UniSuper regularly adds trophies to its cabinet, the two most recent being the Conexus Financial Superannuation Awards 2016 Default Fund of the Year and Overall Fund of the Year, both of which focused heavily on the super fund’s investment proposition. Despite its clear capability and strengths, its internal team structures mean it is nimble, says chief executive Kevin O’Sullivan.
“The combination of the strength of the investment committee – the grunt we have on it – together with the delegation that committee gives to the internal team is probably something that differentiates us,” O’Sullivan says.
As the name suggests, the super fund serves those working in Australia’s higher education institutions, and has managed to attract some of the best investment talent in the industry onto the board and investment team.
One of its latest appointees was Nicolette Rubinsztein, formerly the general manager of retirement at the Commonwealth Bank of Australia. She joined Chris Cuffe, chair of the board, and Ian Martin, chair of the investment committee, as an independent director of the super fund.
“And also with the other experts like Charles Macek and Tony Fitzgerald, there’s this incredible expertise within the entire investment committee, and then there’s John himself,” O’Sullivan says.
John Pearce has been the chief investment officer of UniSuper since 2009 and is the highest-paid chief investment officer in the superannuation industry, receiving a total remuneration of $1,355,279 for the financial year 2014–15.
This is not without reason. Close to half of the assets (around $25 billion) are managed in-house and Pearce has direct responsibility.
This combination of big-hitters on both the board and the investment team means there is comfort in the delegation of investment decisions from the former to the latter.
“We have these people [on the investment committee] with really great experience from across big fund-management companies. Those are the guys challenging the investment team saying: ‘Well, if you can convince us, we are willing to give you delegation to allow you to make significant investments without having to come to us for a separate meeting’.
“So, for example, when a bank calls us and says, ‘We’ve got this deal which is going to close tomorrow and you’ve got an opportunity to buy a couple of hundred million of it’, because of the delegations the investment team can think about [it], then call the bank back and say ‘yes we’ll take the $200 million’.”
He adds that a lot of other funds would need to wait for the next gathering of the investment committee or have a special meeting before the decision could be made, whereas the delegation within UniSuper allows it to access more opportunities.
“It’s funny, because you wouldn’t think a $52 billion fund would be nimble, but we are,” O’Sullivan says.
Some of the “excellent” investment opportunities the super fund has been able to participate in at very short notice, and with significant amounts of capital, include private placements with companies such as GPT, Transurban and DUET.
This structure of delegations also allowed UniSuper to take a large slice of the recent CBA Perls VIII hybrid securities issued to institutional investors.
Ten investment principles
Part of the reason the delegation works is because UniSuper has 10 investment principles that those managing the fund’s assets live by, O’Sullivan says.
This includes the asset allocations having a broad split between growth and defensive allocations as prescribed by the mandates under which the investment options operate.
For example, the balanced option is managed in accordance with a 70/30 mandated split between growth and defensive assets. And while portfolio turnover is relatively low, the super fund avoids setting static asset allocation targets. Instead, monthly meetings are held to discuss portfolio performance and market outlook, and as a result of these meetings, portfolio tilts around the neutral position are sometimes taken.
(It is also worth noting that to drive collegiate behaviour a significant component of discretionary remuneration is tied to common goals.)
Other principles cover areas such as ESG, in-house management, defined benefit management, valuation, diversification, market (in)efficiencies, liquidity, risk, and superannuation equalling life savings.
“If something does not tick all the principles, if it can’t get past them all, then we say that’s not for us; that’s not for our members.”
This recently occurred with a potential fund manager that was not appointed, despite the fact it had been a strong performer, because it failed to get a tick on three of the super fund’s investment principles.
“We had to make a decision, do we actually bypass our principles? Do we say they’ve actually got good performance, albeit their fees don’t get a tick? Even though we wanted to go with them, we didn’t because they did not satisfy the principles. That’s actually a brilliant thing to see.”
FlexiChoice and Fortress assets
Looking ahead over the next five to 10 years, O’Sullivan believes super funds must focus on post-retirement.
“We will need, and the industry will need, to come up with some good CIPR [comprehensive income product for retirement] solutions. There will be some acceleration of that over time, but it’s going to take a while because we are still in relative infancy in this space in Australia,” O’Sullivan says.
“As a fund we are into what I and John [Pearce] call ‘logical incrementalism’. We are not actually trying to be revolutionary, we prefer to be evolutionary.”
This incrementalism starts from the base of UniSuper’s defined benefit (DB) fund which is close to $17 billion and has been around for more than 35 years.
“The focus that we have for our DB fund is to invest in assets that have a lower risk of permanent loss of capital, investments we like to call our ‘fortress assets’. So we are investing in things like Sydney airport and Transurban, investments like that are great assets for a fund like ours.”
The super fund also has a commercial rate indexed pension product, so accumulation members who retire can buy a lifetime pension product from UniSuper.
The fund’s DB expertise and experience with these existing options have helped UniSuper to develop a new product called FlexiChoice, due to be launched in 2017–18, as it continues to push down a “continuum” offering a range of products in retirement.
The default for a member in FlexiChoice will be an income stream rather than a lump sum. Members also will be able to exchange some of their 24 per cent contributions (17 per cent employer/7 per cent employee) for salary. This freedom will allow members to dial down contributions to the 9.5 per cent statutory minimum.
The logic behind this product is, as members’ personal circumstances change due to financial priorities, health or other issues, they should be able to adapt their super arrangements.
“FlexiChoice is a product that will enable members to have greater flexibility to select DB or defined contribution (DC), depending on their current life stage. They can adjust between DB and DC as their circumstances evolve.
“In summary, it will be a more flexible retirement income vehicle that will address some of the things like members outliving their savings such as longevity risk.”
Where the industry needs to step up
Aside from a need to develop more products and services in the post-retirement space, and the perennial issue of reducing fees, one of the major issues O’Sullivan sees the superannuation industry needing to address is its over-attention to peer relativity.
“Peer relativity should be far, far less focused on; instead we should have an increased focus on what outcomes the members want. I am aware I can say that easily given that we are number one in terms of performance relative to other funds over three years.
“It’s nice that we are there, don’t get me wrong, but it’s nicer for me that we have actually delivered continued sustained, strong, long-term absolute performance to make sure we enable our members to maximise their retirement outcomes.”
He adds that the whole competitive aspect between super funds makes it hard to avoid group think, citing the example of direct investment options.
“One fund may have decided that it had to have a direct investment option to stop leakage to SMSFs and many other funds jumped on the band wagon. But is that something that is in fund members’ best interests?”
On the subject of SMSFs, O’Sullivan takes a view contrary to many others in the industry.
“A lot of people in the industry, at least in the big fund part of the industry, think SMSFs are bad, but personally I don’t. I think they can work very well for people,” he says, rationalising that as long as people understand the differential in investment expertise, insurance, tax and administration arrangements, funds should accept that a move to an SMSF may be in a member’s best interests.
“Also, the industry needs to step away from ideology. There’s too much focus on industry fund versus retail fund versus SMSFs. For me, it’s all about how do we make sure people can trust us that their lifetime savings are being looked after, rather than thinking the industry is out to do whatever is best for the funds themselves.
“We need to instil trust in the system. We need to make sure everyone knows we are always looking after the best interest of members, and not just saying that, but doing that.”
To this end, O’Sullivan’s wants UniSuper not only to be best practice in Australia, but also to adopt global best practice.
“Australian funds, and particularly the big ones, need to get their antennae on more than just Australia,” he says.
However O’Sullivan adds: “For those funds that were also nominated for Fund of the Year, I’ve got a lot of time for them as well. It’s not UniSuper and daylight – rather the other funds are very strong as well.”