LOCAL GOVERNMENT (SUPERANNUATION SCHEME) (MERGER) AMENDMENT BILL

Committee Stage

In committee.

(Continued from 15 May 2012.)

Clause 1.

The ACTING CHAIR (Hon. J.S.L. Dawkins): When the committee last met it had made some progress in clause 1. The Hon. Mr Lucas is seeking the call; however, the minister has also indicated that he has some information to put on the record. I am happy to go with the Hon. Mr Lucas first as he is on his feet.

The Hon. R.I. LUCAS: As members would be aware, I asked a series of questions of the minister when we last debated this, I think on Tuesday, and the minister indicated that all of this information, in his view, was available publicly and that he was not going to provide any answers. In the interim I have separately contacted people from Local Super, and we have been contacted by representatives of StatewideSuper as well. I want to, for the benefit of members who might be interested in the issues that I was raising, put on the record information that has been both provided to me and gathered from other sources, as well.

In response to some of the issues that I raised, I am advised that, based on the assets and membership as at 31 March 2012, the combined fund will have a total of $4.044 billion in assets under management, and approximately 160,000 members.

It is clear from both superannuation fund websites that StatewideSuper is the bigger fund, significantly, in terms of numbers of members and of funds under management. I think there is approximately $1.6 or $1.7 billion in funds for Local Super and, clearly, StatewideSuper has approximately $2.4 billion in assets. We see, in terms of this merger, that the bigger partner in terms of not only members, by a long way, but also funds under management is StatewideSuper.

I asked a series of questions about the relative rates of return in terms of the performance of both funds and I have been provided with some information, and I want to provide some further information as well. In relation to the period to 31 March 2012, the one-year return for Local Super we are told was 2.99 per cent, and for StatewideSuper it was 0.89 per cent. For over three years, it was 10.57 per cent for Local Super, and for StatewideSuper it was 4.04 per cent. For the five-year time frame, which I had asked about, for Local Super it was 2.06 per cent and for StatewideSuper it was actually negative 2.52 per cent.

When one looks at that critical five-year horizon in terms of investment performance, as you come into this merger, the members of Local Super have been looking at investment returns on average of 2.06 per cent and StatewideSuper has been going negative at 2.52 per cent over that period. If you go over a longer horizon of seven years, again, Local Super's performance has been far superior. Local Super was 5.74 per cent and StatewideSuper was 2.12 per cent. For 10 years, Local Super has been 5.97 per cent and StatewideSuper 3.47 per cent. Whether it be one, three, five, seven or 10 years, the investment performance of Local Super has been significantly greater than for StatewideSuper during that particular period.

The information provided to me off that table says that is the performance for the default investment option, which contains a significant proportion of each fund's assets for the period to 31 March 2012. I want to come back to that issue of the default investment option in a little while, because it is intriguing that the default option for Local Super—and I will check this; I have the document here—is actually what is called the 'growth option', and I think the default option for StatewideSuper is actually called the 'balanced option'.

As I said, I will check that in a moment; I have the actual documents off their websites. Although, when one looks at the asset profiles of the two, it would seem that they are much closer than might otherwise have been the case. The notes that I have had sent to me from Mr Smelt from Local Super in relation to that table that I have just referred to indicate:

Longer-term historical performance of Statewide's balanced option has been impacted by the investment structure that had been implemented. A review of the fund's investments approximately 3 years ago resulted in a change in the adviser and the approach to management of the assets to be consistent with the approach followed by Local Super. Both funds utilised the services of JANA Investment Advisers for asset consulting advice.

StatewideSuper's single asset investment choice option returns indicate top quartile performance for Australian Equities (over 5 years) and Fixed Interest (over 1 year) as well as second quartile (i.e. above average performance) for Cash and International Equities (over 1 year).

Whilst noting the comments from Local Super that there have been some changes three years ago, I still note that, in terms of the last one-year performance, Local Super's performance at 2.99 per cent compared to StatewideSuper's 0.89 per cent is still significantly greater, and the three-year performance of Local Super at 10.57 per cent compared to 4.04 per cent for StatewideSuper is significantly greater, even for the one year and the three-year profiles.

In the end, as a member of parliament, I am not seeking to impose any view that I might express in this chamber in relation to the adequacy of the decision to merge the two superannuation funds. I hasten to say—and it is the reason why I ask the questions of the minister, because then the information could be provided by the government's advisers and the merger proponents as well—that clearly as an observer we are not privy to all the information in relation to the merged entity.

I am assuming that the proponents of the merger are of the view that, even though Local Super is the smaller partner in the merged entity—that is, by way of members and also funds under management—in some way both the benefits of the merger (which I will turn to in a minute) but also in terms of investment performance will be much closer and will be either dictated to or significantly influenced by the past performance of Local Super, as opposed to the long-term history of StatewideSuper. As I said, that is just an observer's supposition. I readily accept that those who have laboured over this for probably a number of years have much more information and more cogent reasons as to why this would be for the benefit of members, in particular, people from Local Super.

I place on the record again that StatewideSuper is controlled by SA Unions and Business SA—your peak employer and peak union bodies. When one looks at the membership of the board (this is taken from their website, so I assume it is accurate) one sees people like Janet Giles, Ian Steel and Lindsay Oxlad representing the unions, and people like Nick Begakis, Greg Boulton, Mike Terlet and others—that is not the full list—being nominated by Business SA. In relation to Local Super, there are the collective interests of the LGA, the local government bodies and a number of the unions. I think the AWU and the ASU are actively engaged in relation to that.

If I am a member of Local Super and I look at the performance of Local Super over a period of time, and I look at the performance of StatewideSuper and it has been merged, then I am assuming that the reason why there has been no opposition to this is that everyone has accepted the detailed advice that they have been given in relation to how the merged entity will be much closer to or better than the performance of Local Super compared with StatewideSuper.

When one goes to the Frequently Answered Questions section of the respective websites, I have to say that the information that is provided there to a non-member is very broad and non-specific and makes general claims about the benefits. It may well be that the individual members—and we have members representing unions in this chamber who are associated with the unions involved in this merged entity who may well know—have been given detailed information to convince them that this is going to be of benefit to all. As I said, I do not know that. As a non-member I cannot get to the members' section of these funds, and that is understandable. That is one of the reasons why I sought information from the minister on Tuesday when we first debated the bill. As the record shows, the minister refused to provide any answers at all in relation to it. In fact, he tried to jam the bill through before even I could go off and check some of this information for myself.

The issue I want to raise relates to the default investment option. On the surface, it is intriguing because the default option for StatewideSuper is, as I said, the balanced option, and the default option for Local Super is the growth option. However, when you try to go through the detail of the growth option for Local Super and the balanced option for StatewideSuper, they appear to be much closer than perhaps the names might indicate.

Looking at Local Super, the website claims that the market linked account performance for 30 June 2011—the target for the growth funds—was CPI plus 3.5 per cent. The conservative option was CPI plus 2 per cent. The growth option for Local Super achieved net rates of return that exceed changes in CPI by at least 3.5 per cent per annum over rolling six-year periods. However, if you look at the StatewideSuper breakdown, the balanced or default option is to achieve returns after tax and fees that exceed CPI plus 3 per cent over rolling five-year periods. So they are different periods: one is five years and one is six years. The balanced or default option for StatewideSuper is seeking 3 per cent plus CPI. The growth option for Local Super over six years is above CPI by 3.5 per cent.

In looking at the mix of investments in Local Super for what they call the growth option, 74 per cent of the mix of investments are growth investments and 26 per cent are defensive investments. When you go through the balanced or default options for StatewideSuper, the benchmark in the strategic asset allocation—again, not being an expert in this area—is certainly cash and fixed interest, being defensive options, which add to about 15½ per cent.

The other 84½ per cent can be potentially characterised as growth options or growth investments. There are Australian equities, international equities and property. The other three are private equity, infrastructure and alternative debt. I assume that they are generally characterised in strategic asset allocation terms as growth investments. If that is the case then the strategic asset allocation for the balanced fund would appear to be 84½ per cent. I assume that there must be some component of that which is seen to be defensive and not seen to be growth, although it is very hard to tell from the information publicly available.

However, this raises the interesting question as to what the default option is going to be for the merged fund, because as members will know, with superannuation, the majority of members tend to take the simplest and easiest course, which is whatever the default option is. A smaller percentage of people go through it and decide to take the high-growth option, the conservative option, the cash option or the socially responsible option, or whatever else—

The CHAIR: The balanced option.

The Hon. R.I. LUCAS: Yes, most people take the balanced option. However, in relation to Local Super, the default option is not called balanced: it is called the growth option. The next option beneath that appears to be what is called the conservative option, which in most other funds is not the balanced option.

What is not clear in relation to this—and maybe the decisions have not been taken. It may be very clear to all the 160,000 members, that is, they may all have been told that the default option is going to be the growth option from Local Super or the balanced option from StatewideSuper or maybe some new option. As I said, it may well be that that decision has already been taken. These are the sorts of issues that have been raised with me by one or two members. There are members in this chamber who represent the unions involved in all of this. It is confirmation, I guess, that everyone is happy and understands the benefits in relation to the merger that is before us.

The other question that I asked was in relation to the savings. All of the website information said that there would be savings by bringing the two together, and I think that on the surface of it that makes sense but no-one appeared to quantify it. I thank Local Super because they have given me some figures which I will place on the record:

As part of the due diligence completed for the merger savings in the order of approximately $1.5 million per annum had been identified in future years. Over the period to the 2017 financial year the total savings, after allowance for costs associated with the merger, amount to $5.5 million.

I think from that it is clear, and I make no criticism of this, there are obviously significant costs associated with the merger, one would assume—I do not know what they are—and what this answer is saying is that towards the end of this period the savings, after you have expended the initial savings, will start ratcheting up to $1.5 million. I suspect in the early years that you have the upfront costs, there will be lower levels of savings and then eventually it will get up to $1.5 million which is what the target has been.

I think it is useful to have that on the record because members over the coming years will be able to check with their representatives to see whether the claims of the merger have eventuated, that this level of savings has occurred, and that the benefits from that hopefully are being seen by the members.

The next question I raised was in relation to what the current fee arrangements were. The answer I have been provided with is that Local Super's current admin fee is $1 per week plus an asset fee of 0.23 per cent per annum, and they charge an investment fee for the default option of 0.68 per cent per annum. StatewideSuper charges an admin fee of $1.50 per week—so that is a higher dollar per week, but it does not have a percentage asset fee per annum in addition to that. Its investment fee for the default option, which is a different default option, is approximately the same at 0.67 per cent per annum.

It is useful to have that information in terms of the fee arrangements. What members should be asking, and hopefully they already have answers, is what the proposed fees are going to be for the new merged entity. I then asked some questions in relation to the number of defined benefit members. Local Super has advised me that:

Local Super does have members that are provided with defined benefit entitlements and these will be retained unchanged in the merged fund. There are approximately 4,450 members that currently have defined benefit entitlements. Under the previous legislation and this current bill, all members entitlements are supported by the various councils that have employees that are contributing to the defined benefit section of Local Super and the councils are required to contribute the required amount to support then benefits to be provided to those defined benefit members.

The vast majority of employers are councils with a small number of employers and members who have developed from local government activities being outsourced to the private sector in the past.

The last bit of information that Local Super provided me that I place on the record is as follows:

The last actuarial review for the fund was conducted as at 30 June 2011—

this was in relation to Local Super—

and this showed that Local Super was in a satisfactory financial position with sufficient assets to cover vested benefits payable to members and that the current contribution rate payable by employers of 9.3% was sufficient to finance ongoing benefits. Due to volatility in investments since the date of the report we estimate that the vested benefits index at 31 March 2012 was 99.4% and this continues to be monitored on a quarterly basis.

I place that information on the public record. As I indicated on Tuesday, the Liberal Party is supporting the legislation. We do not propose to unduly delay the passage of the bill today. The government wants the bill to be passed by today, and we will certainly be assisting that. I have only one or two questions as a result of information I have just placed on the record; one is in relation to the issues I raised about defined benefit entitlements.

I ask the minister whether the defined benefits for those 4,450 members are guaranteed in all circumstances under the operation of the merged entity; that is, there is no set of circumstances where those members with defined benefits could find themselves in a position where that benefit is not paid to them. Can the minister stand up before the committee and guarantee that there is no circumstance where defined benefit members, as a result of the legislation we are supporting and the merger that is going ahead, will have their defined benefits placed at risk at all?

The Hon. R.P. WORTLEY: The new combined merged super scheme will be regulated and controlled by a board of trustees comprising employers and employee representatives. For the honourable member to sit there and ask me to give a guarantee that there would be no circumstances by which a default benefit scheme or benefits would be dispensed with, I would have to say that I am not prepared to give that guarantee for the simple reason that there may be circumstances where there is a buyout of the benefits of a defined benefit scheme, where members are given a choice to cash out their benefits.

I cannot give an ironclad guarantee of what will happen (I do not think anybody could give an ironclad guarantee), but I am sure that the trustees have an obligation to use due diligence, and one of their charters would be to protect the rights of all members. I do not think the honourable member seriously expects a minister to stand up in this place and give an ironclad guarantee for ever that the defined benefits will be there.

The Hon. R.I. LUCAS: I am certainly not asking questions in relation to where an individual member might be given the option of what the minister says is a buyout, where he or she says, 'Hey, that's a better deal for me; I'm happy with it.' I am contemplating the circumstances where a member is entitled to a level of benefits and, through a set of circumstances, does not get them. So, not to get something even better.

I am not expecting the minister, off his own bat, to give the guarantee. I ask whether he has been given that assurance by the proponents of the merger. If the minister is not going to answer that question, is he prepared to say that, as a result of the proposed merger, members with defined benefits are at no more risk of losing their benefits than already exists under their current schemes?

If the minister's argument is that the trustees can only do the best job they can and that there is always a risk, through poor performance, that even defined benefit members will not get their benefits under the existing legislation and scheme, what I am asking the minister is: has he been given an assurance, or has he sought an assurance, that the members are at no more of a risk under this merged arrangement, and under this legislation we are being asked to approve, of being placed in that position?

The Hon. R.P. WORTLEY: The way these things work is that there is an actuarial review of the assets and liabilities of super funds every so often. They will then work out a figure that will need to be contributed by the employers to ensure that the ongoing benefits are protected. As we see here, as of the vested benefits index at 31 March, it was 99.4 per cent. This continues to be monitored on a quarterly basis, which I imagine is a bit too soon, but every year at least the employers will be told that to continue to be able to pay these benefits they may need to contribute X per cent. That may fluctuate depending on the investments.

As members know, there has been a global financial crisis and the share market has taken a significant tumble over the last few years, but that will pick up eventually. When it does, the amount of contribution may decrease. I have not been given a personal guarantee by the superannuation fund, but I would have confidence to think that the interests of members are protected in this case, because they are two well-run superannuation schemes, and there is a requirement under the act to ensure due diligence and to act in the best interests of their members. I imagine it will be an ongoing process to do that.

At the end of the day, if there is a decision to do away with defined benefits—and I know that defined benefits are not a common thing now; they used to be quite common many years ago but they are going away more to accumulation funds—if they make a decision to do that, it would be a decision that the members would have to endorse, and that could be a possibility in future. I am sure it will be done through consultation and I am sure that members' benefits, if that situation occurred, would be adequately compensated.

The Hon. R.I. LUCAS: I will conclude my comments. I have raised the issues I wanted to, but the final comment I make on what the minister has just said is that the challenge for this merged fund (and we hope it is successful—parliament supports it), to go back to the figures I quoted at the outset, clearly is that you would not want investment performance continuing on the basis of the five-year performance of StatewideSuper. When you look at the comparison of StatewideSuper—and I remind members of the figures provided: over the five-year horizon StatewideSuper was losing at the rate of 2.52 per cent and Local Super was in the positive by 2.06per cent, a significant difference in terms of relative performance. I remind members that StatewideSuper is the much bigger partner in this merger.

Those who represent the AWU members, the ASU members and the other employees within local government have, one would hope, an ongoing interest that the performance of the merged entity will at least reflect the past performance of Local Super, and hopefully even better, in terms of the potential benefits to members, and not reflect the five-year performance of StatewideSuper in terms of the potential benefits to members, because if that is the case some Local Super members in four or five years will be saying, 'Hey, we were sold a pup in relation to all of this. These were the benefits we were going to see; however, here is the reality'. We will not know that for a number of years, obviously, in terms of performance.

That is all I wanted to place on the record in relation to these issues. We wish the merged fund well. Clearly the people who have worked on this will have much more information than those of us who are observing from outside and are not privy to all the confidential information they have been provided with. We hope that that is correct and accurate and we hope that members of the merged fund will benefit in the way that clearly the proponents and government envisage, because they have asked us to support this legislation, and indeed we have.

The Hon. R.P. WORTLEY: I, too, concur with the Hon. Mr Lucas that, looking at the five-year returns, there is a stark difference. I would just like to make the point that, when you are investing the money of a fund, it is much easier to move between investment strategies and fund managers if you are a smaller fund. Very often, small funds make lots of money and big funds make it difficult because they have to transfer their money between different performance managers and the like. So, it is easier for a small fund to have good returns over a period of time.

In saying that, I understand that both schemes will be running parallel with each other for six months. What will happen then is that the trustees, based on advice from JANA Investment Advisors—they give advice to both funds and I take Mr Lucas's point that they have been doing this for three years now and there is still a significant difference between the two, but I am sure they will sort those issues out in the best interest of the members. I, too, would like to wish both of the merged funds all the best for the future.

Clause passed.

Remaining clauses (2 and 3) and title passed.

Bill reported without amendment.

Third Reading

The Hon. R.P. WORTLEY (Minister for Industrial Relations, Minister for State/Local Government Relations) (16:26): I move:

That this bill be now read a third time.

Bill read a third time and passed.