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Pension fund governance: Australian policies and practices

Rotman ICPM / Netspar / Maastricht University Discussion Forum – 30 October

2007

Australian Prudential Regulation Authority

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The Australian Pension System

Age Pension (Proportion %)2007 2046

Full ($11K-14K pa) 55 35

Part 30 41None 15 24

Unfunded component: Age pension (safety net, means tested)

Funded component: Defined benefit (DB) and defined contribution (DC) funds (9% compulsory + voluntary contributions taxed at 15% of gross income)

On RIM projections dependence on full age pension declines to 35% by 2046

Most people will depend on pension funds for their retirement income

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Australian Pension Fund (Superannuation) Industry

Assets: One trillion dollars (exceeds GDP)

Accounts: 20 million (all workers)

Sectors: Corporate and Public Sector (1850s), DB -> DC

6%, 16%Retail (1970s), DC, Public Offer, For-profit

34%Industry (1980s), DC, 50% Public Offer, Non-profit

18% Small funds (1990s), (<5 members)

26%

Regulation: SIS Act (1993)APRA (1998)RSE licensing (2006),

Institutional funds (74% of assets)

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Pension Fund Survey 2006

APRA data collection since 1996 suggests systematic differences in investment returns (Retail returns are 2-3% pa less than those of other funds, not fully explained by volatility differences)

Two questionnaires:1. Trustee governance: policies and practices2. Investment performance: risk adjusted (AA

data)

High quality data:Design input from industry and other

regulatorsTested with a pilot survey of 15 funds in 2005Response was compulsory by lawStreamlined with multiple choice questionsData validation before submissionComprehensive: all funds with more than

$200M

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Survey Data Coverage

Sample Corporate

Public Secto

rIndustr

yRetai

l Total

Number of Funds 40 16 55 76 187Assets ($billion, June 2006) 43 52 150 268 513

Number of Members (million) 0.38 0.86 9.55 9.35 20.14

Number of Directors 312 120 498 389 1319Number of Service Providers 492 328 1242 513 2575

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Data Collection Tables

General Information

Board Policy and Practice

Board Priorities

Key Decision Input

Service Providers

Board Directors

Director Associations

Data Comments

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Overall Industry Findings

Directors are typically well qualified, experienced and reasonably trained for trustee duties.

The industry employs substantial outsourcing.

Funds ensure compliance with legislation and regulation.

Soft dollar arrangements are often in use in the industry.

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Board Practice by Sector

Board Practice Corporate

PublicSector

Industry Retail

Average number of directors per fund*** 7.8 7.1 8.8 5

Average number of board meetings pa** 6.7 9.1 7.5 9.1

Average hours per board meeting*** 3.9 4.4 4.8 2.4

Average number of subcommittee meetings pa per fund* 13.1 15.1 14.7 10.7

Average hours spent pa per director outside board meetings***

69 123 119 90

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Average Director Hours Spent Per Fund Per Year

Hours spent per year1,4001,2001,000800600400200

Corporate

Public Sector

Industry

Retail

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Main Sources of Input to Key Decisions

Key Decision Corporate

PublicSector Industry Retail

Objectives & risk tolerance Trustee Consultant Trustee Executive

Strategic asset allocation Consultant

Consultant Consultant Executive

Benchmark design Consultant

Consultant Consultant Executive

Investment manager selection Consultant

Consultant Consultant Executive

Performance monitoring Consultant

Consultant Consultant Executive

Introducing a new fund option Trustee Executive Trustee ExecutiveDefault option asset

allocation Trustee Consultant Consultant Executive

Asset consultant selection Trustee Trustee Trustee ExecutiveAdministrator selection Trustee Trustee Trustee TrusteeForeign exchange hedging

policyConsultan

tConsultan

t Consultant Executive

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Board Director Characteristics

Service Provider Board Directors (%)30252015105

Corporate

Public Sector

Industry

Retail

Directors with Associations (%)6050403020100

Corporate

Public Sector

Industry

Retail

None Professional advisorGovernment Industry unionEmployer sponsor Fund member

Representation by Directors (%)1009080706050403020100

Corporate

Public Sector

Industry

Retail

Appointed internallyAppointed through personal contactAppointed through executive searchUnion appointedGovernment appointedEmployer electedMember elected

Method Used (%)1009080706050403020100

Corporate

Public Sector

Industry

Retail

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Skin-in-the-game Characteristics

Characteristic (%) Corporate

PublicSector

Industry

Retail

Director personally in the fund*** 69 73 62 21

Av personal super of director in the fund*** 63 56 44 12

Av family member of director in the fund* 8 17 32 15

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Conclusions

Retail funds have governance policies and practices which are statistically different from those of other sectors.

The profit motive may diminish the alignment of interests between a fund and its beneficiaries.

This may lead to a higher agency cost as an explanation for lower investment performance of Retail funds.