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Restrictions on Pension Investing: An Australian Perspective. 2008 06 04 ICPM Leo de Bever Chief Investment Officer Victorian Funds Management Corporation. Australian Pension System. No Public Plan (e.g. Canada Pension Plan) Required pension savings 9% of salary

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restrictions on pension investing an australian perspective

Restrictions on Pension Investing:An Australian Perspective

2008 06 04 ICPM

Leo de BeverChief Investment Officer Victorian Funds Management Corporation

australian pension system
Australian Pension System
  • No Public Plan (e.g. Canada Pension Plan)
  • Required pension savings 9% of salary
    • Contributions taxed at 15% instead of marginal tax rate
    • Fund income taxed @ 15%, capital gains @10%,dividend tax credit is deductible from taxes
    • Tax Free withdrawals on reaching age 60
  • Incremental growth largely in DC “super funds”
    • Small size generally means high management costs
  • “Do it yourself” accounts (e.g. Canadian RSPs) have >1% overhead for balance <A$200,000
    • Audit fees can be $2000 or more
only top 25 of funds have index returns
Only Top 25% of Funds Have Index Returns

An extra 1% above index for 10 years would have been stellar

investment costs fall with asset size
Investment Costs Fall With Asset Size

Better Australian Retail Funds

Australian Super

Victorian Funds Management Corp

Alberta Inv Mgt

OTPP

funds merging more individual accounts
Funds Merging, More Individual Accounts

Source: Australian Prudential Regulatory Authority (APRA)

larger funds have greater return potential
Larger Funds Have Greater Return Potential
  • Tend to have better systems that can assist with better implementation
    • Risk management
    • Cash management
    • Implementation error detection
  • Larger funds make better investment partners
    • Better internal staff
    • Access to better alternatives on better terms
  • Cooperation with other funds can be substitute
    • Requires strong alignment, similar decision process
what it takes to be exceptional
What It Takes to Be Exceptional
  • Independent Board
    • Must be willing to help push boundaries of comfort
  • Empowered internal investment team
    • Quality and pay must be commercially competitive
    • Pragmatic internal - external management balance
  • Focus on maximising return/risk
    • We are risk managers more than asset managers
  • Long term investment horizon
    • Willingness to invest in unusual opportunities
  • Doing the basic better
    • Strong risk and back office systems
asset allocation issues
Asset Allocation Issues
  • Home country bias still strong
    • Dividend tax credits used as justification
  • “Endowment envy” encourages uncritical imitation of what worked in the nineties
    • Taking big risks in inefficient markets had a payoff
  • Tendency to fill alternative asset class buckets
    • Not enough focus on managing return/risk
  • May need to create new alternatives
    • Also should not disregard traditional assets
only long term focus justifies short term risk
Only Long Term Focus Justifies Short-Term Risk

VFMC Risk Profile at $40 Billion

Most Shareholders and Boards want good long term resultsAs long as it does not interfere with making money in the short run

Expected long-term payoff from taking risk 2.5% / year

governance challenges
Governance Challenges
  • Independence of Boards not always clear
    • Public sector: shareholders control strategy, regulation
    • DC Funds: Consultants support “blame avoidance” regime
  • Boards often act like management
    • Few funds have strong internal investment team
    • VFMC is one of handful of exceptions
    • Funds lack the scale for internal management possible
    • “Manager of Manager” model costly
  • Freedom to switch funds creates peer pressure,encourages short-term management horizon
    • Practical significance of clients moving is questionable
    • A good management team would stay the course
other systemic issues
Other Systemic Issues
  • Pension adequacy
    • Low average savings balance for larger % of population
    • Saving 9% of salary is not enough
  • DC lack of Longevity insurance implicit in DB
    • Funds are discussing collective insurance
    • Not clear clients would be willing to pay
  • Lump sum distributions out of DB plans
    • At 54 years and 11 months
  • Fear of legislative change
    • E.g. tax free withdrawals at age 60
direction of change
Direction of Change
  • Fund Consolidation
    • Best thing trustees can do in many cases is vote themselves out of a job
  • Fewer, stronger and more independent Boards
    • Need more degrees of separation
  • Stronger internal teams empowered to act
    • Better delegation from the Board
  • More cooperation among funds on alternatives
    • Industry fund efforts have not been totally effective