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SUPERANNUATION FUNDS MANAGEMENT CORPORATION OF SOUTH AUSTRALIA

 

 

FUNCTIONAL RESPONSIBILITY AND STRUCTURE

 

Establishment

 

The Superannuation Funds Management Corporation of South Australia (Funds SA) is a Statutory Authority established pursuant to the Superannuation Funds Management Corporation of South Australia Act 1995 (the Act).

 

Functions

 

The functions of Funds SA, as detailed in section 5 of the Act are:

·                     to invest and manage the public sector superannuation funds and the nominated funds of approved authorities pursuant to strategies formulated by Funds SA;

·                     such other functions as are assigned to Funds SA by this Act or any other Act.

 

Section 7 of the Act further provides that the objective of Funds SA in performing its functions is to achieve the highest return possible on investment of the funds while having proper regard for:

 

·                     the need to maintain the risks relating to investment at an acceptable level;

·                     the need for liquidity in the funds;

·                     such other matters as are prescribed by regulation.

 

Changes to Functions

 

Amendments to the Act were gazetted on 13 October 2005 to allow Funds SA to invest and manage nominated funds of approved authorities.  Pursuant to the Act, a prescribed public authority may apply to the Minister for approval to transfer funds to Funds SA for the purpose of investment and management of those funds on behalf of the authority.  Funds SA must invest and manage these funds following the Minister’s approval.  At the request of the authority, Funds SA must transfer back any funds of the authority pursuant to the Minister’s approval.

 

This change means Funds SA will potentially invest and manage non-superannuation funds.  While this amendment came into operation on 13 October 2005, Funds SA did not invest and manage any nominated funds of approved authorities for the financial year ending 30 June 2006.

 

Restrictions on Operations

 

Pursuant to subsection 21(1) of the Act, in performing its functions, Funds SA is subject to the direction and control of the Minister.  However, a ministerial direction must not be given for an investment decision dealing with property or the exercise of a voting right.

 

Funds SA has, by virtue of the Act, broad powers over the investment of public sector superannuation funds.  Funds SA, however, cannot borrow money or obtain any other form of financial accommodation unless authorised to do so by the Regulations or by the Minister.  In addition, the Regulations under the Act impose restrictions on the investment of public sector superannuation funds as follows:

 

·                     Funds SA must not invest the public sector superannuation funds in property outside Australia or in real property outside the State, unless the Minister has authorised the investment specifically or by reference to the class of investment to which it belongs.

·                     Funds SA must not enter into derivative transactions (eg futures contracts, forward contracts, swaps etc), unless the contract or dealing has been authorised by the Minister specifically or by reference to the class of contracts or dealings to which it belongs.

 

Management of Superannuation Funds and Schemes

 

The various public sector superannuation funds managed and invested by Funds SA, as defined under the Act, are identified in Note 1 to the financial report.

Funds SA is not responsible for the administration (ie receipt of contributions and payment of benefits) of any of the public sector superannuation funds.  This responsibility rests with the following entities:

 

·                     The South Australian Superannuation Board — South Australian Superannuation Scheme and the Southern State Superannuation Scheme.

·                     The Police Superannuation Board — Police Superannuation Scheme.

·                     The South Australian Parliamentary Superannuation Board — Parliamentary Superannuation Scheme.

·                     The Department of Treasury and Finance — the Governors’ Pensions Scheme and the Judges’ Pensions Scheme.

 

Additional information on the administration of the superannuation schemes is available in the financial reports of the various schemes included elsewhere in Part B of this Report.

 

Structure

 

The structure of Funds SA is illustrated in the following organisation chart.

 

 

Funds SA operates with a small staff comprising investment officers and accounting and administrative support staff.  This structure is complemented by extensive use of external funds management firms.  Fund managers are utilised for all investment types, and there is a single custodian (who is responsible for the integrity and holding of the assets) for the majority of those fund managers.  Each fund manager is appointed pursuant to an agreement which dictates the scope for investment, fees and reporting requirements.  The custodian, JP Morgan Chase Bank NA, is also appointed pursuant to a similar agreement.

 

Funds SA also has a number of controlled entities (fully owned).  Refer Note 20 to the financial report for details.

 

Audit Committee

 

The Act specifically requires Funds SA to establish an Audit Committee.  As at 30 June 2006, the Committee comprised four Board members operating within the framework of an Audit Committee Charter.  Pursuant to that charter, the Committee is responsible for; assessing the quality of both internal and external financial reporting; assessing the effectiveness of Funds SA’s internal control structure; and maintaining an effective and efficient liaison with both internal and external audit.  Audit representatives attended Audit Committee meetings throughout the year.

 

 

AUDIT MANDATE AND COVERAGE

 

Audit Authority

 

Audit of the Financial Report

 

Subsection 31(1)(b) of the Public Finance and Audit Act 1987 and section 28 of the Superannuation Funds Management Corporation of South Australia Act 1995 provides for the Auditor-General to audit the accounts of Funds SA for each financial year.

Assessment of Controls

 

Subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987 provides for the Auditor-General to assess the controls exercised by Funds SA in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.

 

This assessment also considers whether those controls are consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 Financial Management Policies.

 

Scope of Audit

 

The audit program covered major financial systems and focused on obtaining sufficient evidence to form an audit opinion on the financial report and internal controls.

 

During 2005-06, specific areas of audit attention included:

 

·                     investment policy and strategy

·                     investments (purchases and sales, valuation and income)

·                     custodial and fund management

·                     management reporting and monitoring

·                     administration expenses.

 

 

AUDIT FINDINGS AND COMMENTS

 

Audit Opinions

 

Audit of the Financial Report

 

In my opinion, the financial report presents fairly in accordance with the Treasurer’s Instructions promulgated under the provisions of the Public Finance and Audit Act 1987, applicable Accounting Standards and other mandatory professional reporting requirements in Australia, the financial position of the Superannuation Funds Management Corporation of South Australia as at 30 June 2006, the results of its operations and its cash flows for the year then ended.

 

Assessment of Controls

 

In my opinion, the controls exercised by the Superannuation Funds Management Corporation of South Australia in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities are sufficient to provide reasonable assurance that the financial transactions of the Superannuation Funds Management Corporation of South Australia have been conducted properly and in accordance with law.

 

Audit Communications to Management

 

The audit of Funds SA indicated that the internal controls over its operations were satisfactory. No significant issues were raised as a result of the audit.

 

 

INTERPRETATION AND ANALYSIS OF FINANCIAL REPORT

 

Highlights of Financial Report

 

 

2006

2005

Percentage

 

$’million

$’million

Change

NET FUNDS MADE AVAILABLE FOR INVESTMENT

881

293

n/a

NET INCOME EARNED FROM INVESTMENT

  ACTIVITIES:

 

 

 

Inflation linked funds

59

93

(37)

Property

88

74

19

Australian equities

630

553

14

International equities

630

204

n/a

Fixed interest

19

67

(72)

Other

85

21

n/a

Total Net Income Earned from Investment Activities

1 511

1 012

49

 

 

2006

2005

Percentage

 

$’million

$’million

Change

ADMINISTRATION EXPENSES

3

3

-

Change in Net Assets

2 389

1 302

83

 

 

 

 

Net Cash Flows from Operations

50

77

(35)

Net Cash Flows from Investing Activities

(746)

(320)

n/a

Net Cash Flows from Financing Activities

881

293

n/a

 

 

 

 

ASSETS

 

 

 

Investments

10 323

7 932

30

Other assets

2

2

-

Total Assets

10 325

7 934

30

LIABILITIES

 

 

 

Current liabilities

17

12

42

Non-current liabilities

18

21

(14)

Total Liabilities

35

33

6

EQUITY

10 290

7 901

30

 

Statement of Changes in Net Assets

 

Net Funds made available for Investment

 

Net funds made available for investment consists of the net of receipts from and payments to the public sector superannuation funds.  Net funds made available for investment increased by $587 million to $881 million.  Details of receipts and payments for the various funds are provided in Note 4 to the financial report.

 

Of the $881 million, $261 million ($215 million) was made available by the Treasurer for the accruing employers’ superannuation liabilities for the South Australian Superannuation Scheme.  An amount of $464 million was also received from the Commonwealth for the superannuation liability of the former state railway employees.  Further information on these amounts is available in the commentary under ‘South Australian Superannuation Scheme’ elsewhere in Part B of this Report.

 

Income from Investments

 

Net income from investment activities resulted in a return of $1511 million ($1012 million).  This result predominantly reflects the recording of assets at net market values where unrealised gains or losses are brought to account.  In 2006 unrealised gains were $696 million or 46 percent of the reported net income of $1511 million ($664 million or 66 percent).

 

The strong investment returns of 2006 are attributable to:

 

·                     the global (including Australian) equity market has continued its strong performance producing total returns of $1260 million ($756 million).  During 2005-06, realised gains on the sale of equity investments increased by $360 million and other income earned from investments increased by $101 million.  The global equity market’s strong performance derives from solid economic growth of all major economies; the continuing industrialisation of China and strong demand for industrial raw materials and commodities.

·                     returns on Inflation Linked Securities decreased significantly with unrealised losses of $2.6 million (unrealised gain of $30.1 million).  This was offset by an increase of $15.1 million in income earned from investments.  Income earned from these investments are linked to inflation or the Average Weekly Earnings.

·                     returns on fixed interest also decreased significantly due mainly to a decrease in realised gains of $40.8 million. During 2004-05, a significant amount of investments were redeemed resulting in realised gains of $42.7 million compared to realised gains of only $1.9 million in 2005-06. The decrease was offset by other income earned from these investments of $30.7 million.

·                     returns on both the diversified strategies investment classes increased as they were earning revenue for the whole of 2005-06 and there was an increase in funds allocated to these classes.


Note 5 to the financial report provides full details of income earned from investment activities for each of the investment classes comprising the Fund.

 

It is relevant to observe the later comments, particularly on stock market risks, included under ‘Asset Allocation and Risk’.

 

A structural analysis of net income earned by Funds SA for the four years to 2006 is presented in the following table.

 

Net Income Earned From Investment Activities

 

 

2006

2005

2004

2003

 

$’million

$’million

$’million

$’million

Inflation Linked Funds

59.2

92.8

16.6

75.3

Property

87.5

74.3

65.2

50.8

Australian Equities

630.0

553.2

404.6

5.8

International Equities

630.4

203.7

425.8

(175.8)

Fixed Interest

19.2

66.7

19.8

52.0

Cash and other

85.1

21.5

8.2

6.0

 

1 511.4

1 012.2

940.2

14.1

 

The above table reflects that Funds SA’s investment strategy is weighted towards equity holdings.  Refer to the chart and discussions under Statement of Net Assets.  The volatile nature of equities will cause returns from these investments to fluctuate from year to year due to the effect of prevailing economic conditions. Over the last three years, the equity investment classes have produced strong returns.

 

Investment Expenses

 

Investment expenses are deducted from income to determine Net Income Earned from Investments in the Statement of Changes in Net Assets.  In 2006 these expenses amounted to $55.9 million of which $50 million (89 percent) were fund management fees.  These fees equate to 0.5 percent of funds under management.

 

Year

$’million

2003

21.9

2004

25.3

2005

33.5

2006

50.0

 

Although fund manager fees have generally increased over the past four years they remain at 0.5 percent of average funds under management. The increases in the fund management fees correlates with the increase in funds under management; strong investment performance and the additional investment classes which were introduced in late 2004-05.

 

Statement of Net Assets

 

As Funds SA’s main function is to invest and manage the public sector superannuation funds, assets predominantly consist of investments.  Total liabilities as a percentage of total assets are 0.3 percent.

 

As a result of: the decision by the Government to move to full funding of the public sector superannuation liability; the introduction of new superannuation products; increase in contributions; and accumulation of investment earnings; Funds SA continues to experience growth in total funds under management (net assets) as illustrated in the following chart.

 

Asset Classes

 

Funds SA is an investment organisation with broad powers and $10.3 billion of funds under management.  These funds are represented by eight asset classes. 

 

The value of each asset class (excluding cash and diversified strategies which in total only represents 10 percent of total funds under management) and the holding of each asset class as a percentage of total funds under management at 30 June for the last three financial years is illustrated in the following chart.

 

 

As previously noted the above chart reflects Funds SA’s investment strategy’s weighting towards equity holdings.

 

Statement of Cash Flows

 

The following table summarises the net cash flows for the four years to 2006.

 

 

2006

2005

2004

2003

 

$’million

$’million

$’million

$’million

Net Cash Flows

 

 

 

 

 

 

 

 

 

Operations

49.7

77.0

83.3

78.9

Investing

(746.0)

(319.8)

(369.7)

(54.2)

Financing

880.6

293.1

216.2

145.1

Change in Cash

184.3

50.3

(70.2)

169.8

Cash at 30 June

393.0

208.7

128.5

198.7

 

Net cash flows from Investing Activities reflects the level of redemptions and purchases of investments.  During 2006 the purchase of investments decreased by $1893 million to $1040 million. Sales from investments decreased by $2319 million to $294 million.  This reflects fund manager transitions; and strategic asset allocation rebalancing of the portfolios. In 2004-05 there were significant changes to the Australian Equities, International Equities and Fixed Interest portfolios.