Major industry superannuation funds have called on federal Treasurer Josh Frydenberg and Superannuation Minister Jane Hume to change disclosure requirements they fear will hurt member returns.
The funds argued in a letter to the ministers that legislation passed in June will require them to report price-sensitive information that will affect their ability to sell assets at competitive prices and consequently drag down returns.
Under the legislation, funds will have to report every six months on the exact valuations of their unlisted holdings and their holdings of derivatives.
Derivatives are financial instruments struck between two parties at an agreed price and are generally used to protect financial positions.
Too much information
The problem with the legislation is that it “will require superannuation funds to disclose price-sensitive information on unlisted assets,” 12 major funds said in the letter.
“This will undermine our capacity to compete for these assets in a globally competitive market and compromise our ability to sell them at the best price.”
In effect, the legislation is demanding super funds give away more information than they are comfortable with.
Super funds, particularly in the not-for-profit sector, trade often in unlisted assets like property, infrastructure and private equity.
The fear is that if they report the exact values of their holdings every six months, anyone wanting to sell them assets or buy from them will have a clear picture of their valuations.
And that will make it hard for the funds to get a good deal and consequently erode returns for members.
Similar fears are held for derivatives, which include financial instruments such as futures, options, swaps and collateralised debt obligations.
They allow investors to protect their positions by ensuring securities can, for example, be bought and sold at set prices in the future.
If others in the market know the value of derivatives in which funds are trading, it would erode their ability to use them.
An analogy would be a poker player’s position being ruined if others knew their hand.
“The funds are right,” Labor superannuation spokesperson Stephen Jones said.
“It would be crazy if a regulation that is designed to improve performance actually costs members more.”
How much is enough?
Kirby Rappell, executive director of SuperRatings, said the move to more regular reporting of fund assets was a good one.
“At the moment there’s not as much transparency as we’d like to see, so it would be a step forward if we saw more disclosure,” Mr Rappell said.
“But there is a challenge here.
“As the super funds buy more alternative assets they remain responsible for maximising retirement outcomes, which usually means maximising the price of these assets. So you don’t want regulation eroding that ability.”
Mr Rappell said derivatives allow funds waiting on inflows of cash to buy into markets earlier than they otherwise would be able to, and that this helps them maintain their target asset weightings.
So while he supported greater transparency, he said the question is at what point do stricter disclosure requirements become a negative for fund performance.
The new reporting rules, which apply from December, will be more of an issue for not-for-profit funds than retail funds.
“The not-for-profits have about 20 per cent of their portfolios in unlisted assets while the retail funds have less,” Mr Rappell said.
“For some retail funds it’s increasing, but it’s probably only about 40 per cent of what we see in the industry funds.”
UniSuper chief investment officer John Pearce said the fund supported increased investment transparency.
“But we need to strive for the level of transparency that allows a reasonable person to make an informed decision, and at all times not compromise financial outcomes for members,” he said.
“As currently drafted, the new requirements would result in disclosure of commercially sensitive information, and that’s not in members’ best interests.”
The way to get around the issue would be to require funds to disclose asset values within bands so that competitors would be unable to work out funds’ exact positions, Mr Pearce said.
“There is just so much change on so many fronts for super at the moment,” Mr Rappell said.
“Trying to adapt successfully to those regulatory changes is proving a difficult task for funds.
“It’s about figuring out what is the right level of change that drives improved member outcomes.”
The letter sent to the Treasurer and Senator Hume was signed by the chief investment officers of 12 super funds including UniSuper, AustralianSuper and HESTA.
“Given the important role these [assets] play in delivering super fund outperformance and smoothing out market volatility, we ask the government to consider amendments to the draft regulations,” the letter said.
A spokesperson for Senator Hume said transparency in the superannuation sector was important given the nature of the super system.
“In a system where all Australian workers are compelled to invest their deferred wages for up to 40 years in a super fund, members have the right to know what assets their superannuation savings are being invested into and what risks are being taken by their fund,” the spokesperson said.
“Transparency of investment holdings is important for this large and systemically important part of our financial system, representing the largest single financial asset of most Australian households.”
The New Daily is owned by Industry Super Holdings