Performance of Australian superannuation funds

Report
Performance of Australian
Superannuation Funds:
Efficiency, Governance and
Reporting Practices
Yen Bui & Sarath Delpachitra
2
Superannuation Assets
Superannuation Assets versus GDP
7000
6100
6000
Billion
5000
4000
Superannuation
assets
3000
GDP
2000
1000
321
411
519
547
763
1172 1065 1335
0
1997 1999 2001 2003 2005 2007 2009 2011 2035 *
Sources: APRA 2012, APRA 2011, APRA 2007 and Cooper et al. 2010. * is forecast.
Superannuation Assets by Fund Type
Source: APRA data (2012)
Investment Return
Source: OECD 2011
Investment Return by Fund Type
Return and Volatility of Superannuation Funds 2002-2012
Entities
Average
Return
Volatility
Corporate
4.3%
9.7%
Industry
4.5%
9.9%
Public sector
4.7%
10.4%
Retail
2.9%
9.6%
All entities
3.8%
9.9%
Source: APRA 2012
Fees & Costs
Expenses to Earnings before Tax: FY 2010-2011
Source: Computed from APRA data (2012)
Outsourcing
 Outsourcing: risk and accountability
 Diverse outsourcing activities: asset allocation, investment
management, custody, legal, actuarial, auditing
 Non-profit funds: greater outsourcing activities
 For-profit funds: more frequent outsourcing to related party
providers
Governance
 Agency relationship: Non-expert versus professional.
 Members have little influence in fund strategy and activities.
Members
Trustees/Directors
Non-Expert Principal
Professional Agent
Knowledge Asymmetry
&
Information Asymmetry
Source: Developed from Sharma (1997) and Shapiro (2005).
Governance
 To enhance fiduciary duties of trustees and to ensure
trustees act for the best interests of members:
 Legislation (trust law, SIS Act, ASIC, etc.)
 Self-regulation (code of ethics/practice)
Governance
 Multiple relationships  possible multiple conflicts of
interest between members and other parties.
Members
Shareholders
Trustees/Directors
Executives
Service Providers
Source: Developed from Sy (2008).
Governance
more complex relationships &
more conflicts of interest
more costly system
less economic efficiency
(relation between cost input and return output)
reduction of members’ protection
effect on other stakeholders
Reporting & disclosures
 Complex and relatively comprehensive legal framework.
 More emphasis on prudential standards.
 Less emphasis on accounting standards.
 Similar situation with the IASB standards.
 AAS 25 Financial Reporting for Superannuation Plans (2005)
 ED 179 currently being finalised
 Issue date is unknown?
 Global: more disclosures and transparency in other asset
management sectors (e.g. mutual funds) than in pension
funds.
 Global: “Australia’s overall reporting grade is C, with
disclosure ranked D” (Hartge-Hazelman 2011).
Reporting & disclosures
Highlights from preliminary observations on 30 funds annual
reports and websites:
 Reporting practices different between entities.
 Full financial statements not provided in financial reports.
 Full notes not provided.
 Little comparable data.
 Website information not updated.
 Organisational structure/trustees/director trustees’
qualifications and experiences not disclosed.
 Outsourcing activities, related party transactions with
service providers not disclosed.
Conceptual Model
STRUCTURE
CONDUCT
PERFORMANCE
Fund structure and relationships
Investment activities
Economic efficiency
Benefits to
Directors, executives, shareholders,
Governance practices
Governance scores
members &
members, external service providers
Reporting practices
Reporting scores
stakeholders
Market structure
Competition
&
Legal framework
APRA, ASIC, SG, SIS, AASB
Governance
and fund strategy
Developed from Mason 1939; Britton, Clark & Ball 1992; Clement, Dale and Drew 2007
Research Questions
1. To what extent do Australian superannuation funds
operate efficiently?
2. How do governance practices affect the efficiency of
Australian superannuation funds?
3. Is there a positive relationship between efficiency and
reporting practices of Australian superannuation funds?
Research Design
 Large APRA-regulated funds (~ 90% of total super assets),
panel data, 5-year period.
 Data Envelopment Analysis (DEA) to estimate the relative
efficiency of individual funds.
 Governance and reporting practices to be quantified using
scorecards.
 Tobit/OLQ regression model to test the association
between DEA efficiency scores and governance and
reporting scores.
Data Envelopment Analysis
 Inputs: cost to income grouped into four categories:
 Investment
 Administration
 Trustees & directors
 Miscellaneous
 Outputs:
 Investment return
 Volatility
 Liquidity
Current Developments
Exposure Draft Superannuation Legislation Amendments
(Bills 2011 and 2012)
 Further MySuper and Transparency Measures
 Trustee Obligations and Prudential Standards
 MySuper Core Provisions
Draft Prudential Standards
 Operational Risk Financial Requirement
 Defined Benefit Matters
 Insurance in Superannuation
 Conflicts of Interest
 Investment Governance
Governance Practices
 Scorecards, 1 to 10 grading scale
 Basis for the construction of the scorecards:
 2009 OECD Guidelines for pension fund governance
 2010 ASX Governance principles
 2011 & 2012 Bills for superannuation legislation
amendments
 Current literature
 Criteria: fund mission/objectives, accountability, risk
management and performance strategy/policies
Governance Practices Scorecards
 Governance structure/Board characteristics:
 Trustees/director trustees qualifications and experience
 Member representatives
 Independence of directors
 Division of oversight and operational responsibilities
 Presence of specific committees.
 Governance mechanism/Board and fund practices:
 Fund mission and objectives
 Trustee practice/ethics code (self-regulation)
 Selection policies of trustees, directors, members
 Policies for selection/monitoring: outsourcing, external
service providers, related party transactions
 Risk (return, volatility, liquidity and fraud)
 Cost control/improvement
 Investment strategy (life cycle)
 Insurance
Reporting Practices
 Scorecards, 1 to 10 grading scale
 Basis for the construction of the scorecards:
 2010 IASB Framework for financial reporting
 2009 OECD Guidelines for pension fund governance
 2011 & 2012 Bills for superannuation legislation
amendments
 Current literature/observations
 Criteria: relevance, comparability and transparency.
Reporting Practices Scorecards
 Reporting practices:
 Financial statements and notes
 Comparable financial information for multiple periods
 Communication with members (frequency and timeliness)
 Disclosure practices:
 Trustees, director trustees, executives
 Criteria in selection of trustees
 Rights and obligations of relevant parties (including service
providers)
 Risk management strategy (return, volatility, liquidity and
fraud)
 Investment strategy and investment schemes (timely update)
 Cost control strategy and disclosure
 Promotion and marketing costs (retail funds)
Next Steps
 Completing data collection
 Finalising scorecards
 Preliminary results: Q3-Q4 2013

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