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High levels of deferred tax assets (DTAs) in super fund portfolios are corrupting performance surveys, because funds have markedly different policies on valuing the DTAs within their unit prices or crediting rates. Having incurred big losses across most asset classes over the past 18 months, funds are able to reflect the future income tax benefits of the losses in their unit prices today, but only to the extent they are confident they can generate gains against which to offset the losses within a reasonable period of time.

The head of research at Chant West Financial Services, Ian Fryer, said most funds had been letting their DTAs build up until they reached a material level during the September-November market plunge, and most had since capped them. “We’ve talked to several of the major funds and most seemed to have capped the level of DTAs at 5 per cent or less,” he said. Fryer acknowledged the different levels of capping were corrupting fund performance surveys. For instance, Westscheme is only holding DTAs up to 1 per cent of its FUM, even though CEO Howard Rosario said losses capable of generating a future income tax benefit now exceeded that.

“It seems unfair to our continuing members to give people exiting the fund now the benefit of some tax benefit that will come in the future, when we don’t know when in the future it will come,” Rosario said. However Rosario’s bid for member equity could be costing the likes of Westscheme or BT (which is said to have capped DTAs in its super funds at 2 per cent) on the performance surveys in the short-term. “A fund that’s capped DTAs at 5 per cent does get a 4 per cent headstart over a fund capped at 1 per cent, but you’ve got to remember that if the market goes up, that DTA portion doesn’t go up, it’s sitting there doing nothing,” Fryer said.

Some smaller funds are said to have allowed their DTA component to almost reach double figures, seriously threatening the solvency of the fund if it continues to pay exiting members a benefit for losses which has yet to actually materialise. Chant West would like to adjust its performance surveys to account for differing DTA treatments, however Fryer said every single fund would need to disclose its policy, which would not happen without regulatory intervention.

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