Regulators and other stakeholder are asking the AU$1.4tr superannuation fund industry to increase their disclosure of asset holdings. While the industry is responding to those calls, their proposals are tempered by the context of providing meaningful information for members.
The Association of Superannuation Funds of Australia (ASFA) is writing a report on disclosure of asset holdings in conjunction with the Financial Services Council (FSC) that they will submit in June to the Australian Securities and Investments Commission (ASIC). Both ASFA and FSC say they are in favour of increased disclosure of how assets are invested, the disclosures must be meaningful and cost-effective manner.
“You’ve got to start with the uses of the disclosure,” said Pauline Vamos, CEO of ASFA. “It could be verifying that your investment actually reflect the asset allocation you disclose in the [product disclosure statement] PDS and reflect the level of risk disclosed in the PDS. That’s a compliance-cum-audit function. There are two ways to achieve that. Either you get the whole world to verify that by showing a complete list of the assets or you disclose and the regulator regulates the process by which you go through to insure that the asset allocation meets both of those goals. From our perspective, it’s better to review the process rather than reviewing the information.”
If the goal of calling for increased disclosures is to better educate members, then it is reasonable to expect that superannuation funds will disclose general asset class allocations, without disclosing specific holdings, Vamos said.
“The other reason to disclose is to allow members to understand where their money is and make choices,” Vamos said. “Is a list of every single security the fund owns the best way to do it? No. To present a clear understanding to the investor, you can list the asset classes and the sub-asset classes. For example a fund might disclose that 20% of the portfolio is in Australian equities. Of that 20%, 10% of that is in high growth or value stocks and within that, 2% are in financial services, 3% in mining, and the rest is in listed property. That is valuable disclosure, and particularly if you’re developing your own portfolio, you get an idea of where the assets ultimately are. What percentage of my money do I actually have in a group of assets?”
This sort of disclosure provides comparable information, Vamos noted, which is one of the stipulations of the government’s Stronger Super reform, particularly the MySuper products, which will be introduced from 2013 and will have a single, diversified investment strategy with a standard set of fees generally available to all members.
The FSC also supports greater transparency, but CEO John Brodgen said that the cost of implementing greater transparency has to be a consideration.
“The challenge is to ensure that the cost of the implementation to provide more transparency isn’t prohibitively high for fund holders,” he said. “Really, this is a question of at what level do you disclose. At the very least, it is likely that there will be disclosure to allow an individual who is in a balanced fund, with let’s say a third, a third and a third of the portfolio invested in property, cash and equities. At the very least, there should be disclosure within equities to say are 10% are in resources, 10% are in banking and the rest are in other categories. That’s disclosure as to the broad sectors in which there is investment. Equally, let’s say you’re in fixed interest, there will be disclosure as to the percentage of holdings.
“The bigger questions is do we go down to the next level, to say that of that 10% in mining, one third is in BHP and you, the member, actually hold 722 BHP shares. Now, the people we’re targeting, the 50-70% of super fund members who aren’t engaged, if you give them a document that gives that level of disclosure, it’ll be four pages long and they won’t read it. The cost of doing that will be extraordinary to allow the systems to link up. To put that in place will have a massive cost for frankly, very little benefit.”
Brodgen also said that detailed, discrete disclosures could also jeopardise a superannuation fund’s commercial advantage, or give indication of trade movements, which would impair the fund’s ability to maximise returns for members.
The position of Australian Institute of Superannuation Trustees (AIST) is that superannuation funds should disclose asset class percentages, the names that funds use for outsourced management, a list of the top 20 Australian equities a fund has holdings in, and disclosure of substantial holdings within a portfolio, said Fiona Reynolds, AIST CEO.
“You don’t want to have millions of line items on a page somewhere, because that isn’t meaningful,” Reynolds said. “We think that, as a bare minimum, funds should disclose their holdings by asset class, they should list the managers that they have, they should their top 20 Australian equity holdings, and they should disclose any substantial holdings within the portfolio. That information should be up on the website and updated every six months. There could be a six-week lag to get the information up there, so that if there is confidential information, you don’t want it going up their straight away. That’s what we’ve said as a starting point.”
As the industry is working on this issue of how to set a level of disclosure that will be meaningful for an average member, they are not addressing in this specific context the question of whether funds are disclosing information that gives members a clear understanding of how sustainability commitments influence their investment decisions and how they engage with invested companies on ESG-related topics. It is worth noting that 34 asset owners – including superannuation funds – are signatories to the UNPRI, which calls for voluntary commitments around disclosure and reporting to beneficiaries.
Vamos conceded that the sort of asset-holding disclosures that ASFA and FSC are discussing are not the sorts of disclosures that a fund with a sustainability or ESG mission might make.
“When it comes to sustainability reporting, it’s very different,” Vamos said. “The different levels of ethical investing and sustainability and sustainable investing and the different levels of ethical screens, you’ve got what I call the light green to the deep green investors. When you’ve got that sort of approach, then it’s important that you really disclose, and there are funds that do that already – the Hunter Halls, the Australian Ethical Investments – they show their ethical screens. But you need to consider that balance, if you like. Some people really want that information plus exactly what holdings their fund has.”
The FSC co-authored with the Australian Council of Superannuation Investors (ACSI) a set of guidances aimed at listed corporations and what basic ESG disclosures should be made to investors. Brogden said that the superannuation industry should look to those guidelines as well.
“We worked with ACSI last year to issue the ESG guideline and we think that’s the best way to approach it,” Brogden said. “There is absolutely no doubt that there is certainly an increasing expectation from fund members and investors in higher compliance to ESG standards and requirements .The first thing that we’d like is for companies to adopt is our guide because at the very least, the guide gives a template for ease of comparability. How that applies in future to superannuation funds is part of the debate. Super funds will go with the flow in this area.
“I believe there will be more ethical investment funds and ESG compliant superannuation funds and investment funds and indeed investment options in the market in the future. There is no doubt that this is a growth area,. People who are interested will be able to select an investment option or a super fund that is investing with ethical screens.”
But Duncan Paterson, CEO of CAER, noted that the UNPRI will be bringing influence to bear on its signatories to live up to their voluntary commitments, which would lead to more member disclosure for superannuation fund signatories.
“This will have implications for investors, and increasing pressure from UNPRI on investors to be transparent on the methodologies they’re using is something that a number of investors will have to take on board,” he said. “There is also going to be pressure for the consumers of the financial products to have a look through and engage with their providers.”
Paterson said that he believed NGOs will start targeting consumers of financial products such as superannuation fund members to start questioning their service providers about ESG related issues, and he is concerned that the industry is not prepared to handle the questions and provide the information.
“The other thing missing from the discussion at the moment is the likelihood, in my opinion, of an increase in the willingness of NGOs to target funds via the members on the basis of the companies they’re invested in,” Paterson said. “Few superannuation funds have established processes and policies for dealing with that type of communication with members, and that the don’t have people in place to answer the amount of enquiries they might get, either by letter, or e-mail or phone call. That will be an area that will be challenging for the industry in the next 12 months.”
Paterson acknowledged that the industry is grappling with a number of reforms to superannuation structure and governance, new prudential regulation standards from the Australian Prudential Regulation Authority, plus new regulations around the provision of financial advisory services, but said that the issues are on the horizon.
“We have some fund clients that are dealing with the question actively, but when I look around at the funds that are out there and the companies that they’re invested in, and I also hear from various networks about some of the directions that NGO campaigns are taking, I think there is something out there,” he said. “I can understand that they’re under the pump at the moment. But I’m apprehensive that things could be happening or change could take place in the way that superannuation fund members behave that will force it onto them rather than it be something that they elect to have happen.”