Super fund managers face bonus crackdown

FUND managers will find it harder to give themselves big bonus rises 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 bonus rises 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 arises from 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" that bonuses rise in line with the sharemarket but when markets fall, salary packages are renegotiated to include a larger portion of fixed pay.

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

Draft MySuper legislation suggests fund managers may be forced to repay bonuses from previous years when they underperform the market. Bonuses would have to be based on longer periods of market performance and they could be determined on an after-tax and after-fee basis only.

Institute chief executive Fiona Reynolds said the draft criteria represented a "good step in the right direction".

"We need fee models that reward fund managers when they have demonstrably contributed to asset growth and out-performance," she said. Ms Reynolds said there was still a "get-out clause" for funds to overlook the criteria but they would have to prove such an approach was in the best interest of members. While the standards are part of MySuper, Ms Reynolds said they were likely to apply to 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 paid performance fees when they earn them," Ms Reynolds said.

When the government released the draft MySuper legislation last month, Superannuation Minister Bill Shorten said: "We've increased super from nine 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."

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Frequently Asked Questions about this Article…

What are the proposed changes to super fund managers' bonuses under the MySuper performance fee rules?

Draft MySuper rules would tighten performance fee rules so bonuses must be based on longer periods of market performance, assessed on an after-tax and after-fee basis, and could require managers to repay past bonuses if they later underperform the market.

How will the proposed crackdown affect performance fees paid to superannuation fund managers?

The proposal aims to make performance fees fairer by linking them to demonstrable, long-term outperformance after fees and taxes; it would limit short-term ‘win-win’ bonus rises during bull markets and introduce mechanisms to claw back pay when managers underperform.

Could fund managers be forced to repay bonuses if returns fall behind the market?

Yes — the draft MySuper legislation suggests fund managers may have to repay bonuses from previous years when their performance subsequently underperforms the market, although this is part of proposed rules rather than final law.

When do the MySuper rules start and will they apply to all super funds?

MySuper, a no‑frills super product, is scheduled to begin in July next year and the performance fee standards form part of that framework; the Australian Institute of Superannuation Trustees says the standards are likely to apply to other super funds as well, though there is a narrow 'get‑out clause' in certain circumstances.

Why are regulators targeting super fund managers' bonus practices?

Regulators are responding to investor concerns that managers' performance fees can feel like a ‘win‑win’ — rising with bull markets while packages are reworked to increase fixed pay when markets fall — and to ensure fees don’t erode retirement savings as superannuation grows.

How will stricter performance fee rules protect everyday super fund members' retirement savings?

By requiring fees to be tied to genuine, long‑term outperformance after fees and tax and allowing clawbacks for underperformance, the rules are designed to ensure members only pay performance fees when managers have actually earned them, boosting confidence as the super guarantee rises.

What is the 'get-out clause' mentioned in the draft MySuper criteria?

The draft criteria include a provision allowing funds to depart from the standards, but funds would need to demonstrate that doing so is in the best interests of members before they can rely on that exception.

How big is the superannuation industry and how much goes to fund managers?

The article notes Australia's super industry manages about $1.3 trillion in assets, with roughly half the cost of managing those assets arising from payments to fund managers; the industry was on track to generate about $9.4 billion in revenue that year.