Performance of Australian superannuation funds

penredheadManagement

Nov 18, 2013 (3 years and 6 months ago)

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Performance of Australian
Superannuation Funds:

Efficiency, Governance and
Reporting Practices




Yen Bui & Sarath Delpachitra





2


Superannuation Assets



0
1000
2000
3000
4000
5000
6000
7000
1997
1999
2001
2003
2005
2007
2009
2011
2035 *
321

411

519

547

763

1172

1065

1335

6100

Billion

Superannuation
Assets versus GDP

Superannuation
assets
GDP
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











Source: APRA 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%
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).















Members
Trustees/Directors
Non-Expert Principal
Professional Agent
Knowledge Asymmetry
&
Information Asymmetry
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).













Members
Shareholders
Trustees/Directors
Executives
Service Providers
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




STRUCTURE
CONDUCT
PERFORMANCE
Market structure
Competition
&
Legal framework
APRA, ASIC, SG, SIS, AASB
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
Governance
and fund strategy

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