
RG97 – will fee disclosure lead to lower investment returns?
- On 31/08/2017
- fees
Amongst the debate about whether the Australian superannuation system is competitive, everyone agrees that disclosure needs to be improved to allow members to make informed decisions about the relative merits of their fund. In theory, members should gravitate towards funds offering them better value – but they need to know enough about all the important pieces of a superannuation fund before they can make an informed decision.
However, anyone who has trawled through a fund’s mandatory Product Disclosure Statements will understand that the volume of information often hinders comprehension for the lay person. So, the goal should be to provide the relevant information in a standard format which can be easily understood by members.
The MySuper product dashboard is an attempt to do this by showing:
- the target investment return (usually expressed as a target over rolling 10 year periods)
- the investment returns for previous financial years
- a comparison between the return target and the returns for previous financial years
- the level of investment risk, and
- a statement of fees and other costs.
Unfortunately, it is not easy to express these valuable factors into comparable formats. Some of the problems are:
- setting a sensible return – and giving members a sense of the chance of achieving it over the next decade
- providing information about investment governance, depth of expertise and processes – without which, targets won’t be achieved
- providing past performance without commentary about whether it was achieved with a reasonable risk and whether the asset allocation and other factors are still valid
- advising members about risk (and not confusing this with short-term market volatility)
- setting fees on a consistent basis.
On the last point, regulatory requirements for superannuation funds’ fee disclosures are set for major changes, with an extensive revision of ASIC’s Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (RG97). This high impact change in disclosure requirements is now imminent, being scheduled to apply from 30 September 2017.
Australia will be the first market in the world to require fee disclosure of this nature. Unfortunately, there are a number of issues which mean that members will be confused rather than informed.
Key developments include:
- Requirements for disclosure of an extensive range of costs – covering fees, the Indirect Cost Ratio (ICR) and other costs such as transaction costs.
- Inclusion within the ICR of:
-
- costs incurred within “interposed vehicles” – these are entities sitting between a fund and its unlisted assets – typically property and infrastructure.
- reasonable estimates of providers’ management costs and margins on certain derivatives contracts – potentially involving highly complex and hence expensive calculations.
- A broad definition of transactional and operational costs which must be disclosed, including estimated buy-sell spreads in addition to explicit trading costs.
Unfortunately, many investment teams are concerned that RG97 in its current form is likely to have significant unintended consequences:
- Many aspects are still open to interpretation, making the deadline challenging, and making it questionable whether the new requirements will be applied consistently.
- The impact of RG97 on headline costs varies enormously between different funds. Indications of additions to disclosed fees and indirect costs range from a few basis points for some funds through to nearly 1% p.a. for others.
- Underlying costs and net returns to members have not changed – but the appearance of a large hike in fees presents major communication challenges.
- Unlisted assets such as infrastructure – which have for the most part served Australian superannuation fund members well – are especially hard hit.
We question whether the treatment of unlisted assets will increase transparency and comparability. Business management activities of listed infrastructure businesses are included in the cost structure of the business – in Australia and worldwide. In contrast, business management costs of unlisted infrastructure assets are swept up in the RG97 dragnet if they are incurred within interposed vehicles. This potentially gives the appearance of much higher costs for unlisted assets than would be presented if the same assets were listed.
The overall fees of the superannuation industry were 1.03% in the 2016 financial year. We expect they will have reduced much below that level when we publish the 2017FY results later this year. However, we already know the headline rate for 2018FY will rise simply because of a change in fee disclosure. This will feed ammunition to misguided researchers who believe that superannuation offers poor value – ironic when one considers the value delivered by the direct infrastructure assets which will account for much of the increase in apparent investment costs. Pressure to move to assets with lower disclosed investment costs will be an inevitable side effect. It will be especially unfortunate if attempts to make fee disclosure more consistent have the opposite effect in some key asset classes, and if this leads to investment decisions being distorted at the expense of long term net returns to members.
0 Comments