Last August, APRA wrote to about 30 super funds to tell them they needed to either outsource their investments, based on APRA’s own metrics, or merge their funds with another – larger – fund. Now, it’s starting to happen. The first two ‘forced’ mergers are underway.
When you talk to the people who run the “APRA Target 30 Funds”, as they are known in the industry, they say that Australia’s regulator just “wears them down”. APRA is really giving these funds, with whom members probably have a strong affiliation, a “death by 1,000 cuts”. APRA will out-form you. APRA will wear you down. Is this good for Australia’s super fund members? Probably not.
Plus, APRA’s “metrics” to assess super funds are questionable. They are based on “cheaper is better”. If the world equities, as well as bond, markets are fully priced, as a lot of fund managers think they are, and APRA incentivises super funds to go indexed, as it seems to do, then super fund members may be in for a big shock.
Helen Rowell, APRA’s deputy chair, an actuary who has worked at APRA since 2002, wrote to an unspecified number of funds last year demanding a meeting to discuss whether or not they were delivering “quality outcomes” for members.
So, here are the first two APRA ‘forced mergers’: Nationwide Super, a well-regarded industry fund from the mid-north coast of NSW, and Dulux Super, a corporate fund. They have assets of about $400 million apiece.
According to Ian Morante, the chief executive of Nationwide, the fund decided to outsource its investments to Russell Investments, which shares the same member administrator, Link Group, which made the choice a little easier. This was after several visits from APRA staff.
He said that the members would be better served with the outsourcing arrangement, with slightly cheaper before-fee charges. The move would also enable the fund’s management and trustees to concentrate on member services. Nationwide would continue to have the trustee role, he said, and would focus on serving its members well, as it had done since inception.
The Dulux corporate fund, on the other hand, is being outsourced to an unknown provider.
APRA never specified the names of, nor even the number, of funds which are under scrutiny for its controversial ‘scale metrics’. The big industry worry is that APRA may be being naïve with regard to the current marketplace, with fully priced equity and bond markets meaning that indexing can capture members in a bubble. This could become a political issue.
APRA actually denies that it incentivises cheap headline number index funds for MySuper options. Also, it distances itself from the fact that, commercial, for-profit, funds, are much more likely to have plain vanilla indexing than the not-for profits. The industry disputes APRA’s claim that it does not incentivise funds to go down the indexed route. See: John Peterson’s ‘open letter’ on the subject.
Greg Bright is publisher of Investor Strategy News (Australia)