Investment Return by Fund Type Return and Volatility of Superannuation Funds 2002-2012 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. 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. 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 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