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Pension fund governance: Australian policies and practices

Australian Prudential Regulation Authority. Pension fund governance: Australian policies and practices. Rotman ICPM / Netspar / Maastricht University. Discussion Forum – 30 October 2007. The Australian Pension System. Unfunded component: Age pension (safety net, means tested)

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Pension fund governance: Australian policies and practices

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  1. Australian Prudential Regulation Authority Pension fund governance: Australian policies and practices Rotman ICPM / Netspar / Maastricht University Discussion Forum – 30 October 2007

  2. The Australian Pension System 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

  3. 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-profit18% Small funds (1990s), (<5 members) 26% Regulation: SIS Act (1993) APRA (1998) RSE licensing (2006), Institutional funds (74% of assets)

  4. 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 practices 2. Investment performance: risk adjusted (AA data) High quality data: Design input from industry and other regulators Tested with a pilot survey of 15 funds in 2005 Response was compulsory by law Streamlined with multiple choice questions Data validation before submission Comprehensive: all funds with more than $200M

  5. Survey Data Coverage

  6. Data Collection Tables General Information Board Policy and Practice Board Priorities Key Decision Input Service Providers Board Directors Director Associations Data Comments

  7. 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.

  8. Board Practice by Sector

  9. Average Director Hours Spent Per Fund Per Year

  10. Main Sources of Input to Key Decisions

  11. Board Director Characteristics

  12. Skin-in-the-game Characteristics

  13. 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.

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