Macquarie 1Q18 Update – Tracking Well

The Macquarie Group 1Q 18 update shows the group is travelling well, with no significant on-off items in the quarter. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 10.9 per cent at 30 June 2017, down from 11.1 per cent at 31 March 2017.

Macquarie currently expects the year ending 31 March 2018 (FY18) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2017 (FY17).

APRA’s proposal to establish ‘unquestionably strong’ Australian banking sector capital ratios by 2020 would increase Macquarie Bank Limited’s minimum capital requirements by approximately $A1.4 billion.

The estimated annualised cost of the bank tax has the same effect as increasing Macquarie Bank’s Australian effective tax rate from 34 per cent to 41 per cent they said.

The Group’s short-term outlook remains subject to:

  • market conditions
  • the impact of foreign exchange; and
  • potential regulatory changes and tax uncertainties

The Australian mortgage portfolio of $A29.4 billion increased two per cent on 31 March 2017.

Macquarie Asset Management (MAM) had $A460.8 billion in assets under management at 30 June 2017, down four per cent on 31 March 2017, largely due to net asset realisations in Macquarie Infrastructure and Real Assets (MIRA), partially offset by favourable market and foreign exchange movements. MIRA’s equity under management of $A74.2 billion was down four per cent from $A77.2 billion at 31 March 2017. 1Q18 included performance fees from several funds including Macquarie Atlas Roads. During the quarter, MIRA invested equity of $A3.0 billion across four acquisitions and seven follow-on investments in infrastructure and real estate in five countries. Macquarie Investment Management was awarded over $A3.1 billion in new institutional mandates across nine strategies from clients in five countries and Macquarie Specialised Investment Solutions was awarded over $A800 million of new and additional infrastructure debt mandates.

Corporate and Asset Finance’s asset and loan portfolio of $A36.2 billion at 30 June 2017, was broadly in line with 31 March 2017. During the quarter, there were portfolio additions of $A0.9 billion in corporate and real estate lending across new primary financings and secondary market acquisitions. In addition, $A0.8 billion of motor vehicle and equipment leases and loans were securitised.

Banking and Financial Services had total BFS deposits6 of $A47.3 billion at 30 June 2017, up six per cent on 31 March 2017. The Australian mortgage portfolio of $A29.4 billion increased two per cent on 31 March 2017, funds on platform7 of $A79.1 billion increased ten per cent on 31 March 2017 largely due to the final migration of full service broking accounts to the Vision platform, and the business banking loan portfolio of $A6.7 billion increased three per cent on 31 March 2017. During the quarter, BFS entered into exclusive due diligence with Morgan Stanley to provide administration services and develop a new white labelled Wrap offering. BFS won Best Digital Banking Offering and Most Innovative Card Offering at the 2017 Australian Retail Banking Awards.

Commodities and Global Markets saw client hedging and trading opportunities remain steady across the commodities platform, and experienced continued strong customer activity in foreign exchange, interest rates and futures markets, which was driven by ongoing market volatility. CGM also experienced increased equity capital markets activity and market turnover in Cash Equities. During the quarter, CGM entered into an agreement to acquire Cargill’s North American Power and Gas business to expand the geographic and service coverage in key markets in the region. CGM also announced the merger of the Energy Markets and Metals, Mining and Agriculture divisions to form one commodities division called Commodity Markets and Finance.

Macquarie Capital experienced increased client activity in debt capital markets, while equity capital markets and M&A activity remained subdued compared to the prior corresponding period. In 1Q18, 97 deals were completed at $A45 billion, up on 1Q17 and broadly in line with 4Q17 (by value)8. The principal book performed in line with expectations. Macquarie Capital was ranked No.1 for global Infrastructure Finance financial advisory9. Macquarie Capital was also ranked No.1 for announced and completed M&A deals10 and No.1 for IPO and ECM deals in Australia10.

Why regulators have finally noticed the non-banks

From Mortgage Professional Australia.

There are two ways to bury bad news, and brokers have now experienced both. Method one is to run that news on a Friday when everyone’s mind is on the weekend, as APRA did when announcing curbs on interest-only lending on the final day of March. The 2017 Federal Budget took the other approach: burying bad news in more news, namely a controversial $6.2bn bank levy.

Whether increased regulation of non-banks is indeed ‘bad news’ is up for interpretation. Yet for an industry so jaded by regulation, the announcement that APRA will now have oversight of non-bank lenders – who were previously regulated by ASIC – has occurred with remarkably little in the way of reaction.

“Of all the things that were announced, that’s the biggest deal,” Martin North, principal of consultancy Digital Finance Analytics told MPA. “If APRA now has responsibility for them, they will have to make a decision about whether they require them to hold capital, which is probably not going to happen as they aren’t ADIs … but they will probably put a structure, or limits, or some other mechanism to reduce the risky lending behaviour.”

A work in progress

With just three paragraphs in hundreds of pages of budget papers, there’s little in the way of specific information on the new regulations. It has now been confirmed that the government will provide an extra $2.6m over four years to APRA to “exercise new powers” and collect data from non-authorised deposit-taking institutions. To assist with this the Banking Act of 1959 will be modernised, also enabling APRA to restrict lending to certain geographical areas.

Appearing before the Senates Estimates Committee in late May, APRA chairman Wayne Byres was pushed for more information on APRA’s role. Byres played down the degree of regulation. “If there is a systemic risk … APRA would have the capacity to introduce some rules which might help mitigate that. But that is very different to saying we take day-to-day responsibility for individual institutions.”

Nevertheless, uncertainty remains. Asked by Liberal senator David Bushby which institutions would be affected by APRA’s expanded powers, Byres was unable to provide an answer, as the government had yet to announce the actual powers APRA would have.

Byres was more specific about why the new powers were required. It was “in some sense” a consequence of restricting lending by ADIs to investors, which Byres suspected had pushed a large degree of investor lending into the nonbank sector. While Byres said the failure of individual non-banks was “a fact of life”, a build-up of risky lending in the sector could have more far-reaching consequences.

Investor and interest-only caps

Byres’ inability to specify APRA’s new powers (at the time of writing) leaves open the possibility of APRA capping investor and interest lending growth by non-banks at the same level as banks. At present, growth per lender is capped at 10% and 30% respectively.

APRA warned ADIs in March that lending by non-banks they fund “should not be growing faster than their own portfolio or materially faster than their own portfolio and also should be of a similar quality to loans they would be prepared to write themselves”, Byres told the Senate Estimates Committee.

Having experienced rapid investor lending growth from a small base, many non-banks would be hit hard by a percentage-based limit. In a furious article in Australian Broker magazine, ex-Pepper CEO Patrick Tuttle warned against “regulating the non-bank sector out of existence”, as well as depriving legitimate borrowers of funds and causing a sharp correction in house prices. Tuttle also claimed that non-banks had not been consulted by the Treasurer prior to the announcement.

The non-bank lenders MPA spoke to appeared to be unconcerned by the prospect of APRA oversight. Pepper Money said it was “business as usual”, claiming it had already taken note of APRA regulation of ADIs to ensure a balanced approach to lending, in addition to satisfying the demands of warehouse funders. Liberty CEO James Boyle supported the regulator’s efforts to lessen the risk of an inflated property market. Boyle argued that, with limited scale compared to the majors, non-banks already had to build balanced portfolios with diverse geographies, products and borrower types.

However, Boyle said, “as non-banks do not accept deposits, there is less need to apply measures primarily designed for depositors”. According to Boyle, the “very virtue of their difference” allows the non-bank sector to increase competition in the industry, providing better choice for customers. “We would say the government should continue to be sensitive with moves such as those proposed to not increase costs for consumers, stifle competition or shift responsibility for risk management from the regulated to the regulator.”

In MPA’s Brokers on Non-Banks survey, which will be published in August, hundreds of brokers were asked whether they’d continue using non-banks if they were regulated in the same way as banks.

The majority of brokers said they would, pointing out other advantages the non-banks have over the majors. As one Sydney broker explained, “they are proactive, adept and keen for business. Their hunger means that they meet the market and fill the niches the major lenders don’t”.

However, many brokers warned that already-high interest rates would become impossible to justify without correspondingly differing policies. “If non-banks were restricted by APRA, then likely their policy attractiveness would be lost,” commented a broker from Perth, “so the reasons to use them would be less. However, maybe they would keep their upfront approach, which I prefer to the majors’ ‘have to haggle to get a good deal’ approach.”

For decades non-banks have been trying to catch the eyes of consumers and brokers. Australia is only just beginning to wake up to its ‘shadow banking sector’, as Byres found at the Senate when he had to explain that shadow banking was “not illegal banking”. As APRA gradually elaborates on what ‘oversight’ really means, non-banks may discover their newfound popularity with investors is a double-edged sword.

MyState refunds more than $230,000 of over-charged fees and interest

ASIC said MyState Bank Limited (MyState), a Tasmanian bank, has refunded more than $230,000 in over-charged interest and fees to more than 1,040 customers with mortgage offset accounts.

Following a customer complaint, and after a review of its accounts, MyState found that some customers:

  • Did not have their offset accounts linked to their mortgages – meaning that they were over-charged interest
  • Were charged ‘offset account’ fees after their loan had been discharged or changed to a kind that could not be linked to an offset account.

This was due to errors in MyState’s manual administration processes, including failures to link loans and offset accounts, and failures to deal with offset accounts when loans were switched or discharged.

The matter was reported to ASIC by MyState. MyState has worked with ASIC to refund customers and improve its internal processes, including by ensuring employees have appropriate account administration training.

“Banks need to ensure that their products are delivering the benefits that they are promoting,” ASIC Deputy Chair Peter Kell said.

“This is another example of a single customer complaint revealing a systemic issue, and we are pleased that MyState has taken the appropriate action in response.”

MyState has contacted customers who are eligible for a refund. Customers who have questions about their accounts should contact MyState on: 138 001.

Background

MyState is a wholly owned subsidiary of MyState Limited, a national diversified financial services group headquartered in Tasmania.

The breach was detected when a customer enquired about their accounts being linked. MyState conducted a review of accounts set up in a similar manner. MyState found customers with loans and unlinked offset accounts, customers with offset accounts but no loans, and customers with offset accounts together with ineligible loan products.

Fed Holds Rate, Confirms Intent

The latest statement from the FED says the US economic momentum continues, if but slowly. Inflation and income remains on the low side. So they kept the fed funds rate at current levels, but signalled continued future rises. Balance sheet normalisation has yet to start, but says it will commence.

U.S. stocks closed higher, buoyed by strong earnings and the Feds decision.

Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

 

Inflation subdued in the June quarter

The Consumer Price Index (CPI) rose 0.2 per cent in the June quarter 2017, the latest Australian Bureau of Statistics (ABS) figures reveal. This follows a rise of 0.5 per cent in the March quarter 2017.

So nothing here to reinforce the need to raise the cash rate! However, our data suggests many households are experiencing much faster price growth, especially for power and child care.

The most significant price rises for the quarter were medical and hospital services (+4.1 per cent), new dwelling purchase by owner-occupiers (+0.9 per cent) and tobacco (+1.0 per cent). These rises are partially offset by falls in domestic holiday travel and accommodation (-3.2 per cent) and automotive fuel (-2.5 per cent).

The CPI rose 1.9 per cent through the year to June quarter 2017 having increased to 2.1 per cent in the March quarter 2017.

Chief Economist for the ABS, Bruce Hockman, said: “Inflation in Australia remains low. Price falls for automotive fuel; and ongoing competition in the clothing and food retail markets has contributed to this quarter’s result. In addition, the ABS continues to closely monitor the impact of Cyclone Debbie on fruit and vegetable prices. While strong price rises were recorded for select fruit and vegetables such as tomatoes, beans, cucumbers, melons, berries and bananas in the June quarter 2017 – these rises were offset by falls in seasonally available fruits such as oranges, mandarins and apples.”

Westpac Tweaks Mortgage Rates Again

Westpac has introduced changes to its fixed rates, effective 1 August 2017.

Owner-occupied fixed principal and interest (P&I) rates will see a hike of 11 basis points for two-year terms, bringing the rate to 4.19 per cent per annum (p.a.). Three-year terms will conversely see falls of 10 basis points to 4.19 per cent, while both four- and five-year terms will see rates fall by 20 basis points to 4.39 per cent.

Owner-occupied fixed interest-only (IO) rates in one -and two-year terms will see a hike of 13 basis points to 4.79 per cent, while three-year terms will also grow 13 basis points to 4.89 per cent. Four- and five-year terms will increase by 0.13 per cent to 5.19 per cent.

Investor fixed P&I rates with two-year terms will grow by 31 basis points to 4.39 per cent, while three-year terms will see a fall of 5 basis points to 4.44 per cent. Five- and six-year terms will both fall 10 basis points to 4.69 per cent.

Investor fixed IO rates with one- to five-year terms will all see hikes. One and two-year terms will grow 13 basis points to 4.99 per cent, while three-year terms will also increase by 13 basis points to 5.09 per cent. Four- and five-year terms will see rate increases of 23 basis points to 5.49 per cent.

Will Wages Rise Any Time Soon?

On of the drivers of mortgage stress, which continues to rise, is flat and falling income growth. This phenomenon is hitting other economies too, such as the UK.

So, today’s speech from RBA Governor Philip Lowe is timely –  The Labour Market and Monetary Policy. This speech covers trends in employment and wages in Australia, and the impact of these on monetary policy decisions. It describes developments in the labour market in Australia, including the growth of employment in the services sector, and in part-time jobs. The speech then explores the reasons behind subdued wages growth in Australia and other advanced economies, and the challenge this poses for monetary policy. It restates the Bank’s approach to making monetary policy decisions within the framework of a medium-term inflation target, in way that supports sustainable economic growth and serves the public interest.

He makes the point that if some of the long standing links between income growth and monetary policy are not working as they did, more monetary stimulus may encourage investors to borrow to buy assets, which poses a medium-term risk to financial stability.

In comments after the speech, he also made the point that surging asset prices has led to a growth in inequality across Australia.

Whilst unemployment looks reasonable,

… under utilisation is a real issue.

The persistent slow growth in wages is creating a challenge for central banks. It is contributing to an extended period of inflation below target. In years gone by, the more standard challenge was to keep wage growth in check, so as to stop upward pressure on inflation, which could lead to restrictive monetary policy. No advanced economy faces this challenge at present.

It is possible that things could change in the not too distant future, particularly in those countries at, or near, full employment. It may be that the lags are just a bit longer than usual. If so, we could hit a point at which workers, having had only modest pay increases for a run of years, decide that it is time for a catch-up. If such a tipping point were reached, inflation pressures could emerge quite quickly. In this scenario we could see a period of turbulence in financial markets, given that markets are pricing in little risk of future inflation.

This scenario can’t be completely discounted. It would seem, though, to have a fairly low probability in Australia, especially in light of the continuing spare capacity in our labour market. The more likely case here is that wage growth picks up gradually as the demand for labour strengthens.

Globally, an alternative scenario is that the period of slow wage growth turns out to be much more persistent, partly for the reasons that I discussed earlier. In this scenario, wages growth eventually picks up, but it takes quite a while longer. If so, inflation stays low for longer, although there are other factors that could push inflation higher.

This scenario is one in which the Phillips Curve is flatter than it once was. It is one in which inflation is harder to generate. We can’t yet tell though whether the Phillips Curve in Australia has become flatter, given that we have experienced relatively little variation in the unemployment rate over recent times.

The combination of a flatter Phillips Curve and inflation below target raises a challenge for central banks: how hard to press to get inflation up?

For a central bank with a single objective of inflation, the answer is relatively straightforward. Inflation is too low, so you do what you can to get inflation up. If inflation doesn’t increase, you need more monetary stimulus.

This approach does carry risks, though. A flatter Phillips Curve means that the monetary stimulus has relatively little effect on inflation, at least for a while. At the same time, however, the monetary stimulus is likely to push asset prices higher and encourage more borrowing. Faced with low inflation, low unemployment and low interest rates, investors are likely to find it attractive to borrow money to buy assets. This poses a medium-term risk to financial stability.

 

APRA consults on changes to mutually owned ADIs’ capital framework

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on proposed revisions to the capital framework for mutually owned authorised deposit-taking institutions (ADIs) to enable them to directly issue Common Equity Tier 1 (CET1) capital instruments.

In 2014, APRA developed a Mutual Equity Interest (MEI) framework for mutually owned ADIs that enables them to issue Additional Tier 1 and Tier 2 capital instruments that meet requirements for conversion into CET1 capital in certain circumstances. Because of their structure, mutually owned ADIs have traditionally not been able to issue ordinary shares that could qualify as CET1 capital.

The consultation announced today concerns proposed amendments to this MEI framework to allow mutually owned ADIs to issue CET1-eligible capital instruments directly. The proposed changes are intended to give mutually owned ADIs more flexibility in their capital management.

These proposed CET1-eligible capital instruments would share many of the same characteristics as ordinary shares and would, for example, be perpetual, subject to discretionary dividends and accounted for as equity. However, because these instruments are untested, APRA is proposing some restrictions on the amount that may be included in CET1 and, to accommodate the mutual corporate structure of issuing ADIs, proposes limits on MEI holders’ share of residual assets.

Following consideration of submissions received through this consultation, APRA anticipates it will release the final revised APS 111 in late 2017 for commencement as soon as practicable thereafter.

‘Disingenuous’: Former bank exec questions back book repricing

From The Adviser.

A former major bank executive says lifting rates for existing interest-only borrowers has little to do with the regulatory pressures the banks claim they are under.

Following a hefty round of rate hikes for interest-only borrowers last month, former Barclays CEO of mortgages Steve Weston says it was surprising to see the banks’ tactics.

“On the one hand, they talk about wanting to rebuild trust with consumers and do all the right things and they’ve got the ABA engaged with a number of well-intended initiatives to ‘make banking better’,” Mr Weston said, responding to a question at the Vow Financial commercial conference in Hobart on Friday. “But then they do things that appear anything but customer-friendly.

“During June, the four major banks announced reductions in their principle and interest owner-occupier rates of between 0.03 per cent and 0.09 per cent, along with increases in their interest-only rates of between 0.30 per cent and 0.35 per cent.”

Mr Weston explained that the media statements from the banks all claimed they had to reprice their interest-only mortgages to meet APRA’s requirement to limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending.

“The key word there is ‘new’. The equation to measure that 30 per cent is all the loans that settle that month – no more than 30 per cent can be IO. The back book doesn’t come into the measure at all,” he said.

“And I wonder how much consideration was given to the impact the rate changes will have on customers. Encouraging existing borrowers to make principle repayments is broadly sensible, although for some, like investment loan borrowers who also have an owner-occupier loan, this may prove sub-optimal from a tax planning perspective.”

Weston further commented that each of the media releases also stated that the rate changes were not related to the bank levy.

“Typically when you see out-of-cycle rate increases, they are justified by an increase in funding costs or the need to hold more capital. But not this time. This time the banks have been clever in using an APRA cap on new lending and using it to justify increasing rates for existing customers. What has been really surprising is the lack of mainstream media commentary about the rate increases.

“Making the changes even more surprising was that in the May Budget, the Treasurer instructed the ACCC to monitor changes in mortgage pricing by those banks impacted by the bank levy. The Treasurer even asked the ACCC chairman to let him know if he finds any evidence of the bank levy being passed on in higher mortgage rates. Whether it was co-incidental or not, the additional income that will be generated by these rate changes all but equates to the bank levy. So it will be interesting to watch how this plays out.”

According to Mr Weston, who was general manager of broker platforms at NAB before joining Barclays in 2012, the Australian banks could have achieved the 30 per cent limit by tightening their credit policies and increasing rates on new loans.

“The back book didn’t need to be touched,” he said.

“At the very least, the banks could have waited until the interest-only loan period expired before increasing rates. They could have written to customers and advised them about the benefits of commencing principle repayments and letting them know that their interest rate would increase at the end of their interest-only term if they didn’t commence making principle repayments at that time.

“These don’t feel like the actions of banks who want to build trust with customers. To me it feels more like taking an opportunity to increase profits. Actually, it feels very un-Australian,” Mr Weston said.

Giving you more say in your super? Not likely with these changes

From The Conversation.

The government is introducing a raft of changes to the regulation of superannuation in a bid to give consumers more power over their retirement funds. But, in fact, consumers are unlikely to use these new powers and the changes might not improve super fund performance.

The headline change introduces annual general meetings (AGMs) for superannuation funds. Previously these weren’t commonplace, as they are with companies. The government proposes these meetings will help fund members hold superannuation fund trustees and executives to account.

But many of us barely glance at our own superannuation account balances when the six-monthly statement appears in our inbox, so it’s reasonable to predict that, of the 15 million or so superannuation fund members in Australia, only a tiny fraction are likely to go to an annual meeting.

And why would we? One reason shareholders attend listed company AGMs is so they can vote on appointments of directors and remuneration of managers. However, superannuation funds are trusts, not public companies, and members won’t have the same rights even if they attend.

These AGMs will instead offer members the chance to quiz the executives, auditor and actuary, but no votes on material decisions. So this is nothing new: superannuation fund members have virtually no influence over trustee appointments, executive remuneration or other decisions.

Even the industry fund trustees, who are representatives of member organisations in super funds (such as trade unions), are not usually elected by fund members but are appointed by their sponsoring organisations.

If members are consigned to tea and biscuits with the fund chairman, where is the consumer “power” in Financial Services Minister Kelly O’Dwyer’s reforms? It rests mainly with the regulator, the Australian Prudential Regulation Authority (APRA).

The key changes intend to give APRA more responsibility for protecting the interests of superannuation fund members. This is particularly in relation to MySuper – the standardised default superannuation product.

Because superannuation is mandatory for most employees, the system captures many people who don’t have the will or the skill to make active choices about what fund manages their retirement savings. This includes decisions on where their savings will be invested, and what level of life insurance cover they take. Passive members don’t “shop around” for efficient providers, to their own cost.

Following the paternalistic reasoning of the Cooper Review, successive governments have shepherded passive superannuation fund members into MySuper options. MySuper products must have a single diversified investment strategy, are allowed to charge only a limited range of fees and must offer a standard default cover for life and total and permanent disability.

MySuper funds also have to report their investment goals and performance on a dashboard that is supposed to help people make comparisons between similar products. Employers must choose a default fund for their employees from the list of MySuper products.

Even so, MySuper product fees and investment performance vary widely. APRA quarterly superannuation statistics (2017) report that, in 2015, after MySuper was “up and running”, annual fees and costs on a A$50,000 account balance in fixed-strategy MySuper products ranged from $265 per year to $1085 per year (with a median of A$520 per year).

The investment performance of MySuper products also varies considerably. In the same year, the mean annual investment return (gross of expenses) for single-strategy MySuper products was 8.45%, the bottom 10% receive less than a 5.5% return and the top 10% receive more than a 10.9%.

While some variation in returns is due to intentional differences in the design of default investment products, some is related to differences in manager skill or efficiency.

These latest reforms, if passed into law, will mean APRA can refuse or cancel a MySuper authority, at a much lower threshold than applies currently. If APRA has reason to think that a superannuation entity that offers a MySuper product may not meets its obligations, that is grounds to refuse or cancel an authority. Since the default superannuation sector is large, such a decision would be extremely costly to the fund in question.

Under this legislation, trustees of MySuper funds will be obliged to write their own annual report card. Each year, trustees will have to assess the “options, benefits and facilities” offered to their members and the investment strategy (target risk and return). Trustees will also be required to report on the insurance strategy for members, including whether (unnecessary) insurance fees are depleting balances; and to evaluate whether the fund is large enough to do all these at a reasonable cost.

In each case, trustees are required to show that they are promoting members’ financial interests. They will have to compare the performance of their MySuper product to that of other MySuper products.

Even though the trustees score their own card, APRA will also examine these, under the threat that the MySuper authority could be cancelled. It’s not clear how much discipline these rules can impose on trustees, but there are some obstacles to implementation and some possible unintended consequences.

Most superannuation funds know very little about their members. Usually these funds only collect a member’s age, gender, some indication of income, and sometimes their postcode. To show that a financial service, investment or insurance product promotes (or fails to promote) the financial interest of a member will be very difficult on this little information.

For example, two 25-year-old men in the same profession will have very different needs for life insurance if one is single and the other has a non-income-earning partner and a child. But they will look the same to the MySuper trustees.

Also, having an annual peer comparison of investment performance by MySuper trustees will focus on short-term results rather than the long-horizon outcomes needed for a secure retirement.

So the governments’ claim that these changes will “give consumers more power” and strengthen regulation of this large sector are stretching the truth.

Author: Susan Thorp, Professor of Finance, University of Sydney