Performance of Australian Superannuation Funds:

Efficiency, Governance and Reporting Practices

Yen Bui & Sarath Delpachitra

2

Superannuation Assets

1997 1999 2001 2003 2005 2007 2009 2011 2035 *

0

1000

2000

3000

4000

5000

6000

7000

321 411 519 547 7631172 1065

1335

6100

Superannuation Assets versus GDP

Superannuation assets

GDP

Billi

on

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 TypeReturn 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

Governancemore 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 & disclosuresHighlights 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 structureCompetition

&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:

InvestmentAdministrationTrustees & directorsMiscellaneous

Outputs: Investment returnVolatilityLiquidity

Current DevelopmentsExposure 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 principles2011 & 2012 Bills for superannuation legislation

amendmentsCurrent 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 reporting2009 OECD Guidelines for pension fund governance2011 & 2012 Bills for superannuation legislation

amendmentsCurrent 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