How will Basel 3 and associated regulatory changes affect the investment strategies of superannuation funds? Discussant comments by Michael Skully Monash University

2 Banks and superannuation  Basel 3 raises some important questions for banks and through them superannuation funds.  While the paper does not raise the issue directly, banks are of course major players in the retail superannuation funds business via CFS, BT and the like.  They are also major indirect players via their wholesale fund management business, custodial business and other services.

3 Major super funds (6/2012) AMP Super. Savings Trust51.9bn Australian Super 47.8bn State Public Service43.5bn Colonial FS First Choice (CBA)43.2bn Retirement Wrap (BT)34.2bn Universal Super (MLC-NAB)33.9bn First State Super. Scheme 33.9bn UniSuper 32.6bn OnePath (ANZ)26.1b n Retail Employees Super 22.6bn 3

4 Australian loan syndications  Banks will find it more expensive to hold assets on the balance sheet and so may seek non-banks as participants.  It is surprising that despite one of the largest managed funds industry, non-banks account for a very minor portion of this market.  In contrast, the USA is dominated by non- bank activity.

5 Loan syndications: Aust. vs. USA

6 Banks & super fund participation  The problem for superannuation funds to participate in term loan syndications is the matter of liquidity. Most secondary transaction in Australia has been where the banks exited problem loans.  The use of pooled funds with pro-rata repurchase rights on sale is not the solution.  There needs to be a real market.

7 Superannuation fund liquidity  It is certainly true that superfunds should have a long term investment horizon and invest more for the longer term than other investors.  In practice, the introduction of investment choice and then member choice imposed considerable liquidity constraints on most funds.  Some illiquid investment is possible but not at the levels taken prior to the GFC.

8 Other impacts The LCR and NSFR were expected to reduce returns but so far the banks have continued to offer reasonable compensation for taking 31 days and longer products. Derivatives may become more expensive but thus far the use of an ISDA with a 2 way collateral support agreement has mitigated some of the expected regulatory caused cost increases.

9 Member directed options  Some larger superannuation funds now allow members to purchase shares in specific companies and place term deposits within their overall account.  This helps them respond to the rapid growth of the SMSFs as well as allows members to access better TD rates - as retail clients - than the fund itself could as financial institution.  Such deposits, as they are in the name of trustee, would seemingly not have FCS cover.