Kevin Liu

Improving the Cost Efficiency of Australian Pension Management

Recent advances in investment performance measurement and cost analysis are applied to suggest ways to improve Australian pension management. Using empirical data collected by the Australian Prudential Regulation Authority in 2006, we show that investment performance of different types of Australian pension firms is significantly correlated with their average costs. We identify benefits from increased scale (fund size), better fee negotiation, more direct investing, less active management, and better fund alignment with member interests.

Australian Superannuation Outsourcing: Fees, Related Parties and Concentrated Markets

Utilising a unique dataset collected by the Australian Prudential Regulation Authority (APRA), this paper examines the outsourcing by superannuation fund trustees eight superannuation functions, including administration, asset allocation, and investment management. In each of these individual outsourcing markets, we analyse related-party service providers, the concentration of independent service providers, and the combined impact on outsourcing costs. We find that ‘relatedness’ per se does not imply higher outsourcing fees: Related-party service providers used by not-for-profit funds generally charge no more than independent service providers, whereas retail related-party service providers tend to charge higher fees than their independent counterparts. We also find a wide diversity in competitiveness in the market for each function: Where outsourcing is concentrated among a small number of service providers - even where a large number of providers offer the service - we find that the dominant service providers charge higher fees.

Investment performance ranking of superannuation firms

Investment performance studies of pension or mutual funds have overall been too statistically inconclusive to create definitive rankings to help investors make fund selection decisions. This paper presents an alternative approach based on comparing the pension or mutual fund firms themselves which are highly diversified composite portfolios aggregated over all individual portfolios managed by the firms. Performance data of managed fund firms are more useful for investors because we show here that their statistics are more stable and predictable than those of individual portfolios which are subject to more random influences such as selection bias. This paper overcomes the pitfalls of the Sharpe ratio in ex-post performance ranking by using a new metric for the performance of the composite portfolio of a firm. The metric is risk-adjusted by the volatility of the firm’s benchmark, defined by the aggregate asset allocation of the firm. In an empirical study using unique data, we measure the performance of 115 major Australian superannuation firms. The results show that using the new metric the investment performance ranking of the firms is persistent. We identify that higher operational costs are correlated significantly with lower net investment performance. We indicate how the performance ranking of the firms can help investors make fund selection decisions.

The Implications of Complexity for Systemic Risk in the Superannuation System

The funds, entities and regulators involved in the Australian superannuation industry together comprise a system that is complex and dynamic. The differentiation between roles and the distribution of responsibility offers the system as a whole resilience against local failure. However the interconnections that bind and constitute the system have the potential to create and transmit risks within the system. This undermines the systems resilience to exogenous shocks. This paper uses a new data set on 200 Australian superannuation funds to map and analyse those links as a first step towards assessing the nature and severity of the threat that the links pose to systemic resilience. It concludes by outlining some of the regulatory issues that arise.

Pension reform: Australia and China compared

Abstract Over the past few decades, China’s pension system has evolved from separate schemes almost exclusively for urban and public sector workers to one with broad national coverage. In a similar time-frame, successive Australian governments have introduced reforms to Australia’s retirement income arrangements in an attempt to increase retirement savings and address age-related pressures on the financing of the publicly provided age pension. This paper compares, contrasts and assesses the pension systems in China and Australia. Although China and Australia are at different stages of economic development and demographic transition and operate quite different pension systems, there are lessons to be learned from each other.

Too connected to fail: the regulation of systemic risk within Australia’s superannuation system

The funds, entities, and regulators involved in the Australian superannuation industry together comprise a system that is complex and dynamic. The differentiation between roles and the distribution of responsibility amongst entities provides the system with a measure of resilience against the local failure of any one of the entities. However, the interconnections that bind and constitute the system also have the potential to transmit risks within the system, creating the potential for the impact of local failures to amplify through propagation, or in other ways to pose risks to the system as a whole. This article uses a new data set on 200 of Australia’s largest superannuation funds to map and assess those links and to identify the challenges those links pose to the scheme of prudential regulation applied to the superannuation system in Australia. It finds that the function of the entity and the legal form of the linkages, both of which are more variegated than typically occurs in banking sector transactions, crucially influences whether, and to what extent, various types of failures might be transmitted across the system. It also finds that we may be materially under-estimating the possibility that local failures in the superannuation system, which are a near certainty given the current regulatory risk appetite, will have a systemic impact. The findings have broad application across pension and institutional investment markets worldwide.

The Role of Retail and Institutional Traders in Options Markets

This article examines the role of retail and institutional traders in an options market. Using unique data from the Australian Securities Exchange (ASX), trading profits are decomposed into a liquidity part and a position-taking part. Despite the presence of exogenous market makers, both institutional and retail traders derive average gains from supplying liquidity, suggesting that public traders are reluctant to pay for the larger cost of immediacy offered by market makers. Both trader groups incur average losses from price movements unfavorable to their inventory position, indicating that market makers are slightly better at predicting market movements. Overall, the results suggest that retail and institutional traders have similar economic roles.

Pension Reform in China: Racing Against the Demographic Clock

In the context of rapid demographic, political and economic change, the Chinese pension system has evolved from a scheme almost exclusively for urban and public sector workers to one with broad national coverage. However, this apparent success masks structural and governance deficiencies, which if left unresolved, could threaten the equity, adequacy and security of future retirement incomes. This article examines the key demographic challenges for China and their implications for the pension system. We then review and critically assess the current pension arrangements, including recent initiatives, and highlight likely future reforms. Overall, we advocate that the key to sustainable reform will be the establishment of a regulatory framework with well-defined governance structures for both publicly and privately managed pension assets.