With superannuation returns the lowest they’ve been in many years, what do you tell your members to keep their faith in the Fund?
At CSRF we believe the truth is always the best response.
While it may be unpalatable, we believe that there has been so much publicity on a daily basis that our members are well aware of the global financial crisis we are in. While no one wants to see retirement plans having to be delayed or expectations lowered, most members are aware of the origins of the crisis and the various government and central bank interventions that are trying to return world economies to more prosperous times.
Specifically, at CSRF we keep reminding our members that superannuation is a lifelong investment and it is important that they take time to understand how financial markets impact upon returns over time. Even for those members nearing retirement, they are likely to be retired for 20-plus years, so we highlight to them that superannuation is still a very tax-effective savings vehicle.
As Australia’s largest Catholic superannuation fund and with most of your members working in Catholic schools, Clergy and Catholic Church agencies, how has CSRF tailored its member communication and education programs to suit this audience?
We have tried to keep the message simple and consistent.
In this regard, the CSRF communications have focused on a number of key themes, including the importance of salary sacrifice contributions. We have offered salary sacrifice for many years and despite the perception by some that they could be throwing good money after bad, we need to keep reminding members that many investment categories have actually never been so cheap as they are today on a relative basis. Even in volatile times, we encourage our members to stay on track with their long-term strategies in order to reach the financial goals they have set.
Along this theme, we are encouraging as many members as possible to meet with one of our financial planners. We think such a visit to an experienced third party can be of great benefit to members. At this meeting, the member can express their retirement expectations from a financial sense and the planner can then explain exactly what is required to achieve those goals.
Unless the member truly believes the financial mess the world is in currently will never improve, then a rational discussion with goal setting will be of great benefit.
The Fund is also highlighting the need for adequate insurance cover. In these troubled times, it is very important for members to have all the insurances sufficiently covered to meet all contingencies from house and contents, mortgage, death, TPD and TSC
Should the superannuation industry be held accountable for the massive losses to members during the last year?
Without wanting to blame others, I don’t think the Australian super industry should be held accountable in any way. Let me explain.
Firstly, super funds did not cause the losses. Anyone who has invested in the share market would have suffered, whether it was through super, a managed fund, or direct ownership of shares.
Super funds are aware of the risks of investing in shares, so we diversify our portfolios by asset classes and investment managers to reduce that risk. It is impossible to eliminate the risk entirely while at the same time attempting to produce long-term returns which will be acceptable to our members.
No one could have known how low the share markets around the world would go. Unfortunately, not everyone in senior positions in companies, banks, ratings agencies, and even some governments has been entirely honest. If they had been, super funds would have taken on other strategies, I am sure.
At CSRF, we understand some members have a very low tolerance to risk. This is why we offer members investment choice so that they can have some say in the risk they are prepared to accept. Years ago, members of super funds were all in balanced structures. At least today, they have the opportunity to change the portfolio to one of less risk if they so choose.
What mistakes were made in 2008 that could have helped us to avoid the worst effects of the financial crisis?
This is a very important question and one that I would like to devote a bit of time on if you will allow me.
I can honestly say that I believe that almost all of the financial crisis could have been avoided. In my opinion, it was brought about by the greed of investment professionals and investors alike, which was aided and abetted by very lax regulatory bodies overseas, particularly in the USA and UK, and finally complicit ratings agencies.
This greed has been rampant for much of the past decade. The CEOs and Boards of large overseas financial institutions have been encouraged to build shareholder wealth at all costs and to take risks that they might not otherwise have taken to ensure that executive compensation targets were achievable. These institutions were then abandoning their business models due to peer group pressures and the need to retain market share. The folly of this, as seen today is that if any of them had kept to their original models, they might now be in a position to take over the peers who had moved to excessively risky business models.
Regulators such as former US Federal Reserve Chairman Alan Greenspan oversaw an inappropriate interest rate regime that brought about asset price bubbles. What is even worse is that new exotic products such as CDSs (credit default swaps) were allowed to proliferate without appropriate regulation. Then, the complicit ratings agencies were paid to rate these products by the issuing bodies. In other words, there was no independence in the ratings being assigned.
Fortunately for Australia’s sake, our regulators in the majority of instances have been well-prepared for the events that have unfolded over the past two years.
Finally, I believe that ratings agencies should be independent by law. I think the government could provide financial assistance to the agencies and then users of the information would pay on a fee-for-service basis. In this regard, all the institutions around the world that rely on the expertise of the ratings agencies would have confidence in the data been provided. From that information, investors such as the CSRF Trustee would then be in a position to make an informed decision as to where to invest and how much.
What would you do differently for your fund if you had the opportunity to re-live last year?
As a follow on to the previous question, I don’t think CSRF could have done too much differently investment wise, because of the following reasons.
While it is easy to say in hindsight that we should have moved from shares to cash, we simply did not have sufficient information to make that decision. By the time the truth was revealed, it was really too late.
In the past, most downturns have been of relatively short duration, so the correct decision was to ride them out. Moving out of shares would generally have meant that we would have missed the recovery. Unfortunately, this financial crisis has been much deeper and lasted longer than most would have envisaged. Even our government was espousing the view that Australia would ride out the crisis without too much pain until recently.
However, one thing that I know for certain is that we now interrogate our investment managers more deeply to test their knowledge of the entire markets, not just their niche. For example, we now insist that our investment managers of say equities obtain information from fixed interest colleagues. This allows cross fertilisation of ideas and if one sector sees storm clouds on the horizon, then it should provide warning signals to other sector managers.
Given what has occurred, I think we can always attempt to make our members better informed investors. CSRF places a major emphasis on member education, with the aim of increasing the financial literacy of all members. There is always potential to provide more information on the 10 investment portfolios we offer at CSRF, so that members better understand the investment risk/return relationship and select options that meet their risk appetite. However, for the reasons I have mentioned previously, I seriously doubt whether it would have made too much of a difference.
Let’s say that the Trustee thought the markets were going to perform poorly for an extended time period. If they had made each of CSRF’s 10 investment portfolios very defensive and then this scenario did not eventuate, members could perhaps have sued due to the portfolios not being true to label. Still on this point, if the Trustee deviated from the published information in the PDS, then ASIC would have grounds for intervening.
The Government’s review of the way superannuation works is well under way, what would you like to see come from that review?
What I would like to see is that investment income is not taxed as it passes through the accumulation phase. I think this was a regressive step that was introduced by a former government.
Minister Sherry has already introduced some changes for super, particularly around reducing administration fees. What is your position?
I believe that this issue is a bit of a red herring. Let me elaborate. I do agree that some retail fees are far too high and the trailing commission structure that some financial advisers follow needs to be cleaned up. With respect, I think there are many more serious issues for the government to focus on in the financial services industry.
The Minister has also asked APRA to review the responsibilities of trustees in regard to investing in sustainable and responsible investments - is there a place for superannuation to be taking a bigger role in the Federal Government’s nation-building infrastructure agenda? Should there be a regulatory requirement that superannuation savings be invested in those sorts of projects? Why, why not?
I would like to respond to this question in two parts.
First, superannuation funds are expected to make investments that will maximise their members’ retirement savings within acceptable risk constraints. I think it would be dangerous if it became compulsory for super funds to have to invest in projects because they were assigned the task by government, regardless of the so called nation’s best interest.
Having made the above statement, I do believe that super funds should be harnessed to be partners with government in building a better Australia. However, I also believe that there could be appropriate tax breaks that over time would see the benefits to the country far outweigh the immediate tax revenue. For example, super fund money could be used along with government funding to build important infrastructure projects that otherwise might be delayed by decades. Improved rail and road transport corridors are one example that could be undertaken if the correct incentives were put in place. Right around Australia the annual road tolls are falling, due in part to better roads. This then has an immediate flow on effect not only for transport-related costs, but also medical and hospital costs due to reduced road trauma.
Second and with regard to sustainable and/or responsible investments, CSRF is already actively involved in this pursuit. We offer our members the choice of investing in a responsible investment option. In addition, we have other sustainable investments with dedicated managers such as Generation Investment Management where CSRF invests in an international equity product as well as a private equity product called the Generation Climate Solutions Fund.
What are the trends in what your members are looking to do with their investments? Are you seeing a big drift towards adoption of a cash strategy by your members? What is your advice to those members who are looking to move because they are nervous?
I believe many of our members are shell-shocked, literally. I don’t think people generally can believe what has happened in the Western world.
We have seen a greater number of members exercise investment choice within CSRF over the past eight months. However, I must say that most of the increased activity of switching to cash occurred around the time of the Lehman Brothers failure, but as we moved into November, December and January the weekly investment choice switches have tended to return to normality.
CSRF has a great focus on furthering the education of its members. We run a variety of seminars and employer visits on a regular basis as well as having a dedicated financial planning team. Our education is focused on improving members’ financial literacy and encouraging members to spend time with a planner to assist them through these tough times and at the same time set a plan for the longer term.
Our objective at CSRF is to ensure that members select investment options that meet their risk appetite. Members are encouraged to seek financial advice if they cannot sleep at night and are considering moving to cash. The investment markets, particularly shares, have dropped around 50% since their peaks in late 2007. While no one can be certain of how much further the markets are likely to drop, we have certainly entered the fair value territory. We do not want members to be dealt a double blow ie having ridden the market down; we don’t want them to miss the upswing.
We don’t know how long it will take to restore the wealth that has been lost, but we do at least want our members to participate in the recovery.
One option for those members who are really worried is to direct their future contributions to cash while leaving their existing account balance where it is to gain the benefit of the eventual recovery. Cash has no buy/sell spread at CSRF and as such the monies accumulated in this portfolio option can be switched into a more aggressive option when the member deems the time is right to do so.
There has been a lot of recent media interest in superannuation. Has that helped increase awareness and engagement – even if it’s made things more difficult in the short term? Do you think members still trust super fund trustees and managers to make decisions in their best interests?
Trust is something that CSRF has built its reputation on over the nearly 30 years of its existence. I think members still “trust” CSRF, but I think the essence of that trust will experience a shift moving forward. What I mean is that the vast majority of our members believe that the CSRF Board and its staff are honest, trustworthy and that their money is “safe”.
What I think we will see happen now is that where members thought previously that the Trustee would ensure their account balance was safe ie would not go backwards to any great degree, this part of “safe” has been lost for the medium term.
If we see the financial malaise bottom out soon and the beginnings of a return to positive results, we will slowly regain the lost part of that “safety” members thought the Trustee would always ensure.
The standard message from fund heads has been “steady as she goes, super is a long-term investment”. Do you think members are heeding that message, or are they just going with the flow because they are still yet to engage with their retirement savings?
I believe that while it is too hard to generalise, there is probably truth in that members under age 40 would not be too concerned. However, I am sure that for those aged over 40, they are very interested. We are seeing this with the take up of our retirement planning seminars. We are also running more specific updates and forums on the state of the financial malaise in order for those members who may be feeling nervous to at least come and listen to our staff and ask any questions or raise any issues of particular concern. We feel that it is far better to have our members question us, rather than us not interact.
In addition, we continue to publish investment-related articles in our newsletters as well as on our website.
A reason why I am here today is to try and do that little bit extra for our members by informing them of the Fund’s intentions in order to help them get through the financial crisis. I think members are some what comforted when they know that the majority of the Fund’s directors and staff are also members of CSRF. In other words, we are all in this together. This is an important message.
Do you think funds should be able to offer advice directly to members?
Put simply, yes I do. However, I am cognisant that the world has changed and is more litigious, and that fund trustee boards must be compliant with the law.
What frustrates me personally is that the bad actions of a few then make for changes in legislation that all the “well governed” funds will dutyily comply with. However, there will always be the Storm Financials.
It also frustrates me when I read, see and hear advertisements that, while they comply with the law, are shady at best. For example, there is currently an advertisement running on the radio, which to the best of my knowledge is compliant, but at the same time misleading. You know how it goes, the fund manager is offering, say 9%, for BBB rated securities. The add goes on to say that people should request a copy of the ASIC-approved prospectus. My problem with these type of advertisements is that they infer that ASIC has approved the investment where the investor will be guaranteed 9%. People on fixed incomes are then seduced into said investments.
Don’t people think that super funds such as CSRF would invest in such products if we thought they were so good? Our job is to try and educate our members that schemes that seem too good to be true, usually are.
What is your position on the situation around what constitutes provision of “advice” to one of your members?
CSRF has a dedicated financial planning service which I can happily report is well received by our members and we have a number of managers who have are authorised to give advice. In addition, we have a very high percentage of staff who have obtained the ASIC PS146 certification, which affords them the training and knowledge to distinguish the difference between providing advice as distinct from factual financial information.
Because all our members are encouraged to seek financial advice from one of our planners, we are well positioned to both comply with the law pertaining to providing advice, but importantly, also being in a position to actually provide said advice.
Disclaimer: The views expressed above are the personal opinions of Greg Cantor, CSRF CEO and not the views of the CSRF Trustee. This superannuation article is for general information only. It does not take into account your personal objectives, financial situation or needs. As a result, you should consider its appropriateness to your own situation and obtain independent financial advice before making any decisions about your superannuation.
Source: Notes from interview conducted by Evolution Media, 2 March 2009.
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