Two recent reports have delivered very different views of the Integrity of the Australian superannuation system. The 2013 Melbourne Mercer Global Pension Index (the Index) gives the Australian retirement system an A in its integrity sub-index, while Morningstar’s 2013 Global Fund Investor Experience Report rates Australia as a C+. So, who’s right?
In both reports, Australia was rated alongside developed and developing countries.
In the Melbourne Mercer Global Pension Index we were third overall among 20 countries (our score increased from 75.7 to 77.8). Although Denmark and the Netherlands kept their grip on the top two positions, Australia is closing the gap and an ‘A’ Grade (80+) is in the pipeline. But it was in terms of the “integrity” of our retirement system (one of three sub-indices used in the Index, with adequacy and sustainability the other two), that we really shone, moving to the best in the world.
The Morningstar report, which is biennial and designed to encourage a dialogue about global best practices for mutual funds from the perspective of fund shareholders, paints a different picture. Its researchers, who evaluate 24 countries across North America, Europe, Asia, and Africa in four categories – regulation and taxation, disclosure, fees and expenses, sales and media – didn’t rate us so highly, giving us a C+ (most countries rate between B- and C+).
So why does Australia top the pops in the Index in terms of the “integrity” of the system, but only comes in the middle of the field with Morningstar? In truth, the answer is quite simple; it’s a case of apples and oranges. Let me explain.
This year Australia’s improvement in the Index score was primarily due to Stronger Super reforms and a slight reduction in costs due to consolidation of the industry. (The top 10 super funds now account for more than 25 per cent of assets). Stronger Super initiatives, such as improved governance standards and transparency levels, will ensure greater disclosure to members about how their fund is managed, what they invest in and what fees and charges apply. Further, the introduction of prudential standards for the industry will provide greater regulatory oversight of the system and will set the bar higher for the standard of care, skill and due diligence where trustees are concerned.
Morningstar adopts a different approach. As a general rule, it favours active regulation of funds, low tax burdens on investors, increased disclosure, lower fund fees, a varied distribution system that gives investors many ways in which to buy funds and media coverage that emphasises the long term.
While the US achieves the only A grade, most countries are graded at B- or C+. Almost all European countries land in this range, with only small differences occurring between markets.
Different European countries have stronger investor practices in differing areas, but in general investors fare much the same. India is average in most areas but distinguishes itself with required monthly disclosure of a fund’s portfolio.
The other countries receiving average grades, including Australia, Canada, and China, are more distinctive. Australia has low-cost funds and a robust distribution model but is poor at disclosure. Canada does well across the board but is hampered by having the world’s highest total expense ratios.
China, too, fares well in most areas but is hampered by one weakness—in its case, the restrictions it places on both funds and shareholders in buying foreign securities.
As I said, it’s apples and oranges. The two indexes measure different things: the Index is focussed on the outcomes of the retirement system and its impact on individuals, whereas Morningstar looks at funds from an investor’s perspective.
Having said that, there is also some difference in the timing of the reports. The Morningstar report was issued in May, before the new Stronger Super reforms were legally implemented, and also before the FOFA restrictions on commissions took effect in June. Further, implementation of the Asian Funds Passport will require a new more transparent approach from fund managers in Australia when this comes into effect in 2016. [It is evident from the Morningstar report that UCITS has had that effect in the US and Europe.] Consequently, one might expect a better performance in the future for these reasons in the Global Fund Investor Experience Report.
The bottom line is that while the Australian superannuation system is a contributing well to outcomes from retirees, the latest increase in governance requirements under Stronger Super for increased disclosure is only the first step. If our funds and fund managers are to engage more fully on the international stage, there is much more to be done in terms of disclosure and transparency.
Professor Deborah Ralston is executive director of the Australian Centre for Financial Studies