pension fund governance: australian policies and practices
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Australian Prudential Regulation Authority. Pension fund governance: Australian policies and practices. Rotman ICPM / Netspar / Maastricht University. Discussion Forum – 30 October 2007. The Australian Pension System. Unfunded component: Age pension (safety net, means tested) - PowerPoint PPT PresentationTRANSCRIPT
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Pension fund governance: Australian policies and practices
Rotman ICPM / Netspar / Maastricht University Discussion Forum – 30 October
2007
Australian Prudential Regulation Authority
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The Australian Pension System
Age Pension (Proportion %)2007 2046
Full ($11K-14K pa) 55 35
Part 30 41None 15 24
Unfunded component: Age pension (safety net, means tested)
Funded component: Defined benefit (DB) and defined contribution (DC) funds (9% compulsory + voluntary contributions taxed at 15% of gross income)
On RIM projections dependence on full age pension declines to 35% by 2046
Most people will depend on pension funds for their retirement income
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Australian Pension Fund (Superannuation) Industry
Assets: One trillion dollars (exceeds GDP)
Accounts: 20 million (all workers)
Sectors: Corporate and Public Sector (1850s), DB -> DC
6%, 16%Retail (1970s), DC, Public Offer, For-profit
34%Industry (1980s), DC, 50% Public Offer, Non-profit
18% Small funds (1990s), (<5 members)
26%
Regulation: SIS Act (1993)APRA (1998)RSE licensing (2006),
Institutional funds (74% of assets)
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Pension Fund Survey 2006
APRA data collection since 1996 suggests systematic differences in investment returns (Retail returns are 2-3% pa less than those of other funds, not fully explained by volatility differences)
Two questionnaires:1. Trustee governance: policies and practices2. Investment performance: risk adjusted (AA
data)
High quality data:Design input from industry and other
regulatorsTested with a pilot survey of 15 funds in 2005Response was compulsory by lawStreamlined with multiple choice questionsData validation before submissionComprehensive: all funds with more than
$200M
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Survey Data Coverage
Sample Corporate
Public Secto
rIndustr
yRetai
l Total
Number of Funds 40 16 55 76 187Assets ($billion, June 2006) 43 52 150 268 513
Number of Members (million) 0.38 0.86 9.55 9.35 20.14
Number of Directors 312 120 498 389 1319Number of Service Providers 492 328 1242 513 2575
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Data Collection Tables
General Information
Board Policy and Practice
Board Priorities
Key Decision Input
Service Providers
Board Directors
Director Associations
Data Comments
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Overall Industry Findings
Directors are typically well qualified, experienced and reasonably trained for trustee duties.
The industry employs substantial outsourcing.
Funds ensure compliance with legislation and regulation.
Soft dollar arrangements are often in use in the industry.
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Board Practice by Sector
Board Practice Corporate
PublicSector
Industry Retail
Average number of directors per fund*** 7.8 7.1 8.8 5
Average number of board meetings pa** 6.7 9.1 7.5 9.1
Average hours per board meeting*** 3.9 4.4 4.8 2.4
Average number of subcommittee meetings pa per fund* 13.1 15.1 14.7 10.7
Average hours spent pa per director outside board meetings***
69 123 119 90
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Average Director Hours Spent Per Fund Per Year
Hours spent per year1,4001,2001,000800600400200
Corporate
Public Sector
Industry
Retail
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Main Sources of Input to Key Decisions
Key Decision Corporate
PublicSector Industry Retail
Objectives & risk tolerance Trustee Consultant Trustee Executive
Strategic asset allocation Consultant
Consultant Consultant Executive
Benchmark design Consultant
Consultant Consultant Executive
Investment manager selection Consultant
Consultant Consultant Executive
Performance monitoring Consultant
Consultant Consultant Executive
Introducing a new fund option Trustee Executive Trustee ExecutiveDefault option asset
allocation Trustee Consultant Consultant Executive
Asset consultant selection Trustee Trustee Trustee ExecutiveAdministrator selection Trustee Trustee Trustee TrusteeForeign exchange hedging
policyConsultan
tConsultan
t Consultant Executive
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Board Director Characteristics
Service Provider Board Directors (%)30252015105
Corporate
Public Sector
Industry
Retail
Directors with Associations (%)6050403020100
Corporate
Public Sector
Industry
Retail
None Professional advisorGovernment Industry unionEmployer sponsor Fund member
Representation by Directors (%)1009080706050403020100
Corporate
Public Sector
Industry
Retail
Appointed internallyAppointed through personal contactAppointed through executive searchUnion appointedGovernment appointedEmployer electedMember elected
Method Used (%)1009080706050403020100
Corporate
Public Sector
Industry
Retail
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Skin-in-the-game Characteristics
Characteristic (%) Corporate
PublicSector
Industry
Retail
Director personally in the fund*** 69 73 62 21
Av personal super of director in the fund*** 63 56 44 12
Av family member of director in the fund* 8 17 32 15
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Conclusions
Retail funds have governance policies and practices which are statistically different from those of other sectors.
The profit motive may diminish the alignment of interests between a fund and its beneficiaries.
This may lead to a higher agency cost as an explanation for lower investment performance of Retail funds.