Members of superannuation funds that still use a credit rating approach to allocate investment earnings could suffer significant financial losses if they switch funds.
The warning came in a report released yesterday by Rice Walker Actuaries, which called for the establishment of an industry standard to encourage the use of daily unit pricing.
“People who switch regularly may have typically large account balances and every time they change funds, just say its ten switches in the their life time, if each of those is inequitable the potential for loss is significant,” said Rice Walker Actuaries principle Glen Langton.
Most industry and corporate funds will often use one of several crediting rate approaches, all of which involve taking an average rate of return instead of calculating a daily unit price. For members who move during the year, interest rates are often based on conservative estimates said Langton.
He said that for highly volatile underlying asset values which fluctuate on a daily basis such as shares, crediting rates based on average returns longer than a day can cause a misallocation of client’s funds.
“The only way [to ensure best practice] is to move to daily unit pricing where the value of the account balance reflects the true value of their assets at any particular point in time.”
Langton and Rice Walker Actuaries director Michael Rice also called for the application of daily unit pricing for unlisted securities.
The Rice Walker report accepts that daily unit pricing is not a full proof method. As demonstrated by AMP, National Australia Bank and Tower, in the past year, mathematical miscalculations in daily unit pricing occasionally occur
To meet this problem Rice Walker has called on all trustees to keep a cash reserve, built up either from shareholders in the case of retail funds or member benefits in the case of industry and corporate funds, over a number of years, which can be used to compensate members for unit pricing errors.
Rice called for both the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority to make daily unit pricing compulsory.
According to Langton, corporate funds currently using crediting rates would have to spend upwards of $100 thousand to change their systems to adopt a daily unit pricing model.
