Fund managers will have to earn pay rises under new rules

FUND managers will find it harder to give themselves big increases in their bonuses during bull markets under rules proposed by the government, a leading superannuation group says.

By InvestSMART · 15 May 2012

By InvestSMART ·
15 May 2012

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FUND managers will find it harder to give themselves big increases in their bonuses during bull markets under rules proposed by the government, a leading superannuation group says.

About half the cost of managing the nation's $1.3 trillion in super funds is accounted for by payments to fund managers, with the industry on track to make $9.4 billion in revenue this year.

A key complaint of investors has been that managers' performance fees can appear to be "win win".

According to this criticism, bonuses tend to rise in line with the sharemarket but, when markets fall, salary packages are re-negotiated to include a larger portion of fixed pay.

But the Australian Institute of Superannuation Trustees says the practice faces a crackdown when new criteria are introduced with MySuper, a no-frills super product beginning in July next year.

For instance, draft MySuper legislation suggests fund managers may be forced to pay back bonuses from previous years when they underperform the market. As well, bonuses would have to be based on longer periods of market performance and could only be determined on an after-tax and after-fee basis.

The chief executive of the association, Fiona Reynolds, said the draft criteria represented a "good steep in the right direction".

"We need fee models that reward fund managers when they have demonstrably contributed to asset growth and out-performance," Ms Reynolds said.

Ms Reynolds said there was still a "get out clause" that would allow funds to overlook the government criteria, but they would have to prove such an approach was in the best interest of members.

The standards are part of MySuper, but Ms Reynolds said they were likely to apply to performance fees in other super funds.

The proposal comes as the government seeks to raise the superannuation guarantee from 9 per cent to 12 per cent by 2019-20.

"In a compulsory super system where you have legislated growth of 12 per cent, super fund members need to be confident that fund managers are only be paid performance fees when they earn them," Ms Reynolds said.

When the government released the draft MySuper legislation last month, the Minister for Superannuation, Bill Shorten, told BusinessDay some fund managers' pay was excessive.

"We've increased super from 9 to 12 per cent, but we don't want to see that all frittered away by fund managers clipping the ticket on the way through on people's retirement earnings," Mr Shorten said.

The criteria for performance fees is contained in draft MySuper legislation, which is open for industry consultation until tomorrow. The government expects to have legislation ready by the spring sitting of federal parliament.

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Frequently Asked Questions about this Article…

What are the proposed MySuper rules that would affect fund managers' pay?

Draft MySuper rules would tighten how performance fees and bonuses are paid to fund managers. They would require performance fees to be measured over longer periods, calculated on an after‑tax and after‑fee basis, and could force managers to pay back past bonuses if they subsequently underperform the market.

How could the new rules change the way performance fees are calculated?

Under the proposal, performance fees would need to be based on longer periods of market performance and only determined after taxes and all fees are taken into account, so managers are paid only when they demonstrably add net value to members’ accounts.

Could fund managers be forced to repay bonuses if they later underperform?

Yes. The draft MySuper legislation suggests fund managers may be required to pay back bonuses from previous years when their subsequent performance falls short of the market.

Why are regulators targeting performance fees and bonuses now?

Concerns that managers’ bonuses can be a 'win‑win'—rising in bull markets and being replaced by higher fixed pay in downturns—have prompted change. The Australian Institute of Superannuation Trustees and the government want fee models that only reward managers when they actually contribute to asset growth and outperformance, especially as the compulsory superannuation guarantee is being raised.

How big is the super industry and why does this matter for everyday investors?

The article notes Australia has about $1.3 trillion in super funds, with roughly half the cost of running those funds paid to fund managers. The industry is on track to make about $9.4 billion in revenue this year, so rules that better align fees with genuine performance aim to protect members’ retirement savings from excessive or unfair charges.

What is MySuper and when does it start?

MySuper is a simple, no‑frills super product being introduced by the government; the article says MySuper begins in July next year. The draft legislation establishing MySuper performance fee criteria was open for industry consultation and the government expected final legislation by the spring sitting of federal parliament.

Can super funds ignore the new government criteria for performance fees?

There is a 'get out clause' in the proposal that would allow funds to deviate from the government criteria, but funds would have to prove that doing so is in the best interests of their members.

Who is supporting these tougher rules on performance fees and why should members care?

The Australian Institute of Superannuation Trustees, led by CEO Fiona Reynolds, welcomed the draft criteria as a step in the right direction, saying fee models should reward true contribution to asset growth. The Minister for Superannuation, Bill Shorten, has also warned some fund manager pay is excessive. Everyday investors should care because the changes aim to ensure performance fees don’t erode members’ retirement earnings—especially as the super guarantee rises toward 12%.