Australia is facing up to some tough questions and it is asking the questions we need to ask. For example, should we assume that all ESG investments a good thing, or are some more beneficial to pension savers than others?
In this article, I ask whether DC funds should expect to be judged by good intentions or delivered outcomes.
Do we have to choose between our values and our pocket books? https://t.co/RL2f7W2SYR
— Henry Tapper (@henryhtapper) October 28, 2020
Anyone following the recent consultation by the DWP should be intrigued and informed by the debate going on in Australia, sparked by the firebrand consumerist Jane Hume.
Hume is calling for a league table of Superannuation Schemes which are to be rated by performance relative to a bunch of indexed benchmarks. She is being featured in the FTfm by Jo Cumbo
The Australian industry is trying to stave her off by coming up with their own risk-adjusted benchmark which allows schemes greater lassitude over fees and credit for longer term investments into patient capital (which they claim they get no credit for under Hume’s evaluation system).
Hume is saying that trustees should not be putting their values ahead of the saver’s pocket books while the Australian fund industry claims it is in everyone’s long-term interest that they invest for social and environmental good and spend today’s money on tomorrow’s good governance.
Australia’s Finance Review magazine has dubbed the Fund’s initiative ” a second chance for dud Super Funds”. It is hard to disagree that there looks like an element of special pleading from Chief Investment Officers” who can indulge their conviction at no risk to themselves and enjoy adulation in good times while suffering no consequences for failure.
An exact parallel to the UK?
Australia is such a good comparator because , where we pussy-foot around , the Australian Government, Press and Providers go straight to the point.
The DWP’s tortuous justifications for not relaxing the charge cap by spreading performance fees on illiquids can be compared to the Australian Prudential Regulatory Authority’s robust refusal to give way on fees.
The Association of Super Funds of Australia says this will distort the market, lead to index-hugging , destroy the livelihoods of active fund managers , reward caution and give no upside to the entrepreneurial CIO. If this sounds familiar, it is because it is exactly the argument used in the UK by the Investment Association and other fund lobbyists in the UK.
So ASFA has come up with a fresh approach
First, a MySuper fund’s total fees and costs would be assessed against a benchmark of 130 basis points, which the lobbyist said is within one standard deviation of the industry average. This would replace the assumptions made by Treasury, which some have argued are too low.
Anyone familiar with a 0.75% cap (e.g. everyone in the UK) will be wondering what is too low about a cap almost twice as high.
The second stage of ASFA’s recommended test sounds even less consumer friendly
Funds who charge fees and costs net of tax that exceed the benchmark would then proceed to the second stage comprised of an assessment of investment returns, which would calculate risk-adjusted net returns.
However, (ASFA) acknowledges that “there are numerous methods for adjusting returns for risk, and each method has their pros and cons”. Like Treasury’s methodology, therefore, the specific testing criteria for risk-adjusted returns could become contentious.
As in the UK, the tactic is to create a variety of ways of measuring value for money , creating sufficient confusion that all but the real “duds” are allowed to continue on their not so merry way.
Sympathy for the CIO?
I know a lot of CIO’s of large DC funds in the UK bulk at being judged against a single benchmark, especially when that benchmark contains a fee adjustment.
I know that CIOs want to take a long-view and not be judged for short-term performance and for their capacity to operate within a fee budget and I have sympathy for those who really do have conviction in their position.
But CIOs are taking decisions based on their assessments of the risks their customers (members) are experiencing and it would seem that in Australia , they have no accountability for whether the risks they mitigate (ESG risks included) are relevant or accountability for the execution of their risk strategies.
As I argue in “do we have to choose between our values and our pocket book”, there is no reason why a well executed ESG strategy cannot improve returns and the planet, but the difference between a well and poorly executed strategy will be picked up in performance. If strategies fail, it should not be exclusively the saver who picks up the tab. Ultimately those managing the mandate should be stripped of their mandate.
Sympathy for second chances?
In the UK, the DWP is calling for the Trustees of “small” DC Funds (eg those with less than £100m of member’s money) to consider their VFM by a Heath Robinson-esque value for money test. It is a test that gives trustees sufficient wriggle-room not just to be “contentious” but useless and – as promoted in the DWP improving member outcomes consultation, it will not lead to trustees calling time on themselves.
However, the Australian model , proposed by Jane Hume, for all its brutality, does provide a standard by which Super schemes can be compared and judged. It should be studied by the DWP and seriously considered for adoption in the UK. Ultimately -ESG has to be subject to VFM evaluation like everything else.
I am fed up with giving second chances to under-performing DC pension schemes and the sooner we standardize performance measurement in terms of member outcomes, the better.