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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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