restrictions on pension investing: an australian perspective
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Restrictions on Pension Investing: An Australian Perspective. 2008 06 04 ICPM Leo de Bever Chief Investment Officer Victorian Funds Management Corporation. Australian Pension System. No Public Plan (e.g. Canada Pension Plan) Required pension savings 9% of salary - PowerPoint PPT PresentationTRANSCRIPT
VictorianFunds ManagementCorporation
Restrictions on Pension Investing:An Australian Perspective
2008 06 04 ICPM
Leo de BeverChief Investment Officer Victorian Funds Management Corporation
Australian Pension System
No Public Plan (e.g. Canada Pension Plan)
Required pension savings 9% of salary Contributions taxed at 15% instead of marginal tax rate Fund income taxed @ 15%, capital gains @10%,
dividend tax credit is deductible from taxes Tax Free withdrawals on reaching age 60
Incremental growth largely in DC “super funds” Small size generally means high management costs
“Do it yourself” accounts (e.g. Canadian RSPs) have >1% overhead for balance <A$200,000
Audit fees can be $2000 or more
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Australia Pension Savings: Global Context
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High Growth Rate of Pension Assets
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5
Only Top 25% of Funds Have Index Returns
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07
VFMC Passive Benchmark +1%
VFMC Passive Benchmark
VFMC Actual net of 6% effective tax and fees
Intech upper quartile
Intech median growth fund
An extra 1% above index for 10 years would have been stellar
Investment Costs Fall With Asset Size
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Better Australian Retail Funds
Australian Super
Victorian Funds Management Corp Alberta Inv Mgt
OTPP
Funds Merging, More Individual Accounts
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Source: Australian Prudential Regulatory Authority (APRA)
Larger Funds Have Greater Return Potential
Tend to have better systems that can assist with better implementation
Risk management Cash management Implementation error detection
Larger funds make better investment partners Better internal staff Access to better alternatives on better terms
Cooperation with other funds can be substitute Requires strong alignment, similar decision process
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What It Takes to Be Exceptional
Independent Board Must be willing to help push boundaries of comfort
Empowered internal investment team Quality and pay must be commercially competitive Pragmatic internal - external management balance
Focus on maximising return/risk We are risk managers more than asset managers
Long term investment horizon Willingness to invest in unusual opportunities
Doing the basic better Strong risk and back office systems
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Better Mix of Internal – External ManagementOntario
Teachers’2006
Victorian Funds Management Co
2006
Investment staff Salaries ~2 bps ~1 bps
STI and LTI in bps of assets ~10 bps ~1 bps
External Fees (includes embedded fees) ~3 bps ~35 bps
Total Investment Costs ~15 bps ~37 bps
% managed externally ~10-15% ~100%
IT ~3 bps ~0.5 bps
Rent, Legal, Financial, Compliance, Custody, etc
~4 bps ~4bps
Total Investment cost bps ~22bps ~42bps
Value added/Assets last 5 yrs ~4% none
Assets Under Mgt AUD$110B AUD$40
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Asset Allocation Issues
Home country bias still strong Dividend tax credits used as justification
“Endowment envy” encourages uncritical imitation of what worked in the nineties
Taking big risks in inefficient markets had a payoff
Tendency to fill alternative asset class buckets Not enough focus on managing return/risk
May need to create new alternatives Also should not disregard traditional assets
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Only Long Term Focus Justifies Short-Term Risk
1 in 6 Worst Outcome 1 in 100 Worst OutcomeAnnual 4000 10.0% 12000 30.0%Monthly 1155 2.9% 3464 8.7%Weekly 553 1.4% 1658 4.1%Daily 250 0.6% 750 1.9%Hourly 88 0.2% 265 0.7%
VFMC Risk Profile at $40 Billion
Most Shareholders and Boards want good long term resultsAs long as it does not interfere with making money in the short run
Expected long-term payoff from taking risk 2.5% / year
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Governance Challenges
Independence of Boards not always clear Public sector: shareholders control strategy, regulation DC Funds: Consultants support “blame avoidance”
regime
Boards often act like management Few funds have strong internal investment team VFMC is one of handful of exceptions Funds lack the scale for internal management possible “Manager of Manager” model costly
Freedom to switch funds creates peer pressure,encourages short-term management horizon
Practical significance of clients moving is questionable A good management team would stay the course
Other Systemic Issues
Pension adequacy Low average savings balance for larger % of
population Saving 9% of salary is not enough
DC lack of Longevity insurance implicit in DB Funds are discussing collective insurance Not clear clients would be willing to pay
Lump sum distributions out of DB plans At 54 years and 11 months
Fear of legislative change E.g. tax free withdrawals at age 60
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Direction of Change
Fund Consolidation Best thing trustees can do in many cases is vote
themselves out of a job
Fewer, stronger and more independent Boards Need more degrees of separation
Stronger internal teams empowered to act Better delegation from the Board
More cooperation among funds on alternatives Industry fund efforts have not been totally effective
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