The Superannuation Funds Management Corporation of South Australia (operating under the business name Funds SA) is a statutory authority established pursuant to the Superannuation Funds Management Corporation of South Australia Act 1995 (the Act). The Act provides for a Board of Directors consisting of at least five but no more than seven members, to be established as the governing body of Funds SA. The Board of Directors consisted of seven members at 30 June 2000.
The functions of Funds SA, as detailed in section 5 of the Act are:
to invest and manage the public sector superannuation funds 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 public sector superannuation 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.
Funds SA has, by virtue of the Act, broad powers in relation to 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.
The Act specifically requires Funds SA to establish an Audit Committee. The Committee comprises three Board members operating within the framework of an Audit Committee Charter.
The various public sector superannuation funds, as defined under the Act, and managed by Funds SA, are identified in Note 1 to the financial statements.
Funds SA is, however, not responsible for the administration of any of the public sector superannuation funds. The South Australian Superannuation Board is responsible for all aspects of the administration (ie contributions and benefits) of the South Australian Superannuation Fund, Southern State Superannuation Fund and the associated Employer Contribution Accounts.
The Police Superannuation Board is responsible for all aspects of the administration of the Police Superannuation Fund and the associated Employer Contribution Account.
The Department of Treasury and Finance is responsible for the administration of the Governors’ Pension Scheme, the Judges’ Pension Scheme and the Parliamentary Superannuation Scheme.
Additional information relevant to the characteristics and the administration of the superannuation schemes may be obtained by reference to the financial statements of the various schemes which are included elsewhere in Part B of this Report.
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 fund management and consulting expertise. Fund managers are utilised in relation to 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 is also appointed pursuant to a similar agreement. In April 2000 the Chase Manhattan Bank replaced State Street Global Investor Services Group as custodian.
Funds SA also has a subsidiary holding corporation established by regulation under the Public Corporations Act 1993 and a number of controlled entities (fully owned). Refer Note 17 to the financial statements for details.
Funds under management increased by $1.1 billion to $5 billion.
Investment income totalled $781.1 million compared to $352.2 million in the previous year.
Section 28 of the Superannuation Funds Management Corporation of South Australia Act 1995, provides for the Auditor-General to audit the accounts and financial statements of Funds SA and the public sector superannuation funds.
In addition, clause 13(3) of the Schedule to the Public Corporations Act 1993, provides for the Auditor-General to audit the accounts and financial statements of Funds SA Subsidiary Holding Corporation.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 1999-2000 specific areas of audit attention included:
investment policy and strategy
investments (purchase and sales, valuation and income)
management reporting and monitoring
administration expenses.
The audits of the controlled entities of Funds SA Subsidiary Holding Corporation for the period ending 30 June 2000 were carried out by private accounting firms.
Upon finalisation of the audit of the Corporation’s financial statements, a management letter conveying the scope and results of the audit was forwarded to the Chairperson. Audit representatives also attended Audit Committee meetings throughout the year.
The audit of Funds SA indicated that the internal controls over its operations, including its accounting and investment functions were satisfactory. No issues of concern were raised as a result of the audit.
The CIS environment comprises network based personal computers utilising the HiPortfolio Software as the investment and general ledger system. The general control environment over the CIS operations was considered satisfactory.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of Funds SA included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that 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, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
The accounting policies adopted in preparing the general purpose financial statements are explained in Note 2(a) to the financial statements. In particular, assets and liabilities are recorded at net market values as at the balance date.
The net assets of Funds SA (funds under management) increased by $1 094.9 million to $4 997.2 million. Of this increase net funds made available for investment contributed $316.1 million while income from investments provided $781.1 million.
Net funds made available for investment consists of the net of receipts and payments, from and to the client superannuation funds. Net funds made available for investment increased by $273.4 million to $316.1 million. This was due principally to the fact that in the previous year the majority of the funds made available by the Treasurer in respect of accruing employers superannuation liabilities, had not been transferred to Funds SA at the balance date.
Income from investments totalled $781.1 million compared to $352.2 million in the previous year. The main factors impacting on income were:
an increase of $58.5 million in income from Australian equities due principally to increased dividends of $16.8 million, an increase in unrealised gains of $26.2 million and an increase in realised gains of $15.8 million.
an increase of $213.2 million in income from International equities due principally to an increase in unrealised gains of $195.4 million and an increase in realised gains of $112.7 million offset by a movement in the currency hedge of $95.8 million representing a realised expense of $71.7 million compared with realised income of $24.1 million in the previous year.
an increase in income from the Adelaide Plaza Fund of $90.6 million due principally to an increase in realised gains of $92.8 million mainly as a result of the sale of FSASER Hotel Pty Ltd and Adelaide Casino Pty Ltd.
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 and as a result of investment earnings, Funds SA has experienced rapid growth in total funds under management in recent years as illustrated in the following chart.
Funds SA is an investment organisation with broad powers and as indicated $5 billion of funds under management. These funds are represented predominantly by six investment classes and the level of holdings for each of these investments at 30 June 1999 and 30 June 2000 is illustrated in the following chart.
The decision as to how the funds will be invested is established through an investment policy. Underpinning the investment policy and decision making process is an understanding of the risks facing Funds SA. It should be noted that in the investment market at large and some specific financial risks implicit to its operations include:
Share Market Risk — The impact on earnings of movements in share prices of investments. This is particularly relevant for Funds SA’s holdings of Australian equities and International equities.
Interest Rate Risk — The sensitivity of earnings to future movements in interest rates. This is particularly relevant to Funds SA’s holdings of inflation-linked and fixed-interest securities.
Concentration Risk — The risk of an over-exposure in the weighting ascribed to an individual investment or asset class.
Currency Exposure — The impact that movements in currencies have on the value of, and earnings on, overseas investments. This is particularly relevant for Funds SA’s holdings of International equities.
As from 1 July 1999 members of the Triple S Scheme were provided with investment choice to enable them to tailor the investment strategy more directly towards their individual risk/return preferences and financial circumstances.
Funds SA together with the South Australian Superannuation Board and the Police Superannuation Board designed four investment products (ie strategies) for Triple S Scheme member investment choice (balanced, growth, conservative and cash) and also one for the defined benefit schemes. The objectives of these products is shown hereunder with respect to:
the real return objective, ie the return in excess of inflation that is targeted over the long term;
the investment time horizon, ie the likely minimum period required to enable the investment strategy to deliver the objective;
risk, measured as the possible frequency the investment strategy may deliver a negative return.
|
Defined |
|
|
|
|
|
Benefit |
Balanced |
Growth |
Conservative |
Cash |
Product Objectives: |
|
|
|
|
|
Real return objective |
5.8 percent |
5.4 percent |
6.2 percent |
4.3 percent |
2.2 percent |
Investment time horizon |
10 years |
6 years |
10 years |
2 years |
Less than 1 year |
Possibility of negative return |
1 year in 4 |
1 year in 4 |
2 years in 7 |
1 year in 5 |
Nil |
Total funds at 30 June 2000 ($’million) |
3 526.3 |
1 443.7 |
26.4 |
0.7 |
0.1 |
Reference should be made to Funds SA’s annual report for the strategic asset allocations applying to each of the investment products. A comparison of the target asset allocation for each of the five products compared to the actual position at 30 June 2000 revealed that all variances were less than 1 percent, which is well within the rebalancing ranges around the strategic target, ie a rebalancing policy has been adopted by Funds SA to ensure the efficient maintenance of the asset allocation within an acceptable tolerance around the strategic target.
Funds SA values its investments at net market value, in accordance with the requirements of Australian Accounting Standard AAS 25 ‘Financial Reporting by Superannuation Plans’. Any increases or decreases in the market value are brought to account through the Statement of Changes in Net Assets. As such the value of the investments under management has a direct impact upon the level of income earned by Funds SA in any one year. Funds SA has established performance benchmarks for each asset class as follows:
Australian Equities All Ordinaries Accumulation Index then Standard and Poor/ASX 300 Accumulation Index from April 2000.
International Equities Tailored benchmark incorporating specific subsectors and hedge ratios.
Property Mercer Australian Unlisted Property Index and ASX.
Listed Property Trust Accumulation Index.
Inflation Linked UBS Warburg Australia Inflation Linked Bond Index.
Fixed Interest UBS Warburg Australia Composite Bond Index.
Cash UBS Warburg Australia Bank Bill Index.
Funds SA’s objective is to exceed the relevant benchmark in each asset class.
The return performance of each of the six distinct asset classes, against their relevant benchmark, for the 1999-2000 financial year, is depicted in the following chart:
The return performance of each of the distinct products (excluding ‘cash’), against their relevant benchmark, for the 1999-2000 financial year is depicted in the following chart:
