2014_07_31_research_navigating the new mysuper plan

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Navigating the

New MySuper Landscape

AIST and RiceWarner Research

Navigating the New MySuper Landscape

AIST and Rice Warner Research

July 2014/246448_1 Page 1 of 44

Table of Contents

1. Executive summary ......................................................................................................................2

2. Scope and approach .................................................................................................................. 11

3. Common types of MySuper ...................................................................................................... 12

4. Designing and Comparing MySupers ........................................................................................ 18

5. Our findings ............................................................................................................................... 24

6. Conclusions and recommendations .......................................................................................... 32

Appendix A List of included MySupers ...................................................................................... 34

Appendix B Commentary on four specific MySuper ‘Look-alike’ products ............................... 36

Appendix C Product dashboards – Summary of AIST Interviews .............................................. 43

This report constitutes a Statement of Advice as defined under the Financial Services Reform Act.

It is provided by Rice Warner Pty Ltd. which holds Australian Financial Services Licence number 239

191. Subject to section 1.3 of this report, this report should not be distributed, in whole or in part,

without Rice Warner’s prior written consent.



July 2014/246448_1 Page 2 of 44

1. Executive summary

1.1 The aims of this report

The original aim of MySuper was to provide a ‘no-frills’ easy to compare product to make our lives as

superannuation consumers much easier.

But the truth is we now have a system which is even less user-friendly and comparing funds will be

harder than before. We are only just seeing what the market has to offer and what the new design

Approved MySuper product features will deliver. On top of this, a number of retail providers offer

MySuper ‘lookalike’ products which have some similarities to their Approved MySuper counterparts.

The aim of this report is to examine:

� To what extent has MySuper delivered on its promise of improved retirement outcomes, lower

fees and ease of comparison and greater transparency?

� What are the characteristics of the common investment solutions being used as MySuper solutions,

namely glide paths and single balanced options?

� What trends are there in terms of investment objectives, asset class strategies and fees? and

� What are the common features of selected MySuper ‘lookalikes’?

1.2 Data sources

This report is based on three data sources:

� Publicly available data for the Approved MySupers listed in Appendix A and the selected MySuper

‘lookalikes’ described in Appendix B including Product Disclosure Statements, Annual reports and

APRA data

� Interviews with major market participants including the CEOs and/or Chief Investment Officers of

several Industry Funds and Retail Funds including:

- AMP

- Australian Super

- BT

- Care Super

- Colonial First State

- Equipsuper

- First State Super

- Mercer Super Trust

- Plum

- REST

- Sunsuper.



July 2014/246448_1 Page 3 of 44

� Interviews and information provided by the CEO’s, Chief Investment Officers and other Senior

Executives within the following asset consulting firms in Australia:

- Frontier Advisors

- JANA

- Mercer Investments

- Russell

- Towers Watson.

We were assisted by AIST staff, including David Haynes, Karen Volpato, and Danny Rouse who provided

valuable feedback and commentary at all stages of the research. In addition, the entire AIST Policy

Committee provided guidance and support throughout the project.

We thank all of the participants for their valuable contributions. Nevertheless, any opinions expressed

or conclusions drawn on the basis of the information are our own and except where stated as such,

should not be interpreted as expressing the views of the Industry Sources.

1.3 Use of this report

This report has been prepared for the sole use of the Australian Institute of Superannuation Trustees

(AIST) for the purposes set out in section 1.1. No part of this report may be reproduced by any party

other than AIST without written permission of Rice Warner.

1.4 Our findings

The commoditisation of superannuation products

MySuper will commoditise superannuation products and this will arise from a number of mandated

features of a MySuper product, including:

� A single default investment strategy ‘MySuper’.

� Standardised fees for all members within a MySuper product (which employers may subsidise).

Employers may negotiate a discounted fee for their employees who are members if this can be

justified.

� Basic default death and TPD insurance on an ‘opt-out’ basis.

� No commissions to advisers.

� Large employers (500+ employees) may negotiate a tailored MySuper product.

� MySuper does not apply to defined benefit divisions or retirement products.

Overall effect on fees

MySuper will have a profound impact on fees within the superannuation industry.

� The introduction of MySuper has been a driver of significant margin compression on the

Commercial master trusts and most have settled on asset-based fees just under 1% a year which is

more expensive than the large industry funds, but much closer than their previous products (which

also included the cost of advice).



July 2014/246448_1 Page 4 of 44

� Many funds have introduced lifecycle investments, which also help to curb fees. This occurs as

those with the highest balances are older and have higher proportions of relatively cheaper

defensive assets.

We have examined the change in fees for 98 of these MySuper products as at the time of writing this

report against the fees we recorded for the default options in the same funds at 30 June 2011.

The results of our analysis are given in Table 1 and 2.

Table 1. Super product fees - 2011 Average fee by account balance (percentage % of assets)

Segment Average $ per

member fee

Average % of

assets fee $5,000 $20,000 $50,000

Corporate 47 0.62 77 170 355

Retail 64 1.61 144 385 867

Industry 68 0.76 106 220 449

Public Sector 28 0.58 57 144 317

Total 63 0.92 109 248 525

Table 2. MySuper product fees - 2013 Average fee by account balance (percentage % of assets)


member fee

Average % of

assets fee $5,000 $20,000 $50,000

Corporate 81 0.69 115 219 426

Retail 72 0.82 112 235 481

Industry 74 0.72 110 217 433

Public Sector 29 0.64 61 156 347

Total 69 0.73 106 215 433

The results show that:

� Average fees have come down overall due to a reduction in asset based fees, however, dollar

based fees have increased, largely with CPI.

� The largest reduction has occurred within retail fund offerings with a reduction in percentage

based fees from 1.61% to 0.82%.

� Average fees for corporate and public sector funds have actually increased.

Investment fees:

The downward trend on investment fees is not limited to some of the Commercial master trusts.

With the increased focus on lower fees we see the emergence of other means of reducing investment

fees in both Industry funds and retail funds. Notable investment trends include:

� reducing exposure to the more expensive asset classes including alternatives

� reducing exposure to the more expensive fund managers or switching to lower cost fund managers

� applying a ‘margin squeeze’ to fund managers

� increased use of ‘honeymoon’ fee deals – especially from start-up managers



July 2014/246448_1 Page 5 of 44

� increased use of ‘in-house’ funds management to reduce costs

� use of multiple asset consultants on a project basis

� elimination of performance based fees where possible.

In the case of the Commercial master trusts there is the added ability to reduce profit margins.

Pressure to reduce the headline fee of MySuper products has caused some funds to invest some of

their assets passively rather than with active managers:

� Passive management means the investment manager attempts to achieve the same performance

as the benchmark or market, as closely as possible.

� Active management involves the investment manager attempting to outperform the market return

by holding higher allocations to individual investments that they expect to perform well.

With the introduction of MySuper, our research indicates that:

� Many large industry funds continue to invest actively and have left their allocations unchanged.

� Some smaller industry funds have increased the proportion of passively managed assets in their

portfolios to reduce costs.

� Of a representative basket of leading commercial funds, the average percentage of assets passively

managed has increased from 24.0% in 2011 to 46.6% in 2013.

� Corporate and public sector funds have largely left their allocations unchanged.

The types of MySuper investment strategies being used:

There are two main types of MySuper offerings in the market - being Balanced and Lifecycle. The latter

type should be split into those which are now commonly described as ‘Switch’ type Lifecycle and

‘Cohort’ style lifecycle:

� We found that many of the Industry Funds had already tailored their balanced default investment

strategies to meet the needs of their membership and so, for them, MySuper was more of a ‘fine-

tuning’ exercise than a major overhaul.

� Moreover, those industry funds catering to specific sectors or with more homogenous workforces

were able to tailor to a higher degree than their multi sector/multi industry counterparts. Evidence

of this can be seen in the high degree of variation in the target asset allocation of the Balanced

type MySupers in the market.

� Many Industry Funds rebranded their balanced funds as their MySuper strategies to avoid any

disruption to members and to allow them to retain their past investment track record. For many of

these funds this made sense as the vast majority of fund assets was invested in the existing default

option already.

� That said, we also found that many of these funds seriously considered the alternatives. Some

common arguments against a change included the added costs to implement and to administer the

lifecycle alternative.

� Whilst the major changes in default investment strategies were with the retail funds, a significant

minority of industry funds also switched to lifecycle (the ‘Switch’ type). Moreover, we found that

more Industry Funds would have done so had they had the time and/or the administration capacity

to do so.



July 2014/246448_1 Page 6 of 44

Investment objectives:

� On average, the Retail Funds MySuper default investment options are aiming for an investment

return objective of around 0.5% per annum less than the Industry Funds default investment

options despite a similar exposure to growth assets.

� The Retail MySuper default investment options are either targeting lower levels of return volatility

or have assumed a higher probability of achieving the same return objective than their Industry

Fund counterparts.

Asset allocation:

� Industry funds in general tend to have a larger exposure to alternative assets; retail funds on the

other hand have adopted a larger exposure to passive investments for their MySuper investment

options:

- Alternative assets generally include unlisted investments such as private equity, infrastructure

and hedge funds. These assets typically have higher cost structures, reflecting the increased

complexity, however with a correspondingly higher return expectation

- Passive investment on the other hand has a lower fee as the manager is simply trying to

replicate the market index returns, typically using an algorithm or rules based approach which

has a correspondingly lower cost structure to implement.

� This is an oversimplification, however, since when it comes to the active versus passive debate,

retail funds should be considered on a case-by-case basis with retail providers using different

approaches. For example:

- The BT, Mercer and AMP ‘Cohort’ style lifecycle MySupers have mostly utilised active

investment managers.

- The ANZ/Onepath MySuper uses passive underlying managers.

- The CFS MySuper uses a hybrid approach, aiming to outperform the relevant market cap

indices in both the Australian and Iinternational equity classes and passive managers in all

other asset classes.

Single or multiple pricing points:

� The majority of retail funds that have adopted a ‘Cohort’ style lifecycle approach (also known as a

glide-path) have a common investment fee (i.e. a single fee) across each cohort.

� In contrast, most of the Industry Funds which adopted the ‘Switch’ lifecycle approach have

different investment fees at different ages, better reflecting the underlying cost of investment

management based on the asset allocation at each age.

� Several of the funds with Lifecycle MySupers quoted the limitation to four pricing points only as a

reason for adopting a single pricing point.

� It was the common view that the number of pricing points should reflect the number of cohorts to

better reflect the cost of investing within that cohort.

Sequencing risk:

Sequencing risk is the risk that a member crystalizes a poor investment outcome as a result of

withdrawing assets following an adverse market movement:

� Most of the lifecycle funds (‘Switch’ and ‘Cohort’ types) seek to address sequencing risk by

reducing exposure to growth assets as a member nears retirement.



July 2014/246448_1 Page 7 of 44

� Funds with a Balanced MySuper option (Industry funds and retail funds alike) do not necessarily

need to adopt a lifecycle approach to address sequencing risk as they seek to implement other

strategies including:

- at the option level - the use of dynamic asset allocation and other downside portfolio

protection methods

- at the member level – introduction of quality advice customised to the individual member.

Dashboards / Standard Risk Measures [SRMs]

� SRMs have been introduced to assist members make sense of the investment risk of various

investment options. A SRM for a fund gives a relative measure of the risk of that option in terms of

the likelihood of it producing a negative return over a 20 year investment period.

Post retirement

� Most Lifecycle My Supers are designed as ‘to retirement’ whereas a notable minority are designed

to manage the members’ investments ‘through retirement’.

Table 3. MySuper offering comparison – Balanced vs. Lifecycle

MySuper offering Balanced Lifecycle (cohort and switch type)

Communication � Easier to communicate to members

as no change;

� Easier for members to compare

against other balanced types; and

� Most of the money is in the default

so why change?

� Relatively difficult to explain to members

accustomed to a Balanced default;

� More difficult to compare lifecycle

options and with other Balanced types;

and

� May involve a significant level of change

to the existing asset allocation .

Investment

objective

� Typically to outperform inflation by a

margin over 10 years and to

outperform other balanced options;

and

� Which means a focus on net returns.

� For switch type there is typically an

inflation objective for each option; and

� For cohort types the objective may be

associated with a ‘defined goal’ having

targeted retirement income levels.

Asset allocation/

active management

� Active or passive but mostly active;

and

� Industry funds tend to have higher

allocations to alternative assets.

� Active and passive management are

both represented.

Sequencing risk � Members have to manage this risk

themselves; and

� This can be achieved through active

asset allocation or by encouraging

members to seek financial advice.

� Designed to avoid sequencing risk; and

� Members are automatically switched at

predetermined ages (in the case of

switch type) or actively managed in the

cohort case.

Investment fees � Generally lower if the level of

growth assets is lower and for

passive type investments.

� For switch type lifecycles the fees

generally vary according to age.



July 2014/246448_1 Page 8 of 44

Single or multiple

fees?

� By definition a single price for all

members.

� For switch type lifecycles the fees

generally vary according to age; and

� For cohort types lifecycle there is

typically a single price at all ages.

MySuper offering Balanced Lifecycle (cohort and switch type)

Past performance � Past performance history is often

retained.

� No past performance history but

performance of the Choice options may

be instructive.

1.5 Some MySuper conclusions and recommendations

Key MySuper objectives – and have they been delivered?

� MySuper was designed to provide members with access to super funds with standardised features

and fees.

� And the simple fact is that many super funds now have a simple and cost-effective MySuper

account which offers:

- lower fees and restrictions on the type of fees that can be charged

- simple features so that members don't pay for services they don't need

- a single diversified investment option or a lifecycle investment option.

� For many consumers, however, it will be more difficult to compare funds than before because of

the diversity of approaches that have been adopted by the different funds.

Future MySuper Design

� For many funds, the design of their MySuper will need to be reviewed in the future as a result of

the changing needs of their members and as new MySuper solutions are developed.

� We believe that the common themes for the future development of Lifecycle MySuper design will

include:

- They will need to be developed to go beyond age as the single determinant

- Other criteria might include:

> account balance (current or expected at retirement)

> income level

> contribution level

> nominated retirement age/expected departure date

> gender, and so on.

- For those using age, there will be more cohorts with narrower age bands.

- This will lead to a greater use of ‘multiple pricing’, provided the law is changed to allow more

than four pricing points.

- The Lifecycle MySuper of the future may be a ‘whole of life” glidepath using a ‘through

retirement’ model rather than the current ‘to retirement’ model which sees asset allocation

managed through to age 85 rather than 65.



July 2014/246448_1 Page 9 of 44

- These will need to be integrated with social security entitlements and take account of the fact

that many Australians have three or four accounts, which the Trustee can only guess at the

quantum.

� For a Balanced Fund MySuper design, we believe that one of the major developments in the future

will be to focus more on after tax outcomes.

Comparing MySupers has become more complex

The diversity of Balanced Funds and the increased use of lifecycle funds (‘Switch’ and ‘Cohort’ type)

have made it harder to compare funds than ever before.

That is, many superannuation funds are seeking ways to differentiate their product offering through the

structure of their default investment offering. While the intent is to design a default that aligns to the

value proposition, many members would be hard pressed to know which to choose.

The typical Industry Fund Balanced MySuper has a growth debt ratio between 70% and 80% in growth

assets.

We have found that several industry funds have stepped outside of the 70% to 80% range in response

to the needs of their membership. Two examples of note are:

� Equipsuper, which reduced its strategic asset allocation from 70/30 to 60/40 as a result of MySuper

� AustralianSuper’s Balanced MySuper, which has become a 90/10 when you classify infrastructure

as a 100% growth asset.

New methodologies should be developed to compare MySupers: viz when comparing Balanced and

Lifecycle MySupers and when comparing different Lifecycle MySupers:

� For Balanced Funds, it should be easier to compare each MySuper’s return objective and one way

of doing this would be to standardise the expected probability of achieving the objective. There is

considerable variability in this area.

� More broadly, there should be a standard methodology to determine whether an asset class is

‘growth’ or ‘defensive’.

The main areas of variation are in the real asset classes where some funds classify infrastructure as

growth and some say it is part growth and part defensive. Similar variations in nomenclature arise in

other real asset like property.

Do Lifecycle or Balanced MySupers produce better retirement outcomes?

� Some commentators in the market have concluded that a typical ‘Cohort’ Lifecycle MySuper will

reduce the expected retirement income compared to a typical Balanced MySuper.

� We have found that whether or not a Lifecycle MySuper will outperform a typical 70/30 Balanced

MySuper will depends on many factors which include (but are not limited to) the:

- implicit probability assumption that the Balanced Fund will meet its objective

- design of the Lifecycle MySuper (what variables are used – age, account balance etc.)

- ‘defined goal’ implicit behind each cohort

- Strategic Asset Allocation (SAA) of each cohort – including use of alternative asset classes

- level of active management at the sector level. For example, alpha



July 2014/246448_1 Page 10 of 44

- level of DAA (both frequency and magnitude).

This is an area which requires very careful examination when comparing MySupers and is analogous

to comparing a defined contribution fund (single balanced) with a defined benefit fund (cohort

based glide path).

1.6 Common features of the MySuper lookalikes

Several MySuper ‘lookalike’ products have been developed with similarities to Approved MySupers.

� General product features:

- These are simple online products where members can access their account and make changes

through their internet banking.

- Similar to the MySuper products offered by the same institutions, these MySuper lookalikes

are designed to be ‘cradle to the grave’ type solutions encompassing savings, transition to

retirement, and retirement stage.

� Investments:

- Unlike many retail funds that use life stages as the default investment in their MySuper, the

four MySuper ‘lookalikes’ use a single investment option as their default.

- As well as the default investment strategy, in all cases the MySuper ‘lookalike’ gives members

a very comprehensive range of alternative investment choice options to choose from.

- The member may need to seek advice given the level of choice available.

� Insurance:

- Death, TPD and/or SCI options must be selected and cover is subject to underwriting.

- The member must select the cover they need which means that they will need advice.

- In most cases, the insurance premiums are loaded to pay for the cost of insurance

administration.

� Fees:

- With a single exception in our sample, these products are not cheap.

- All have adviser fees that can be added in or inbuilt trails and commissions for some existing

clients.

This report document was prepared and reviewed for AIST by the following consultants.

Prepared by Peer reviewed by

Michael Gomersall Stephen Freeborn

Senior Consultant Principal Telephone: (03) 8621 4103 Telephone: (02) 9293 3723

[email protected] [email protected]

July 2014



July 2014/246448_1 Page 11 of 44

2. Scope and approach

The aim of this report is to examine:

� To what extent has MySuper delivered on its promise of improved retirement outcomes, lower

fees and ease of comparison and greater transparency?

� What are the characteristics of the common investment solutions being used as MySuper solutions,

namely glide paths and single balanced options?

� What trends are there in terms of investment objectives, asset class strategies and fees?

� What are the common features of selected MySuper ‘lookalikes’?

2.1 Data sources

This report is based on three data sources:

� Publicly available data for a sub-set of 43 Approved MySupers and 4 MySuper ‘lookalike’ products

selected by AIST and RiceWarner as a representative sample of the industry. This included Product

Disclosure Statements, Annual reports and APRA data;

� Interviews with major market participants including the CEOs and/or Chief Investment Officers of

several Industry Funds and Retail Funds; and

� Interviews and information provided by the CEO’s, Chief Investment Officers and other Senior

Executives within the leading asset consulting firms in Australia.

2.2 Our sub-set of Approved MySupers

We took the 79 ‘public-offer’ MySupers at the time of the study and removed the 12 Tailored MySuper

products of the remainder we took a representative group of 43 MySuper products which included

both retail and industry funds as well as Telstra Super.

The full list of the Approved MySupers included in our analysis is listed in Appendix A.

2.3 Our sub-set of MySuper ‘lookalikes’

The four MySuper ‘lookalikes’ are described in detail in Appendix B.



July 2014/246448_1 Page 12 of 44

3. Common types of MySuper

MySuper was designed to provide members with access to super funds with standardised features and

fees.

3.1 Superannuation Prudential Standard

Superannuation Prudential Standard (SPS) 530 specifies that for the investment strategy of a MySuper

product, the RSE licensee is required to document how the investment strategy:

� is diversified over multiple risk factors and sources of return as required in the SIS Act

� complies with sections 29VN(d)(i) and 29VN(d)(ii) of the SIS Act

� demonstrates compliance with rules for the relevant permissible fees in a MySuper product.

An RSE licensee must also determine appropriate measures, approved by the Board, to monitor the

performance of each investment in each investment option and each MySuper product on an ongoing

basis.

RSE licensees have interpreted this requirement with essentially three types of MySuper investment

strategies that are in common usage today. These are:

� the Single Diversified ‘Balanced’ Strategy

� the Simple or ‘Switch’ Lifecycle Strategy

� the Cohort Lifecycle Strategy – also known as a glide path or target date fund.

3.1.1 Key features of a MySuper product

MySuper products are required to offer members:

� a minimum level of Death and Total and Permanent Disability (TPD) insurance cover

� a limited financial advice service

� a set of (low-cost) fees

� a default investment option which RSE licensees have interpreted as a single diversified balanced

option or a lifecycle option.

By having the same features across all MySuper products, the government wanted to make it easier for

members to compare the MySuper products offered by different funds.

3.1.2 Additional requirements for a lifecycle option

For a lifecycle option, the age of the members is a factor that must be used to differentiate different

subclasses of the membership.

There is no limit on the number of age cohorts but the lifecycle option must have at most four different

pricing points and the investment fees for the age cohorts reflect a fair and reasonable attribution of

the investment costs of the fund between the age cohorts.



July 2014/246448_1 Page 13 of 44

3.2 Single Diversified Strategy

3.2.1 Key features

� This strategy is characterised by a single, diversified investment strategy which applies to all

members who do not make a choice.

� This was the most common investment default pre MySuper (although not universal) and remains

the most common MySuper strategy by far amongst the not-for-profit funds (industry and

corporate funds) post 1 January 2014.

� By definition, being a single strategy it also means a single investment fee for all members within a

MySuper strategy.

3.2.2 Which Funds use this strategy as their MySuper?

Graph 1 shows the variation of asset allocation amongst funds with a Balanced MySuper:

Graph 1. Balanced MySuper – growth versus debt target asset allocation

In summary:

� There are 30 funds in our ‘Top 43 MySuper’ that use this approach; and

� 25 of the 30 are Industry Funds.

3.2.3 Some examples

� Starting with Australian Super we see:

- SAA is somewhere between an 80/20 and a 90/10 growth/defensive mix depending on how

you define infrastructure and property, which AustralianSuper sees has having both growth

and defensive qualities.



July 2014/246448_1 Page 14 of 44

- AustralianSuper feels that the average member should stay in Balanced until age 75 as the

majority of its members will receive some portion of the Age Pension. After age 75 if no

investment choice is made they are defaulted to conservative which is 50/50.

- Engagement seems to be a function of age with members exercising this around age 50.

� REST:

- REST’s target asset allocation is 76% growth assets.

- Its membership is on average around age 27, predominantly female, low account balance,

average balance on exit of just $18,000.

- REST takes the view that this justifies a higher allocation to growth assets including illiquids like

property and infrastructure.

- The REST MySuper is the only option on the menu with exposure to agriculture.

- REST uses dynamic asset allocation to help protect members from downside risk.

- Moreover, REST’s growth exposure has reached as high as 80% on occasion.

� Equip is different again in that:

- 75% of members we in the default.

- At age 50, 35 to 40% of them make an active choice hence (like AustralianSuper) we see

engagement as a function of age and balance with the average being $150,000:

> the default for members aged 30 to 50

> they looked at retirement income adequacy and a 75% income replacement level

> they found that the 70/30 rate was too high for members aged 30 to 50;

> so they broadened the SAA range, and focus more on downside protection and use more

DAA.

3.2.4 Our findings:

� It is notable that very few retail funds use this strategy post MySuper, with the major exceptions

listed in the chart above - being IOOF, Plum and Russell. Other exceptions include AMP and ING.

� This strategy is often accompanied by a long track record of past investment performance and by

definition a single investment fee.

� There are many differences to consider which reflect the needs of each fund, the fund’s

membership profile and the degree of tailoring which has been built in.

� Comparing the Single Diversified ‘Balanced’ MySuper may appear simple but it is not, it goes well

beyond comparing investment fees and past performance.

� Other major factors include the investment return objective and the degree of certainty with which

the fund will achieve this return objective and the level of investment return volatility expected

along the way.



July 2014/246448_1 Page 15 of 44

3.3 The Simple or ‘Switch’ Lifecycle Strategy

3.3.1 Key features

� this strategy is characterised by switching members between investment options at

pre-determined ages

� switching occurs at specified ages which are pre-determined.


� The following eight funds in our ‘Top 43 MySuper’ use this approach. Of these funds:

- five are Industry funds

- two are Retail funds

- one is Telstra Super.

Graph 2. Lifecycle generation 1 – simple or ‘switch’ strategy

3.3.3 Some examples of Switch Lifecycle Funds

� Starting with AUSCOAL we see:

- members start out in a 100% growth option with three main switches linked to age

- switch to 80% growth option at age 45, then to 60% at age 55 and then 40% at age 65

- the investment fees vary for each portfolio.

� AON warrants special attention:

- members start out in a 100% growth option and then are switched each and every year after

age 42

0%

20%

40%

60%

80%

100%

30 35 40 45 50 55 60 65 70

Gro

wth

exp

osu

re

Age

AUSCOAL FirstState Super Guild Sunsuper AON Telstra Virgin



July 2014/246448_1 Page 16 of 44

- their Strategic Asset Allocation (SAA) reduces evenly by 4% each year until it reaches 0% by age

67

- the investment fee is uniform at all ages.

� Sunsuper needs some additional explanation:

- The de-risking that occurs after age 55 occurs monthly meaning graph 2 is closer to a straight

line than the annual switching represented.

3.3.4 Our findings:

� This strategy is often accompanied by a long track record of past investment performance.

� There can be a single investment fee or multiple investment fees.

� Generally we found that the not-for-profit funds adopt multiple pricing points (with the exception

of Sunsuper which applies a single investment fee at all ages) while the two retail funds also adopt

single investment fees at all ages.

3.4 The ‘Cohort’ Lifecycle Strategy

3.4.1 Key features

� This strategy is characterised by allocating members into a cohort of members with dates of birth

within a range, typically 10 years in width but a few funds have narrower five year bands.

� Each year members in each cohort will be told whether their investment portfolio is either ‘on

track’ or not for their projected retirement income.

� Members do not switch between options as in the switching lifecycle design but rather their asset

allocation is managed according to whether each cohort is ‘on track’ or not to meet the goal of that

cohort, a concept known as ‘funding to a defined goal’.


� The following six funds in our ‘Top 43 MySuper’ use this approach.



July 2014/246448_1 Page 17 of 44

Graph 3. Lifecycle generation 2 – cohort strategy

3.4.3 Some examples of Cohort Lifecycle Funds

� Starting with AMP we see:

- there are six cohorts for members born in pre 1950 as well as for the 50s, 60s, 70s, 80 and 90s

- the investment objective increases from CPI plus 2% for the oldest cohort to CPI plus 5% for

the youngest

- the portfolios are actively invested using internal funds

- the investment fees are the same for each cohort.

� Colonial First State warrants special attention:

- there are 11 cohorts for members born in five year age bands

- the investment objective increases from CPI plus 1.0% for the oldest cohort to CPI plus 3.0%

for the youngest

- the portfolios use a combination of active (equities classes) and passive strategies.

3.4.4 Our findings:

� Funds adopting a cohort lifecycle strategy will seldom have a long track record of past investment

performance since the MySuper option is new and simply has not been in operation for a sufficient

length of time to give meaningful historical information.

� These funds generally offer accompanied a single investment.

� There are many differences to consider when comparing funds and it will be important to compare

funds and cohorts with similar investment objectives including the target level of retirement

income.

� This highlights the need for members to seek financial advice on retirement.

20

30

40

50

60

70

80

90

100

1990's 1980's 1970's 1960's 1950's 1940's

Gro

wth

ex

po

sure

(%

)

Age cohort

AMP SignatureSuper ANZ Smart Choice BT Super for Life CFS FirstChoice Mercer SmartPath



July 2014/246448_1 Page 18 of 44

4. Designing and Comparing MySupers

4.1 Who provided advice?

� We generally found that Trustees took the driving role themselves and asset consultants were

typically used as an additional source of research and/or in a technical capacity to determine the

risk and return characteristics of the MySuper and/or to help with scenario analysis and stress

testing.

� That said, for some of the retail funds, MySuper was more of a change and they generally sought

more advice from asset consultants on technical modelling.

� Most of the asset consultants we surveyed did not have a single house view and saw the merits of

the different types of solutions.

4.2 What factors did Trustees consider?

4.2.1 Understanding the needs of the Fund membership

The following is a useful checklist of the features which Trustees should consider as part of

understanding the needs of their fund membership:

Average age

� This is often the biggest driver

� There are two aspects to age. Firstly, the average age of the fund will determine the mean term of

the investment. Secondly, the spread of ages will determine how similar or dissimilar members are

and hence the need for different investment solutions for different age groups of members.

Expected departure/retirement age

� When we combine age with anticipated retirement/departure age from the fund, we get an even

better picture of the likely timeframe for the investment for these age groups.

Homogeneity of the membership and quality of data

� The level of homogeneity amongst the disengaged members will influence the need for a simple or

more complex investment default arrangement.

� The ability to detect these differences will depend on the quality of membership data.

� Some of the retail funds we surveyed told us that they could not select a Single Diversified Strategy

since their members were ‘just too different’.

� The risk appetite for our younger members was not going to be met by a ‘static balanced’ fund.

‘To’ or ‘Through’ retirement?

� Some funds have designed their default to apply just to age 65 (the so-called ‘to-retirement’ group)

whereas a smaller group have designed a whole of life default (the ‘through retirement” group’).

Gender

� Female members may have lower account balances and experience breaks in their fund

membership associated with having children.



July 2014/246448_1 Page 19 of 44

Behavioural finance

� Members tend to make investment choices based on past performance, usually just after they

receive their annual benefit statement. To counteract this several of the funds have designed their

MySuper so that they can make active changes to their asset allocation to try to take the volatility

out of the returns.

� The use of ‘dynamic asset allocation’ to protect the ‘downside’ is becoming more prevalent post

MySuper.

Average account balance now/at retirement

� Many funds have found that member engagement is function of account balance meaning that

members generally start to take a more active interest in their investments as their account

balance grows.

� For members with larger account balances, Q Super is an interesting case study in that there is a

different investment strategy for disengaged members over the age of 58 depending on whether

the member’s account balance is below or exceeds $300,000.

� For members with lower account balances, many funds felt that cohort lifecycle strategies are

inappropriate for these members who will be heavily reliant on social security in retirement.

Moving members with small account balances to a more defensive asset allocation as they get

closer to retirement was thought to have little benefit and could significantly impact the member’s

financial position.

Retirement adequacy

� In some cases the structure of the investment objective can be linked to the member’s own

retirement adequacy.

Level of disengagement

� Many funds found that member engagement was not only a function of account balance but also

of age. Equip is an interesting case study in that it found that 35 to 40% of their members make an

active investment choice at age 50.

� Hence the fund’s MySuper is designed for members aged 30 to 50.

Nature of choice options

� The behaviour exhibited by members making investment choice can also be instructive.

� For instance, faced with a large negative return, some members can be tempted to move to cash

and never come back to equities.

Level of super and other assets outside of the fund

� The average Australian has three super funds which makes it more difficult to tailor a strategy.

� Those funds that control a higher proportion of the members’ overall account balance will find it

easier to design their MySuper solution. Ideally, this should take account of the level of support

that members will receive in retirement from outside sources including the Aged Pension.

Access to advice

� The ultimate aim is to have every member make informed investment choices. This can be

achieved by providing effective member education, communication and advice solutions.



July 2014/246448_1 Page 20 of 44

4.3 Other factors which were considered

In addition, we found is that there was much more to MySuper design than simply matching members’

needs with the best investment solution.

Other features that were considered included:

Consistency of marketing message:

� Many Industry Funds were of the view that the existing default met all of the requirements of

MySuper and has already been designed to cater for the needs of their fund members.

� Why then would they change the message to members?

Retention of existing investment performance:

� Similarly, many of the Industry Funds concluded that the existing default was delivering strong

returns for many years so why change now if it’s not broken?

Administration constraints and increased cost:

� Introducing a lifecycle strategy requires a reasonable sophisticated administration system which is

capable of switching members or managing members in cohorts.

� A change to a lifecycle approach would be expensive to administer.

Time pressure:

� What the Trustee could achieve in the MySuper timeframe was important (and we understand that

at least three industry funds may have had a different solution had they had more time.

� Several industry funds seriously considered lifecycle but could not deliver in the legislative

timeframe.

4.4 How should we compare MySupers?

4.4.1 How should we compare the Single Diversified MySupers?

There is considerable variety between funds using the Single Diversified MySuper Strategy. When

comparing funds we should consider the following:


The most common investment return objective is to use achieve a return after tax and fees which

exceeds inflation (CPI) plus a margin every year. Of the 25 Industry funds over 80% have an investment

objective in the range of CPI plus 3% to 4% p.a. with the average being CPI plus 3.4% p.a.

That there are a few outliers such as UniSuper which uses CPI plus 4.8% (70/30) and Australian Christian

is CPI plus 1.5% (50/50).

The other aspect of this investment objective is the estimated probability of the MySuper product

achieving the CPI objective.



July 2014/246448_1 Page 21 of 44

The most common probability of achieving the CPI objective was 67% although some funds want to

achieve their objectives with as high a probability as 80%.

We found that this was not well communicated to members given there is no requirement to discuss

the level of confidence the Trustee has in meeting its return objective.

Target strategic asset allocation:

Using the allocation to growth/debt for the Single Diversified MySuper:

� for Industry Funds this varied from 90/10 to 50/50 with the average being 74% growth assets

� for the smaller group of Retail Funds the most common SAA was 70/30 with ING’s Living Super the

outlier with a 50/50 split which brings the average down to 66%.

Active management:

Most Industry Funds are generally fully active and include meaningful allocations to alternatives and

illiquid assets.

The retail funds are very mixed in their approach to active management, however:

� plum’s MySuper has a one third allocation to passive whereas Russell is fully active

� both AMP and IOOF have largely passive approaches.

Investment fees:

Base investment fees varied by fund considerably. The base fee for the Single Diversified MySuper:

� For Industry Funds this varied from 0.39% to 0.98% but 80% were in the much narrower range of

0.46% p.a. to 0.72 p.a. with the average base fee being 0.66% p.a.

� For the smaller group of Retail Funds the base fee varies from Nil (with ING) to 0.60% with Plum.

Generally speaking the larger funds were able to offer lower base fees. By extension tailored MySuper

offerings also have a tailored fee base.

Performance based fees:

These are still common place although the larger funds are removing them where possible. In relation

to the Single Diversified MySuper:

� For Industry Funds the performance fee varied from nil percent to 0.32% p.a with the average

performance fee 0.07% p.a.

� For the smaller group of Retail Funds the performance fee was either close to Nil or undisclosed.

4.4.2 How should we compare the Simple or ‘Switch’ Lifecycle MySupers?

� There is even more variety between funds using the ‘Simple’ or ‘Switch’ Lifecycle strategy reflecting

the higher degree of tailoring that has been applied to these solutions.

� In addition to the features we used to compare the Single Diversified Balanced Funds we also need

to consider the following additional features.



July 2014/246448_1 Page 22 of 44

Number of options:

� Generally between two and four – with three being the most common.

The ages at which members are switched:

� There is no pattern here and every fund is different.

� That said, switching generally starts to occur at around age 40 or 45 with a second switching

between 50 and 55 or even as late as 65 where there are only two options.

The investment objective and asset allocation at equivalent ages:

� If we are comparing funds we need to compare the investment objectives and asset allocations by

looking at a member of each fund at the same age.

� To illustrate this point, in our survey group of MySupers for the under 40s the investment return

objective varied between CPI plus 3.0% p.a. (which was for a 75/25 growth option) to CPI plus

5.0% p.a. for a 100/0 growth option.


� As members are switched from one option to another it is important to understand whether or not

the base fee stays the same.

� For Industry Funds the base investment fee generally reduces as the member gets older and the

exposure to less expensive defensive assets increases.

� For the smaller group of Retail Funds the base investment fee stays the same throughout the

member’s lifetime.

4.4.3 How should we compare the ‘Cohort’ Lifecycle MySupers?

� In addition to the features we used to compare the Single Diversified Balanced Funds and Switch

Lifecycle funds we also need to consider the following additional features.

The estimated retirement income:

� For example, is the fund assuming a retirement income replacement need of two thirds of the

member’s pre-retirement income or 75% of the member’s pre-retirement income?

The width and number of cohorts:

� Most of the retail funds have established cohorts describes as 50s, 60s, 70s, 80 and 90s for

members born in those decades.

� Less common is the use of five year cohorts used by Mercer and Colonial First State.

� Clearly the narrower the cohort the more targeted the defined goal.

The investment objective of each cohort:

� We see from the survey that the average CPI plus objective, risk band and weighting to growth

assets is as shown in Table 4.



July 2014/246448_1 Page 23 of 44

Table 4.

Lifecycle Cohort CPI objective Growth allocation Risk band

1940s 1.6% 36% 3

1950s 2.2% 53% 4

1960s 2.8% 77% 5

1970s 3.3% 87% 5

1980s 3.4% 89% 5

Lifecycle Cohort CPI objective Growth allocation Risk band

1990s 3.7% 90% 5


� most of the retail funds use a single pricing point for each cohort

� Mercer is the exception with five year cohorts and four pricing points.



July 2014/246448_1 Page 24 of 44

5. Our findings

5.1 The commoditisation of superannuation products MySuper will have a profound impact on fees within the superannuation industry and will commoditise

superannuation products. This will arise from a number of mandated features of a MySuper product,

including:

� A single default investment strategy ‘MySuper’ (members who wish to elect an alternative strategy

will need to hold a Choice product).

� Standardised fees for all members within a MySuper product (which employers may subsidise).

Employers may negotiate a discounted fee for their employees who are members if this can be

justified.

� Basic default death and TPD insurance on an ‘opt-out’ basis.

� No commissions to advisers.

� Large employers (500+ employees) may negotiate a tailored MySuper product.

� MySuper does not apply to defined benefit divisions or retirement products.

Despite MySuper being for the ‘disengaged member’, funds are able to build intra-fund advice into

their fees and MySuper members are also allowed to apply for additional insurance without being

Choice members.

Employers have been required to make default contributions on behalf of their employees to a

MySuper product since 1 January 2014.

5.1.1 Impact on overall fees

The introduction of MySuper led to significant margin compression on the Commercial master trusts.

Most have settled on asset-based fees just under 1% a year which is more expensive than the large

industry funds, but much closer than their previous products (which also included the cost of advice).

Many funds have introduced lifecycle investments which also help to curb fees (MySuper legislation

allows four different pricing points for these products). This occurs as those with the highest balances

are older and have higher proportions of relatively cheaper defensive assets.

Apart from different investment structures, the other areas of product differentiation are:

� Sophisticated advice models

� Life insurance

� Member services – which depend in part on the quality of administration platforms

� Introduction of member-direct investments as a defence against members shifting to the SMSF

segment.

We have also seen the beginnings of member analytics as funds start to shift to a member-centric

world.



July 2014/246448_1 Page 25 of 44

At the time of writing, APRA lists 117 authorised MySuper products of which 79 are Public Offer funds

and 38 are Non Public Offer. The number of authorised products is much lower than the 200 that APRA

expected when the legislation was initially drafted.

We have examined the change in fees for 98 of these MySuper products as at the time of writing this

report against the fees we recorded for the default options in the same funds at 30 June 2011. We

were unable to capture the full market due to an absence of data in 2011 for some small corporate

funds and corporate divisions of retail funds as well as the creation of some new products not existing

in 2011.

The results of our analysis are given in Table 5. We have weighted average results by assets and

members as at 30 June 2013. We have combined fees for Retail products and large Corporate Super

Master Trusts under the heading ‘Retail’.



member fee

Average % of

assets fee $5,000 $20,000 $50,000

Corporate 47 0.62% 77 170 355

Retail 64 1.61% 144 385 867

Industry 68 0.76% 106 220 449

Public Sector 28 0.58% 57 144 317

Total 63 0.92% 109 248 525



member fee

Average % of

assets fee $5,000 $20,000 $50,000

Corporate 81 0.69% 115 219 426

Retail 72 0.82% 112 235 481

Industry 74 0.72% 110 217 433

Public Sector 29 0.64% 61 156 347

Total 69 0.73% 106 215 433

5.1.2 Investment fees

� The reduction in MySuper investment fees is not strictly limited to some of the retail funds.

� In fact most funds were glad that the focus of the regulator shifted away from being a ‘race to the

bottom’ as some thought it would be initially.

� With the increased focus on lower fees we see the emergence of other means of reducing

investment fees in both Industry funds and retail funds. Notable investment trends include:

- reducing exposure to the more expensive asset classes including alternatives

- reducing exposure to the more expensive fund managers or switching to lower cost fund

managers

- applying a ‘margin squeeze’ to fund managers



July 2014/246448_1 Page 26 of 44

- increased use of ‘honeymoon’ fee deals – especially from start-up managers

- increased use of ‘in-house’ funds management to reduce costs

use of multiple asset consultants on a project basis

- elimination of performance based fees where possible.

� In the case of the Commercial master trusts, there is the added ability to reduce profit margins.

� In many Industry Funds and Corporate Funds that was happening anyway:

- fees have been reducing steadily through pressure on managers from funds with scale

- this has been accelerated through the trend towards internal funds management in Australian

equities, infrastructure and property within funds like AustralianSuper and REST

- performance fees still exist but are being removed where possible

- the consulting spend is changing too as many funds re also internalizing many of the roles of

the traditional asset consultant like manager selection and capital markets research

- consultants are used more on a project basis and different consultants are used for different

projects

- some funds however are reducing their investment fees through:

> higher use of passive or enhanced passive strategies

> substituting more expensive asset classes with less expensive ones eg fund of fund hedge

funds are far less popular.

- For some, MySuper saw the introduction of buy-sell spreads and termination fees.

� Pressure to reduce the headline fee of MySuper products has caused some funds to invest some of

their assets passively rather than with active managers:

- Passive management means the investment manager attempts to achieve the same

performance as the benchmark or market, as closely as possible.

- Active management involves the investment manager attempting to outperform the market

return by holding higher allocations to individual investments that they expect to perform

well.

� Passive management is a less expensive way to manage assets given that there is less time spent by

the investment manager analysing the market, in addition to a lower number of trades being

placed.

� Further, it is possible to purchase an indexed fund where the fund purchases and holds the

individual stock.

� With the introduction of MySuper, our research indicates that:

- Many large industry funds continue to invest actively and have left their allocations

unchanged.

- Some smaller industry funds have increased the proportion of passively managed assets in

their portfolios to reduce costs.

- Of a representative basket of leading commercial funds the average percentage of assets

passively managed has increased from 24.0% in 2011 to 46.6% in 2013.

- Corporate and public sector funds have largely left their allocations unchanged.



July 2014/246448_1 Page 27 of 44

5.2 The types of strategies being used

There are two main types of MySuper offerings in the market being Balanced and Lifecycle. The latter

type should be split into those which are now commonly described as ‘Switch’ type Lifecycle and

‘Cohort’ style lifecycle;

� We found that many of the Industry Funds had already tailored their Balanced default investment

strategies to meet the needs of their membership and so for them MySuper was more of a ‘fine-

tuning’ exercise than a major overhaul.

Moreover, those industry funds catering to specific sectors or with more homogenous workforces were

able to tailor to a higher degree than their multi sector/multi industry counterparts. Evidence of

this can be seen in the high degree of variation in the target asset allocation of the Balanced type

MySupers in the market.

� Many Industry Funds rebranded their balanced funds as their MySuper strategies to avoid any

disruption to members and to allow them to retain their past investment track record. For many of

these funds this made sense as the vast majority of fund assets was invested in the existing default

option already.

� That said, we also found that many of these funds seriously considered the alternatives. Some

common arguments against a change included the added costs to implement and to administer the

lifecycle alternative.

� Whilst the major changes in default investment strategies where with the retail funds, a significant

minority of industry funds also switched to lifecycle (the ‘Switch’ type). Moreover, we found that

more Industry Funds would have done so had they had the time and/or the administration capacity

to do so.

5.3 Single or multiple pricing points

� The majority of retail funds that have adopted a ‘Cohort’ style lifecycle approach (also know as a

glide-path) have a common investment fee across each cohort.

� In contrast, most of the Industry Funds which adopted the ‘Switch’ lifecycle approach have

different investment fees at different ages, better reflecting the cost of investment at that age.

� Several of the funds with Lifecycle MySupers quoted the limitation to four pricing points only as a

reason for adopting a single pricing point. It was the common view that the number of pricing

points should reflect the number of cohorts so that the fee can better reflect the cost of investing

and the level of growth assets at different ages.

5.4 Asset allocation

� In reality, for many funds there was very little change to asset allocation as a result of MySuper.

� Industry funds in general terms continue to have larger exposure to alternative assets and retail

funds larger exposure to passive investments. This is an oversimplification, however, when it

comes to the active versus passive debate, retail funds should be considered on a case by case

basis with retail providers split down the middle.

� For example:

- The BT, Mercer and AMP ‘Cohort’ style lifecycle MySupers are largely active, whereas

- The ANZ/Onepath version is passive. Target asset allocation, return objectives and fees.



July 2014/246448_1 Page 28 of 44

The following section looks at the target asset allocation, investment return objective and base

investment fees for the 43 Approved MySuper products in our research sample.

In Table 6 we look at these factors by dividing the sample of 43 products into:

� balanced Funds (Industry Funds) – there are 25 of them

� balanced Funds (Retail and Corporate) – there are only five

� lifecycle Generation 1 (Switch Type) – there are eight

� lifecycle Generation 2 (Cohort Type) – there are five.

Table 7. Universe of 43 Approved MySuper Funds – averages

Type of Fund Number of

funds

Avg AA

- Growth

Avg CPI +

objective

Avg Risk

Band

Avg Base

Fee Avg PBF

Industry – Balanced 25 74.2% 3.4% 5 0.66% 0.07%

Retail & Corporate – Balanced 5 66.4% 3.2% 5 0.33% N/A

Lifecycle Gen 1 ifecycl 8 59.1% 2.9% 4 0.44% 0.03%

Lifecycle Gen 2 - Retail 5 73.5% 2.9% 5 0.44% N/A

Total 43 69.6% 3.0% 0.49%

The averages in Table 7 for the lifecycle products assume an equal weighting of each cohort or age

group within a given lifecycle MySuper.

In Table 8 we look at these characteristics in more detail by breaking down the lifecycle funds by cohort

as most of these products divide members into those born in each decade.

Table 8. Universe of 43 Approved MySupers – averages for lifecycle gen 2

Lifecycle Gen 2 Avg AA

- Growth

Avg CPI +

objective

Avg Risk

Band

Avg

Base Fee Avg PBF

1940s 35.8% 1.6% 3 0.43% Unspecified

1950s 52.8% 2.2% 4 0.41% Unspecified

1960s 77.2% 2.8% 5 0.44% Unspecified

1970s 87.3% 3.3% 5 0.45% Unspecified

1980s 89.2% 3.4% 5 0.45% Unspecified

1990s 90.0% 3.7% 5 0.45% Unspecified

A word of caution when dealing with small samples

As mentioned earlier, we have taken a representative sample group of 43 MySuper products which

included both retail and industry funds as well as Telstra Super.

The sample has been skewed in favour of funds which had their MySuper products approved earlier

which in turn means more of the larger funds are in the universe.



July 2014/246448_1 Page 29 of 44

Whilst we have not tested whether this group has the same characteristics as the universe of 122

Approved MySuper products now available, we believe the sample size is sufficiently large to draw the

following general conclusions:

Target Asset allocation:

� For the Balanced Funds:

- For the 25 Industry Funds in our sample the target growth asset allocation varied from 90/10

to 50/50 with the average being 74% growth assets.

- For the smaller group of Retail Funds the most common target growth allocation was 70%

with ING’s Living Super the outlier with a 50/50 split which brings the average down to 66%.

- That said the Industry Funds have a significantly lower allocation to equities and a higher

allocation to alternative assets including direct property, private equity and infrastructure.

� For the Lifecycle funds:

- The lifecycle 1 funds have a significantly lower target growth allocation than lifecycle

generation 2 as well as the Balanced Funds.

- This is partly explained by the inclusion of QSuper which does not have a cohort with a target

growth exposure of more than 66%.



- The average return objective is very similar for Industry, Retail and Corporate Funds.

� For the Lifecycle Funds:

- The average investment return objective is considerably lower than the equivalent Balanced

Fund with a similar average target growth asset allocation.

Investment base fees


- The average investment base fee for the retail Balanced Funds is half that of the Industry Fund

counterparts.

- That said, the retail group is quite small and is heavily skewed by the low cost MySuper

products issues by ING and AMP.

� For the Lifecycle Funds:

- The average investment base fee is similar for both switch based and cohort based funds even

though this group of 13 lifecycle products includes a mixture of retail and industry funds.

- What is clear, however is the prevalence of variable pricing amongst the industry funds

whereas only one of the retail providers, Mercer, uses multiple pricing which reflects the lower

cost of investing within cohorts with lower levels of growth assets.

Retail compared with Industry funds

Table 9 looks at these same features but from the perspective of industry funds and retail funds.



July 2014/246448_1 Page 30 of 44

Table 9. Universe of 43 MySupers funds – industry vs retail

Type of Fund Avg AA

- Growth

Avg CPI +

objective

Avg Risk

Band

Avg Base

Fee Avg PBF

Industry 68.6% 3.3% 5 0.60% 0.06%

Retail 70.0% 2.8% 5 0.41% Unspecified

Target asset allocation

� For the Retail:

- The average target growth asset allocation of 70% is the average of the Balanced and lifecycle

averages.

� For the Industry Funds:

- The average is heavily influenced by the handful of Industry Funds that chose to introduce

Switching type lifecycle funds with quite low average growth allocations.

� Even so, the Industry Fund and Retail Fund averages are very similar.


� The Retail Funds are aiming for around 0.5% per annum less than the Industry Funds despite a

similar exposure to growth assets.

� It would appear that the Retail MySupers are either targeting lower levels of return volatility or

have assumed a higher probability of achieving the same return objective than their Industry Fund

counterparts.

Investment base fees

� For the Industry Funds:

- Base fees are broadly consistent with what they were before MySuper and this is consistent

with the message that most of the changes to asset allocation or fees have been happening in

response to the GFC and not in response to the Stronger Super legislation per se.

� For the corporate funds:

- There has been a major downward change in fees.

- Even allowing for higher levels of passive investment in some Retail MySupers the reduction in

fees is a result of lower margins and a reduction in the cross-subsidization between

administration and investment fees.

5.5 Sequencing risk

� Most of the lifecycle funds (‘Switch’ and ‘Cohort’ types) address sequencing risk by reducing

exposure to growth assets as a member nears retirement.

� Funds with a Balanced MySuper (Industry funds and retail funds alike) options do not necessarily

have to adopt a lifecycle approach to address sequencing risk. Other alternatives are:

- option Level: the use of dynamic asset allocation and other downside protection methods

- member Level: the use of quality advice.



July 2014/246448_1 Page 31 of 44

5.6 Post retirement

� Most Lifecycle MySupers are designed as ‘to retirement’ whereas a notable minority are designed

to manage the members’ investments ‘through retirement’.



July 2014/246448_1 Page 32 of 44

6. Conclusions and recommendations

6.1 Future MySuper Design

� Many funds believe that the design of their MySuper will have to change in the future as member

needs change and as new solutions are developed.

Common themes for the future development include:

� Lifecycle strategies will need to be developed that go beyond age as the single determinant.

� For those Lifecycle options using age , there will be more cohorts with narrower age bands.

� This will lead to a greater use of ‘multiple pricing’ provided the law is changed to allow more than

four pricing points the regulator will need to not ‘single pricing’.

� ‘Through retirement’ not ‘to retirement’:

- More funds will focus on the pension phase with an increased focus on ‘through retirement’

rather than ‘to retirement’ strategies.

6.2 Comparing MySupers has become more complex

� The diversity of Balanced Funds and the increased use of lifecycle funds (‘Switch’ and ‘Cohort’ type)

have made it harder to compare funds than ever before.

� The typical Industry Fund Balanced MySuper has a growth debt ratio between 70% and 80% in

growth assets.

� We have found that several industry funds have stepped outside of the 70% to 80% range in

response to the needs of their membership. Two examples of note are:

- Equip which reduced its strategic asset allocation from 70/30 to 60/40 as a result of MySuper.

- AustralianSuper’s Balanced MySuper has become a 90/10 when you classify infrastructure as

growth.

� New methodologies should be developed to compare MySupers: viz when comparing Balanced and

Lifecycle MySupers and when comparing different Lifecycle MySupers.

� For Balanced Funds it should be easier to compare each MySuper’s return objective and one way of

doing this would be to standardise the expected probability of achieving the objective. There is

considerable variability in this area.

� More broadly, there should be a standard methodology to determine whether an asset class is

‘growth’ or ‘defensive’.

The main areas of variation are in the real asset classes where some funds classify infrastructure as

growth and some say it is part growth and part defensive. Similar variations in nomenclature arise

in other real asset like property.



July 2014/246448_1 Page 33 of 44

6.3 Do Lifecycle or Balanced MySupers produce better retirement outcomes?

� Some commentators in the market have concluded that a typical ‘Cohort’ Lifecycle MySuper will

reduce the expected retirement income compared to a typical Balanced MySuper due to lower

levels of volatility at older ages and impact of the money weighted return being greater at older

ages.

� We have found that whether or not a Lifecycle MySuper will outperform a typical 70/30 Balanced

MySuper depends on many factors which include (but are not limited to) the:

- implicit probability assumption that the Balanced Fund will meet its objective

- iesign of the Lifecycle MySuper (what variables are used – age, account balance etc.)

- ‘iefined goal’ implicit behind each cohort

- strategic Asset Allocation (SAA) of each cohort, including use of alternative asset classes

- level of active management at the sector level

- level of Dynamic Asset Allocation (both frequency and magnitude of changes).

This is an area which requires very careful examination when comparing MySupers and is

analogous to comparing a defined contribution fund (Balanced MySuper) with a defined benefit

fund (Cohort type Lifecycle MySuper).

Moreover it highlights the need for members to seek advice.



July 2014/246448_1 Page 34 of 44

Appendix A List of included MySupers

Table 10. List of included MySupers

Fund Fund type MySuper name MySuper type

Industry balanced

Australian Christian Super Industry Ethical Balanced Balanced

AustralianSuper Industry Balanced Balanced

AustSafe Industry Balanced Balanced

Care Industry Balanced Balanced

CBUS Industry Growth (CBUS MySuper) Balanced

Club Plus Superannuation Industry MySuper (Balanced) Balanced

Energy Super Industry MySuper Balanced

Equip Industry Equip MySuper Balanced

HESTA Industry Core Pool Balanced

HIP Industry Growth (HIP MySuper) Balanced

Hostplus Industry Balanced Option Balanced

Legalsuper Industry MySuper Growth Balanced

LUCRF Industry MySuper Balanced Balanced

Maritime Super Industry Moderate Investment Option Balanced

Media Super Industry Balanced investment option

(accumulation) Balanced

MTAA Super Industry My AutoSuper Balanced

NGS Super Industry Diversified (MySuper) Balanced

Prime Super Industry MySuper Balanced

REI Super Industry Trustee Super Balanced Option Balanced

REST Industry Core Strategy Balanced

Tasplan Industry MySuper Balanced Balanced

TWU Industry Balanced MySuper Balanced

UniSuper Industry UniSuper Balanced Balanced

VicSuper Industry Growth (MySuper) Balanced

Vision Super Industry MySuper Balanced Growth Balanced

Retail balanced

AMP Retail MySuper Balanced Balanced

ING Retail Living Super - Smart Balanced Balanced

IOOF Retail IOOF MySuper Balanced



July 2014/246448_1 Page 35 of 44

Fund Fund type MySuper name MySuper type

Plum Retail Plum MySuper Balanced

Russell Retail Russell MySuper Balanced

Lifecycle generation 1

AON Retail MySuper Lifecycle Lifecycle - Generation 1

AUSCOAL Industry AUSCOAL Default Lifecycle Lifecycle - Generation 1

First State Super Industry MySuper Lifecycle Lifecycle - Generation 1

Guild Industry Guild Retirement Fund (MySuper) Lifecycle - Generation 1

QSuper Industry QSuper Lifetime Lifecycle - Generation 1

Sunsuper Industry Lifestyle Investment Strategy Lifecycle - Generation 1

Telstra Corporate Telstra Super MySuper Lifecycle - Generation 1

Virgin Super Retail Virgin Super Essentials Lifecycle - Generation 1

Lifecycle generation 2

AMP Retail AMP MySuper Lifecycle - Generation 2

ANZ Retail ANZ Smart Choice Super Lifecycle - Generation 2

BT Retail BT Super for Life - Lifestage Fund Lifecycle - Generation 2

CFS Retail FirstChoice Lifestage Lifecycle - Generation 2

Mercer Retail Mercer Smart Path Fund Lifecycle - Generation 2



July 2014/246448_1 Page 36 of 44

Appendix B Commentary on four specific MySuper ‘Look-alike’

products

B.1 Background

There are superannuation products in the marketplace which are marketed as low fee, but are not

authorised MySuper products.

The purpose of this part of the research is to:

� determine whether disclosure of MySuper ‘lookalikes’ in terms of fees, returns, etc. provides

members with enough to make a comparison with a MySuper product

� what are the differences between MySuper and MySuper ‘lookalike’ products?

The following products have been reviewed:

1. BT Lifetime Personal Super ^.

2. ING Living Super.

3. FirstChoice Personal Super ^.

4. OneAnswer Frontier Personal Super #.

B.1.1 Requirements of a MySuper

MySuper was designed to provide members with access to super funds with standardised features and

fees.

MySuper products will offer members:

� a minimum level of Death and Total and Permanent Disability (TPD) insurance cover

� a limited financial advice service

� a set of low-cost fees

� either a single default investment option or a lifecycle option.

By having the same features across all MySuper products, the government wanted to make it easier for

members to compare the MySuper products offered by different funds.

So how do the MySuper ‘lookalikes’ shape up when it comes to the basic MySuper product features?

^ In the case of both BT Lifetime Personal Super and FirstChoice Personal Super there is a related wholesale

personal non-superannuation product with lower fees which may be more comparable with MySuper products

# there is no association with Frontier Advisors



July 2014/246448_1 Page 37 of 44

Table 11. MySuper ‘lookalikes’

Does it satisfy the requirement of

MySuper

BT Lifetime

Personal Super

ING

Living Super

Colonial

FirstChoice

Personal Super

OneAnswer Frontier

Personal Super

Minimum level ofDeath and TPD

insurance cover

No

Opt in only

No

Opt in only

No

Opt in only Yes

A limited financial advice service Over the phone Over the

phone Over the phone Over the phone

A set of low-cost fees No Yes No No

Either a single default investment

option or a lifecycle option Cash Option is

1.14% p.a.

Nil Fee on

Balanced

Option

(50/50)

Cash Option is

0.55% p.a.

Balanced option

costs 0.90% before

rebate

B.2 About each ‘look alike’ product

B.2.1 BT Lifetime Personal Super

� This is not a MySuper product:

- it is marketed as a product that can be used throughout working life

- BT Cash investment option is the default

- fees are not listed using the headings required for MySuper products

> Three generic titles:

i. Issuer fee – of 1.03% p.a.

ii. Expense recoveries of 0.11% p.a.

iii. Performance fee.

- which together means the asset based fee for the Cash Option is 1.14% p.a.

- there are insurance administration and commission fees

- there is no minimum death or TPD insurance cover, coverage is entirely dependent on medical

underwriting and no option to purchase SCI cover.

Whereas BT Super for Life has been designed such that:

� It is a MySuper product:

- Online and integrated with other banking products.

- Marketed as ‘low fee’ everyday product to take from job to job which is suitable for:

> employees – for personal contributions

> employers – for SG

> self-employed – for tax deduction

> spouses.

- As a means to aggregate other super accounts – super search is provided.



July 2014/246448_1 Page 38 of 44

> No minimum balance.

- Administration fee:

> $5 per month ($60 pa)

> plus 0.45% pa of your account balance for all other investment options (this is Nil for the

Super Cash option).

- Investment fee:

> 0.50% pa of account balance for all other investment options (this is Nil for the Super Cash

option).

- Indirect cost ratio - Stronger Super expense recover and superannuation levy:

> up to 0.10% pa.

- Investments:

> is a lifecycle product and integrates with TRAP and Pension products

> uses a cohort based lifestage fund as the MySuper – both for Savings and TRAP/AP.

- Insurance:

> There is minimum Death and TPD cover with SCI opt-in.

B.2.2 ING Living Super

� This is not a MySuper product

- won the Best New Product of 2013 as awarded by Super ratings

- it is marketed as a product that can be used throughout working life and from job to job

- it combines Savings Account, TRAP and Pension Account like many bank MySupers

- online applications.

� Fees:

- no admin fees or management fees on cash or term deposits with ING Direct, as well as the

Balanced option

- opt in advice fees.

� Investments:

- lots of choice – including Australian shares and ETFs

- if no investment choice is exercised, 99% of the money will be invested in the Balanced option

and the remaining 1% will be in the Cash Hub which are both nil fee.

� Insurance:

- optional death, TPD and SCI cover

- level of cover is either:

> lifestages

> fixed cover

> fixed premium cover.



July 2014/246448_1 Page 39 of 44

- There is no minimum death or TPD insurance cover, coverage is entirely dependent on medical


B.2.3 Colonial FirstChoice Personal Super

� This is not a MySuper product

- it combines Savings Account, TRAP and Pension Account like many bank MySupers

- it is marketed as a product that can be used throughout working life

- it is described as value for money

- online reporting.

� Fees:

- Colonial First State Diversified is 1.35% p.a. (after a 60 basis points rebate).

- Also an APRA SuperStream levy of up to 0.01%.

- Portfolio rebates on eligible FirstChoice products and options for amounts over $400,000.

- Insurance admin fees of up to 10% of premiums.

- Opt in advice fees.

� Trails and commission for existing investors prior to 11 June 2013:

- trails on cash and first rate products

- insurance commission up to 22%.

� Investments:

- lots of choice – 110 options

- Colonial First State Cash option – costs 0.55% after rebate.

� Insurance:

- optional death, TPD and SCI cover

- there is no minimum death or TPD insurance cover, coverage is entirely dependent on medical


Whereas Commonwealth Essential Super has been designed such that:

� It is a MySuper product:

- online and integrated with other banking products

- marketed as ‘low fee’ everyday product that Is designed to take from job to job which is

MySuper compliant suitable for:




> spouses.

- as a means to aggregate other super accounts – super search is provided:

> no minimum balance.



July 2014/246448_1 Page 40 of 44

- administration fee:

> $5 per month ($60 pa)

> plus 0.40% pa of your account balance for all other investment options (this is Nil for the

Cash Deposit option).

- investment fee:

> 0.40% pa of account balance for all other investment options (this is Nil for the Cash

Deposit option).

- indirect cost ratio - Stronger Super expense recovery and superannuation levy:

> nil.

- investments:


> uses a cohort based life stage fund as the MySuper – both for Savings and TRAP/AP.

- Insurance:

> there is minimum Death and TPD cover with no SCI.

B.2.4 OneAnswer Frontier Personal Super

� This is not a MySuper product;

- It combines Savings Account, TRAP and Pension Account like many bank MySupers.

- It is marketed as a product that can be used throughout working life.

- It is described as value for money.

- Online reporting.

� Fees:

- Member fee of $135.29 p.a. ($115 p.a. after tax) if account balance is below $100,000.

- Ongoing fee rebates on account balance over $300,000.

- Opt in advice fees.

� Commission:

- Insurance commission up to 27.5% p.a. (inclusive of GST) for basic insurance cover.

- Customised cover will lead to 70% of premium is paid as commission in the first year and 17%

thereafter.

� Investments:

- Lots of choice – 85 options plus ANZ term Deposits.

- Nil fee for AMZ Term Deposits, ANZ Cash Advantage and ANZ Prime CMA.

- OnePath Balanced option – costs 0.90%.

� Insurance:

- Automatic death and TPD cover.

Whereas ANZ Smart Choice Super has been designed such that:



July 2014/246448_1 Page 41 of 44

� It is a MySuper product;

- online and integrated with other banking products

- marketed as ‘low fee’ everyday product that Is designed to take from job to job which is

MySuper compliant suitable for:




> spouses.

- as a means to aggregate other super accounts:

> no minimum balance.

- administration fee:

> $50 pa.

- investment fee:

> 0.50% pa of account balance for all other investment options (this is Nil for the Cash

option).

- indirect cost ratio - Stronger Super expense recovery and superannuation levy:

> nil.

- investments:


> uses a cohort based lifestage fund as the MySuper – both for Savings and TRAP/AP.

- insurance:

> there is minimum Death cover and opt-in TPD and SCI cover.

B.2.5 Common characteristics of the MySuper lookalikes

� General product features:

- All are simple online products (that can also be sold through an employer or an adviser).

- All members can access their account an and make changes through their internet banking.

- Similar to the MySuper products offered by the same institutions, these MySuper lookalikes

are designed to be ‘cradle to the grave’ type solution encompassing three stages:

> Savings Stage.

> Transition to Retirement Stage.

> Retirement Stage.

� Investments:

- Unlike many retail funds that use life stages as the default investment in their MySuper, the

BT, CFS and ANZ MySuper ‘lookalikes’ use a single investment option as their default.

- In the case of BT and CFS MySuper lookalikes, both have a cash option as their default unlike

the Lifestages they use in their MySupers.



July 2014/246448_1 Page 42 of 44

- The ING MySuper lookalike is different and has a nil fee Balanced option (50/50).

- As well as the default investment strategy, in all cases the MySuper Lookalike gives members a

very comprehensive range of alternative investment choice options to choose from.

Presumably this requires an adviser to help (and charge a fee).

� Insurance:

- Death, TPD and/or SCI is options must be selected and is subject to underwriting.

- Once again the member needs to select cover which may mean they need advice.

- In most cases the insurance premiums are loaded to pay or the cost of insurance

administration.

- For the ANZ MySuper lookalikes product, if customised insurance cover is selected, 70% of

premium is paid as commission in the first year and 17% thereafter.

� Fees:

- Apart from the ING Living Super nil fee these products are not cheap.

- All have adviser fees that can be added in or, in the case of CFS, inbuilt trails and commissions

for existing clients pre 2013.



July 2014/246448_1 Page 43 of 44

Appendix C Product dashboards – Summary of AIST Interviews

On the subject of risk measures in the product dashboard:

� Positive feedback included:

- Members need more communication and greater comfort around risk.

� Negative feedback included:

- Dashboards may confuse members.

- Risk is multi-dimensional, therefore it is impossible to capture all risk.

- Risk is not understood well by members, which makes them think of volatility.

On the subject of the Standard Risk Measure (SRM):


- The more ways you communicate investment risk the more breakthrough you towards hitting

the mark.

- SRM is better than using volatility as generally members would not have a good understanding

of investment volatility.

- The current dashboard risk measure is good but what does it actually measure? The standard

risk measure is reasonable but should be augmented with other metrics (see below).


- The average member won’t understand it.

- A 1-10 risk rating would be better than the current rating of 1-7.

- There are several problems associated with SRM:

> Standard Risk Measure takes into the number of negative returns but not the size of the

negative return or how frequently the negative years could come together.

> Similarly it doesn't capture extent of which retirement objective does not achieve the

outcome.

> The current dashboard risk measure is good but what does it actually mean?

> There needs to be standardization of the inputs and this will be up to the regulator to

enforce.

Opinions on a new product dashboard requirement that APRA sets a probability of say 75% of achieving

the target return.


- It should give members greater comfort around risk.


- Are they seriously considering this?

- Setting a probability as high as this could lead to funds decreasing their CPI objectives and this

would be hard to communicate to members.

- A 75% probability is on the high end, it would be more reasonable to set a probability in the

range 60 to 67%.



July 2014/246448_1 Page 44 of 44

- With glide-path funds different objectives may be needed for different cohorts.

- Even with a lower probability of 67% this would be difficult to achieve in the aggressive

options regardless of whether it is a glide- path or a single option.

* * *

2014_07_31_research_navigating the new mysuper plan

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