John Peterson, former fund manager and asset consultant, has presented a forceful case to the Productivity Commission inquiry into the efficiency of the superannuation system backing the argument that an extreme focus on costs is to the detriment of super fund members. MySuper comes in for a particular serve.
The director of the Peterson Research Institute says in his submission presented this month that neither the Cooper – which recommended MySuper – nor Murray inquiries explicitly stated the ability or otherwise of investment managers to contribute positively to investment returns.
Peterson says: “This implicit treatment of active investment management as a cost – and hence something to be minimized – rather than a source of investment risk and return, is having a very significant influence on the portfolio construction and manager selection policies adopted by many Australian superannuation funds.”
The submission says: “Personally, I have observed a significant increase in allocations by superannuation funds to more passive investment strategies in traditional investment markets such as domestic and international equities – including indexed and enhanced index, and factor/beta strategies.
“I have also received considerable anecdotal evidence that investment decisions driven by fee pressures are common in the alternative asset classes, including observations by industry colleagues that they are only permitted to make new investments that reduce the superannuation fund’s MER.
“I have also observed a significant increase in allocations to co-investments in alternative assets, which by their nature leave superannuation funds with more concentrated exposures to larger transactions in private equity, infrastructure, etc., than would be the case if investments were made in the more ‘optimally’ constructed funds offered by managers.”
He notes that fee negotiations that reflect the purchasing power of big super funds are not inappropriate, having conducted many himself on behalf of funds.
“However, there is considerable evidence that investment decisions are being influenced by a desire to minimise reported MERs – in order to meet the requirements of regulators and gatekeepers – rather than to meet an objective of maximising net returns to investors. This represents a potentially considerable misallocation of investment resources – and hence allocation inefficiency – to the ultimate detriment of superannuation investors and the functioning of the wider economy….
“To a significant degree the Cooper Committee’s recommendation for the establishment of the MySuper product, with its explicit focus on fees and costs rather than net investment returns, represents a significant backwards step towards the prescriptive regime of superannuation regulation that existed prior to the Campbell Committee of Inquiry in 1981.”
Peterson says: “It is my contention that the current regulatory regime under which superannuation funds operate is producing considerable inefficiencies in investment strategy and allocation, with large negative outcomes for investors and the broader community.”
This contention is based on two premises:
- The significant difference between the revealed preference of investors – in particular the trustee directors of superannuation funds – and the actual investment decisions made under the current regulatory regime; and
- The basing of current prescriptive legislation and regulation on ‘analysis’ of markets and manger performance that is fundamentally flawed.
Jeremy Cooper, the chair of retirement income at Challenger Ltd, is a former ASIC deputy chairman who headed the Super System Review that recommended MySuper in 2010. David Murray is a former chief executive of the Commonwealth Bank and a former chair of the Future Fund who oversaw the Financial System Inquiry last year. Both inquiries focused on headline fees and charges rather than net returns in their funds management commentaries.