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

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Melbourne Money and Finance ConferenceCrediting
Rate v Unit Pricing Issues for Super Funds

• Jules Gribble
• 25 May 2007

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The Big Picture

• Value attribution
• Primacy of investor interests
• Governance bar raised
• Issues and errors WILL happen

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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

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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

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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

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Forward/Historic UPs
Time
Historic UP
Forward UP
UP Calc

• Historic UP inequitable in principle

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

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

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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

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People and Processes
Para
UP
Fund
Data
Admin
Investors
Review
/-
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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

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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

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Governance Cycle
Board Management Staff
Policy
People
Monitor
Implement

• - Process
• Systems
• Document

• - Accountability
• Sign-off
• Review

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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

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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

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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

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Jules Contact Details

• Jules_Gribble_at_askit.com.au
• (3) 9605-4602, 0408-127-624
• www.askit.com.au