Controlling the conflicts

The ratings houses examining the performance of superannuation funds run the risk of being perceived as having a conflict of interest when their work is specially commissioned by particular funds or groups of funds.

That was one of the key bottom line findings of an analysis of the four major ratings houses that regularly assess the superannuation industry — Rainmaker, SuperRatings, Chant West and Rice Walker.

In what represented a first for the superannuation industry, the Association of Superannuation Funds of Australia (ASFA) used its national conference in Melbourne to rate the methodology and performance of the four companies providing ratings of major superannuation funds.

In a session dubbed ‘rate-the-raters’, ASFA’s principal researcher Ross Clare analysed the performance of the four companies but stopped short of suggesting that any one company was better than another.’

What he did say, however, was that there was potential for perceptions of conflicts of interest in circumstances where the ratings undertook particular projects for entities that were seen to have a vested interest.

“Just like most other participants in the financial services sector, ratings agencies are not registered charities or funded out of taxation revenue,” the ASFA paper said. “They are for profit organisations with business plans which look to the creation of income streams. These income streams are almost wholly sourced from funds, employers and industry bodies.”

“Remuneration can be a touchy subject, as company executives have found out when shareholders and consumers take an interest in what they are receiving. Those paying generally are less relaxed than those receiving remuneration. So too, there can be concern about the remuneration of ratings agencies,” Clare’s paper said.

“The financial and other involvement between funds and ratings agencies has the potential to generate perceptions of possible conflicts of interest,” it said.

The paper went on to say that there was a perception that those commissioning the research almost always specified the research parameters for the work to be done and that the results used were often, if not always, selective.

“Various clients also tend to be more comfortable with one researcher compared to another,” it said. “It may be some time yet before Industry Fund Services commissions Chant West to do some work for them and, equally, the Investment and Financial Services Association (IFSA) may not be rushing to get SuperRatings to do work.

“Unless and until all research is paid for by ultimate consumers, that is, fund members, employers, and financial planners, then there will be scope for actual, potential or perceive conflicts of interest,” the paper said.

It said that one of the greatest antidotes to accusations of bias was disclosure and that the more ratings agencies made disclosures about their ratings process, the less scope there would be for claims of bias in their methodology.

“Equally, if both the terms of reference and the complete research report are published in the case of commissioned research, this will provide an appropriate context for other evaluating such research,” the paper said.

In presenting his paper to the conference, Clare said that he had provided it to the principals of the ratings houses to allow comment and those principals responded to his presentation at the conference.

Warren Chant from Chant West said that ratings were not the be all and end-all but just a guide.

“Everything we do is for the benefit of members and is aimed at assisting them to choose a fund,” he said.

The principal of Rainmaker, Alex Dunnin, took issue with the ASFA paper, particularly with reference to perceptions of bias.

“Rainmaker is obsessed with delivering to consumers,” he said.

The principal of SuperRatings, Jeff Bresnahan, said he believed the ratings industry had been overwhelmingly positive for superannuation, especially in terms of increasing public recognition of the need to increase retirement savings.

However, he said it was important to look at the macro position rather than dwell too long on the micro.