Why asset segregation could be a good thing
The decision by Australian super funds on whether to segregate member assets into separate accumulation and pension pools or continue combining them is a critical one that needs to be front and centre of their boards and executive teams’ strategic thinking.
Raewyn Williams, the Australian Managing Director of the global implementation specialist manager Parametric, says: “There is no hard and fast rule on what the best approach is – but any decision needs to be far more nuanced than simply looking at fund size.
“The influence of scale on this decision is quite limited, and factors such as brand strategy, member composition, technological platform, legal positioning and culture are more likely to drive segregation thinking.
“The decision should nest within the fund’s broader strategic thinking about whether a mass production philosophy will drive its enterprise model or whether mass customisation will be the key to the fund’s future.”
These observations are drawn from Williams’ latest piece of research, titled “Should Superannuation Funds Segregate Their Assets?”, which examines different forms of asset segregation, the key motivations for super funds to consider it and why segregation is an individual super fund’s choice.
“The backdrop to this research is the fact that more than 2.8 million accounts will move from the accumulation to the pension phase over the next decade.
“Whether these retirees keep their savings with their super fund, change funds, adopt a self-managed approach or move out of the system entirely will hugely influence the destiny of superannuation funds, so it’s critical they use their best thinking, and devote adequate resources, to ensure they get this decision right.”
She says for those super funds interested in building the business case for segregation, one quantifiable benefit of asset segregation is the performance drag on international equity pension portfolios from foreign dividend withholding tax.
“This drag—38 basis points on a passive international equity portfolio over 2018—is a permanent cost to pension (but not accumulation) members and can be addressed if super funds can design exposures specifically for pension pools.
“For another example, consider the idea of ‘franking-credit-tilted’ Australian equities. Our previous research has identified the additional risks introduced into an accumulation portfolio to target this extra source of yield. But does this evaluation change if a segregated pension portfolio can double the extra yield for the same amount of risk—or redefine its definition of risk entirely?
“And how asset segregation would be implemented is also relevant to any decision and shouldn’t be parked for a later investigation.”
Williams says another important piece of the jigsaw will be the final form of the Government’s Retirement Income Covenant, as this could have a big influence on whether more super funds choose asset segregation.
“The portfolio levers available in an unsegregated structure may not be nuanced enough to meet the legislative requirements of a Comprehensive Income Product for Retirement.
“This would be a disturbing development, given that we believe segregation is a highly individual decision and should be a question of super fund fit, not regulatory impost. Asset segregation will be a good strategy for many super funds, as a powerful instrument in their plans to genuinely deliver mass customisation to members, but it will not be the answer for every fund.”
For more information or to obtain a copy of any research cited, please contact:
Simrita Virk at Shed Connect
M: 0434 531 172
Parametric Portfolio Associates® LLC (Parametric), headquartered in the U. S. in Seattle, Wash., with Australian offices at MLC Centre, Suite 6502, 19-29 Martin Place, Sydney NSW 2000, is registered as an investment adviser under the U. S. Securities and Exchange Commission Investment Advisers Act of 1940. Parametric is exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and pursuant to the Australian Securities and Investments Commission's (ASIC) Class Order 03/1100 and ASIC Corporations (Repeal and Transitional) Instrument 2016/396. SEC rules and regulations may differ from Australian law. Parametric is not a licensed tax agent or adviser and does not provide tax advice in Australia or any other country. This material is intended for wholesale use only and is not intended for distribution to, nor should it be relied upon, by retail clients. With over $216 billion USD of assets under management as of 31 December 2018, Parametric is a global asset management firm offering investors a variety of portfolio solutions, including tax-managed centralised portfolio management, tax-managed indexing and factor investing strategies, as well as emerging markets and defensive equities strategies. Parametric Australia is a division of Parametric Portfolio Associates® LLC that is a majority-owned subsidiary of Eaton Vance Corp, one of the world's most dynamic global asset management companies.
For more information please visit website: www.parametricportfolio.com.au