Melbourne Money and Finance Conference Crediting Rate v Unit Pricing: Issues for Super Funds

1. Melbourne Money and Finance ConferenceCrediting Rate v Unit Pricing: Issues for Super Funds Jules Gribble 25 May 2007

2. The Big Picture • Value attribution • Primacy of investor interests • Governance bar raised • Issues and errors WILL happen

3. Value Attribution • Crediting Rate / Invest Account • Value = Dollars + Interest • Number of dollars increases • Unitised • Value = Units * Unit price • Value of each unit increases • Key is value change

4. Crediting Rate Process • Typically • Interim rate - prospective • Declared rate – retrospective • Attribute annually • Transactions occur during periods • Some issues • Smoothing - and reserves • Attribution – complexity, time • ‘Close enough’ is not good enough

5. Unit Price Process • Calculation conceptually simple … • UP = Net Asset Value / Units on Issue • NAV = Assets – accruals, expenses • Full process completed each UP period • Force asset liability match each period • Appearance of precision • Inherent ‘noise’ in the process • Role of estimates

6. Forward/Historic UP’s • Historic UP inequitable in principle Time Forward UP Historic UP UP Calc

7. Where to Unitise? Reporting / perception User – external to entity Member Accounts Admin Systems – internal Crediting Rates Investment Management Commonly unitised already Fund Managers

8. Unit Pricing • NOT a cause of errors • Drives • Transparency • Accountability • Good governance • Consequences • Improved equity • Cultural changes when unitise

9. Why is Value Attribution Difficult? • Operational risk management • Theory vs implementation • Real time ‘treadmill’ • Emphasised with unit pricing • Increased use of Unit Pricing • Competitive (perceived?) pressures • Portability and choice • Improved equity and governance

10. People and Processes … Para UP Data Fund Admin Investors Review $ +/-

11. Two Streams of Governance • Functional Chain • Process implementation • What to do • Focus on detail • Governance Chain • Policy and process management • How it is done • Focus on bigger picture

12. External Guidance • APRA/ASIC – ‘Good practice’ guide • Not ‘Best practice’ • Ensure policy set, not set policy • Context of risk management, governance • Minimum bar to get over • Not ‘carved in stone’ • ASFA, IFSA - Recommended practices • Accountable for own needs and position

13. Governance Cycle Board Management Staff Policy People Monitor Implement • - Process • Systems • Document • - Accountability • Sign-off • Review

14. Principles - Functional Chain • Appropriate value for each investor • Equity • Best estimate at the time • Primacy of member interests • Group – long term interest of Fund • Independence of investors • Documentation

15. Principles - Governance Chain • Explicit policy setting • Policy and rules reflected • Consistency with industry, regulation • Simplicity and robustness • Independent reviews • Implicit is proper risk management • Regulatory ‘lighting rod’

16. Some Observations … • Forward unit pricing is good practice • Daily unit pricing not ‘more equitable’ • Equity is difficult • Outsourcing has risks • Can super funds afford not to unitise? • Performance fees – in whose interest

17. Jules’ Contact Details • Jules_Gribble@askit.com.au • (3) 9605-4602, 0408-127-624 • www.askit.com.au