Melbourne Money and Finance Conference Crediting Rate v Unit Pricing: Issues for Super Funds Jules Gribble 25 May 2007

2 The Big Picture  Value attribution  Primacy of investor interests  Governance bar raised  Issues and errors WILL happen

3 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

4 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

5 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

6 Forward/Historic UP’s  Historic UP inequitable in principle Historic UP Forward UP UP Calc Time

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

8 Unit Pricing  NOT a cause of errors  Drives Transparency Accountability Good governance  Consequences Improved equity Cultural changes when unitise

9 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

10 People and Processes … Fund Data UP Admin Investors Review Para $ +/-

11 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

12 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

13 Governance Cycle Policy Monitor Implement Board Management Staff People - Process - Systems - Document - Accountability - Sign-off - Review

14 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

15 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’

16 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

17 Jules’ Contact Details   (3) , 