Asset owners say their investment decisions are being scrutinised for proof they are in the best interests of their members, a discussion on “Member outcomes, dislocations and asset allocation” at the Fiduciary Investors Symposium heard.
Speaking on the panel last week, Kristian Fok, CIO of Cbus Super, commented that the way superannuation funds make decisions is now subject to intense media query.
“Increasingly, there is greater scrutiny around how we go about doing our business and a demand for more transparency and clarity over how we make decisions,” he said.
Fok told the conference that unlike in the past, the majority of media enquiries are about investment strategies.
“At the same time, judgement calls are being made as to whether we are making decisions for our own purposes or for members’ interest.
“Increasingly, the media claims decision-making doesn’t align with benefits to members.”
Fok accepts the heightened scrutiny is a consequence of the massive cash flows moving to industry funds following the Hayne royal commission.
“What that means is there will be a counterpoint to that. And because of our size, there is a reasonable degree of scrutiny around what we do because of the nature of our sponsoring membership.”
He conceded it is a complex and difficult area to navigate.
Conference-goers heard that Cbus Super’s investment strategy is partly due to it having a youngish membership and strong cash flows.
The CIO argued the success of the superannuation fund’s strategy is predicated on those positive cash flows continuing so anything that disrupts those flows – like reputation risk – is a threat.
Not surprisingly, given that super fund’s membership is based in the construction industry, sustainability and ESG remain front of mind.
That said, Fok added that the Cbus membership is divided on climate change so the fund must focus on the social impact of the shift to a low-carbon world as well as the environment.
Specifically, the panel discussion centred on a report by the Productivity Commission calling for a 10 ‘best in show’ list of super funds.
Statewide Super investment committee member, Sandi Orleow, who moderated the panel discussion, outlined concerns about the top 10.
“Asset owners are unsure whether funds would be judged on returns, a combination of risk and return or on factors other than just financial performance,” she said.
Orleow cited an APRA report which stated the uplift in industry practices has not kept pace with the heightened expectations of members, regulators and the broader community in all areas.
As a result, she pointed out, the prudential regulator requires further changes to ensure funds remain fit for purpose so “it is likely the sole purpose test will evolve”.
Panellists then acknowledged asset owners will need to do more in terms of demonstrating how they are delivering member outcomes outside the narrow definition of financial performance.
But Orleow asked whether funds would breach fiduciary responsibilities by incorporating some ESG strategies.
“Cbus has membership in the building sector so investing back into communities and having good ESG credentials is consistent with duty. But for a multi-employer structure, the rules are a bit vaguer,’ she cautioned.
The panel then discussed the prudential regulator’s latest push for super funds to annually assess and compare the appropriateness of product offerings. An amendment to the new rules includes assessing the different outcomes for members.
To that end, Michael Winchester, head of investment strategy at First State Super discussed the role of traditional asset allocation in delivering member outcomes, not just as part of the accumulation stage but in the post-retirement phase.
Winchester told delegates that measuring member outcomes is not as straightforward as it seems and pointed out that most asset owners looked at long-term returns which was a mistake.
“Members don’t actually get those long-term returns. Rather, they get dollar rate returns because of their varying experience in accumulation and decumulation over time. Therefore, the long-term average return that the members receive in retirement can be quite different,” he said.
“Different capital market outcomes, cash flow patterns and the interaction of those with age pension entitlement and drawdowns all have to be added into the mix.
“A combination of member preferences and a variability of income has led to massive fluctuations in member balances.”
To that end, First State Super is implementing MDUF to assess customer preferences and other determinants of a risk budget for member cohorts which has provided much more confidence in the allocation process, according to Winchester.
Bhanu Singh, head of Asia Pacific portfolio management at Dimensional Fund Advisors, agreed that the goal in retirement is very different to building wealth over time and therefore the risks are different.
Singh told delegates the main goal is to cast certainty around consumption upon retirement.
“Right now, there is not much clarity about “what a pot of money” means 25 years post retirement and that’s the challenge,” he noted.
“Switching from a focus on capital balance to a steady stream of income being projected for your life is a pretty big shift which has implications for communications.”