Super fund segregation should be front of trustees’ minds

Whether superannuation funds segregate members’ assets into separate accumulation and pension pools or continue combining them is a critical decision for trustees and needs to come down too much more than just fund size, a leading implementation manager has warned.

While there was no set rule on what superannuation fund boards and executives should decide, 2.8 million accounts would move from the accumulation to pension phase over the next decade as the Baby Boomers retire, making it an increasingly important choice.

According to Parametric, a key benefit in segregation of the two asset pools lay in the performance drag on international equity portfolios from foreign dividends withholding tax.

“This drag—38 basis points on a passive international equity portfolio over 2018—is a permanent cost to pension, but not accumulation, members and can be addressed if super funds can design exposures specifically for pension pools,” the company’s Australian managing director, Raewyn Williams, said.

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Another consideration for trustees would be the final form of the Government’s Retirement Income Covenant, which could impose legislative requirements that the portfolio levers available in an unsegregated structure mightn’t be nuanced enough to meet.

“This would be a disturbing development, given that we believe segregation is a highly individual decision and should be a question of super fund fit, not regulatory impost,” Williams said. “Asset segregation will be a good strategy for many super funds, as a powerful instrument in their plans to genuinely deliver mass customisation to members, but it will not be the answer for every fund.”

Parametric strongly believed that the decision should come down to funds themselves, with Williams saying it should ultimately tie back to a fund’s broader strategic thinking as to whether mass production or mass customisation would better drive its future.