As they get bigger, UK schemes will have to change the way they operate and the things they invest in. David Rowley looks at what they can learn from their Australian counterparts.

The list of physical assets and companies purchased outright by big Australian DC superannuation funds over the past three years is jaw dropping.

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UniSuper, the superannuation fund for university employees has just bought a new cancer hospital in Melbourne. The Australian mineworkers’ fund owns a digital finance company. A fund for New South Wales public sector workers recently bought an IFA operation with 200-plus advisers. A Queensland private sector workers’ fund owns a chain of holiday camps. Australia’s biggest superannuation fund owns a majority stake in the 68 acre Kings Cross development in central London. QSuper intends to launch its own insurer.

This article is taken from our special Pioneers of DC edition of Pensions Insight. To read case studies from some of the most innovative and groundbreaking schemes out there click here.

There is a story here about such funds outgrowing the local stock market and becoming direct private equity owners, and a story about the growing sophistication of internal asset management. But there is also a tale about how the boards of these funds are evolving to cope with such changes to their operating model.

In one of the most startling appointments of late, Cbus, the AU$30bn (£17.2bn) construction workers fund appointed the former head of AMP Capital, Stephen Dunne, to chair its investment committee. The move coincided with a ramping up of the fund’s internal fund management expertise. The ability of large super funds to recruit such star names is attributable to the enormous purchasing power they wield in Australian business and the opportunity for figures such as Dunne to retain influence on a part-time basis.

How are the boards of funds evolving to cope with changes?”

Another notable appointment was Peter Costello, who served as Australian treasurer from 1996-2007, to the board of Qantas Super, the second largest corporate super fund.

Sometimes these independents join the main board, or in cases such as Dunne they sit on specialist sub-committees that allow the main board more time to focus on overall strategy and risk assessment. Christine Kotur, an independent consultant to boards, explains how this works. “The principal board would continue to focus on the traditional governance and fiduciary role: concentrating on the best interests of members and the sole purpose test [which ensures a superannuation fund is maintained for the purpose of providing benefits to its members on their retirement],” she says.

“Subsidiary boards would then focus on the ‘business’ of asset and investment management with specialist directors recruited for their skills and experience, including the capacity to identify and appoint directors to the boards of specific assets.”

Another means of ensuring internal fund management or wholly owned external assets are properly run is through a greater sophistication of reporting.

Jane Paskin, partner at the law firm Clayton Utz and an adviser to large super funds, says: “It’s for the board to decide what information they want or need. Trustees need to ask if the board has got enough information to satisfy themselves that the business they own is going to be efficiently run.”

A board will need data on how to benchmark such assets, so they know when they need capital injections and when to sell too.

OTHER CHALLENGES

Since the dawn of compulsory superannuation in 1993, compound growth and ever rising employer contributions (currently 9.5%) have seen assets under management reach $2trn, which is larger than the domestic stock market. At such scale, governments get nervous about failure in the system, so there has been a constant stream of regulatory standards and expectations imposed in the past three years.

Trustees are now required to show care, skill and diligence in fulfilling their duties rather than the ‘reasonable man’ test. This makes it easier for a member to sue, in theory, if mismanagement of any of the assets listed above can be proven.

Such pressure was intended to encourage the appointment of a broad range of experts, but it has often led to the appointment of lawyers to boards to help with compliance.

This trend followed the creation of a set of prudential regulatory standards for superannuation funds in 2013 that left many boards complaining they now spend more time on compliance than strategy. The problem is so great the Australian Institute of Superannuation Trustees (AIST) has spoken to the Australian Prudential Regulatory Authority (APRA) to ask if funds can create a separate committee to deal with compliance issues, so the main board can focus on strategy.

Trustees would prefer to focus on competing for members who gained freedom of fund choice in 2005. This means a constant drive to provide superior service at a reduced cost.

Trustee boards now face a maelstrom that they may not be able to effectively navigate”

Funds are also facing the hurdles of creating drawdown products, or CIPRs (comprehensive income products for retirement) to retain members as they transition to retirement, and the threat (or opportunity) of robo-advice.

Andrew Harris, an adviser to boards and senior executive teams for Sheldon Harris, describes the current landscape:

“Trustee boards now face a maelstrom that they may not be able to effectively navigate unless they have the right capabilities. To survive, informed boards are seeking to acquire individuals with a broad range of skills spanning strategy, mergers and acquisitions, product development and marketing, advice, investment management, administration, and technology.”

Tom Garcia, chief executive of AIST, hears from his members that retention is their biggest strategy issue, not least as the industry is going through a retrospective process of pot follows member, which should reduce 30m accounts to 18m.

This article is taken from our special Pioneers of DC edition of Pensions Insight. To read case studies from some of the most innovative and groundbreaking schemes out there click here.

Online engagement is critical and therefore he sees digital know-how as the most prized skill needed on a board after legal and investment knowledge.

It is not hard to find those who agree with Garcia. Maree Pallisco, head of superannuation at EY, says she only knows of one person with IT skills who currently sits on a superannuation board, but believes more should follow, despite some who believe such people should only ever be advisers.

Funds need someone who “lives and breathes IT who is in the market to understand what everyone else is doing,” rather to someone who has retired from the industry whose knowledge could quickly become outdated she says.

Pallisco sees such a person helping in online engagement, anticipating digital disruption, and also understanding the risks of implementing IT incorrectly.

THE RISE OF THE INDEPENDENTS

One of the best examples of the professionalisation of trustee boards is the appointment in 2014 of Anne Ward to become the independent chair of Qantas Super. She describes herself as a “professional company director” and she has been part of a culture change on boards.

She says succession planning processes for many super fund boards have become more mature and deliberate, to ensure a pipeline of talented, board-ready candidates is identified. Notably, she oversaw the appointment of Costello to her board.

Her belief in the strategic role of independents in filling skills gaps, chimes with the views of the Liberal Party (effectively conservatives) which would like to make sure independents make up a third of all super fund boards. The move is being resisted by the Labor Party which sees it as a threat to employee representatives who are chosen by unions.

Ward notes that the support given by APRA - which serves a similar role to the UK’s Pensions Regulator - on the issue. In a speech to the AIST in October 2015, APRA’s chief Helen Rowell said: “The APRA’s long held view is that independent directors play a very important, positive role on boards.”

This article is taken from our special Pioneers of DC edition of Pensions Insight. To read case studies from some of the most innovative and groundbreaking schemes out there click here.