, ASFA
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