Farewell To All Those Expensive Super Funds
Sydney Morning Herald
Thursday June 16, 2005
The superannuation sector is buzzing about a report last week that at least 400, and perhaps as many as 600, corporate super funds may close or merge rather than meet the Australian Prudential Regulation Authority's new licensing requirements.
Given that there are just over 1000 corporate funds remaining (there were more than 4000 in 1997), such a large-scale withdrawal by the corporates from the sector would represent a massive acceleration of the long-term trend for corporates to outsource their super.While the decision of a large proportion of the corporate super sector to relinquish their licences could be attributed to onerous new APRA licensing requirements that will apply from July 1 next year, that may be more a catalyst than a cause. Trustees have been concerned about escalating liabilities, the disconnection created by compulsory super for the employer-employee relationship and the inability of all but the largest funds to be competitive on costs and services with wholesale master trusts and industry funds. With the choice of fund environment imminent, it appears many, perhaps most, corporate funds have surrendered to the inevitable. That is going to have some interesting consequence. A report by investment bank ABN Amro and superannuation consultants Rice Walker last week showed $58 billion of funds still controlled by the corporate sector. If much of that is up for grabs, there will be a scramble by the big wholesale platform providers and industry funds to get their share of the action. The ABN Amro/Rice Walker report predicts that corporate funds could decline to between 20 and 200 within two to three years, with the rest outsourcing arrangements. It notes margins already compressed as corporate master trusts and industry funds compete for the business of corporations, with wholesale fees falling from between 110 and 130 basis points three years ago to about 80 basis points for the larger corporate plans. The study found corporate funds were the cheapest of the super offerings, with an expense rate of only 0.75 per cent, which may reflect some subsidisation of services by the employer. The next best were corporate master trusts, with an expense rate of 1.14 per cent and industry funds with expenses of 1.17 per cent. Retail master trusts were far more expensive, at 2.11 per cent. Choice of funds has been characterised as a battle between high-cost retail super providers and low-cost industry funds. It is likely, however, to be more complicated than that, given all the providers will alter their offerings and pricing to try to retain their existing base of funds and win businesses. With only a relatively small proportion of employees likely to shift their accounts in the first year or two of choice - the best guesstimate seems to be between 5 and 10 per cent might move - the biggest impact of choice might not be on fund transfers but on pricing. To be competitive for new business, and prevent customers moving to industry funds, retail master trusts will have to accept margin losses. Bigger industry funds, if they want to compete for the corporate funds with wholesale master trusts, could experience their own margin compression. The winners in that battle could gain economies of scale and competitive advantage - there will be rationalisation and consolidation of industry funds and master trusts as it becomes a volume rather than margin game. The lure is a larger share of the $700 billion in the super system and the $50 billion a year that pours into it. The other potential beneficiaries of choice and a heightened awareness of more options for individual fund members could be the accountants and advisers who support and promote the self-managed element of the system. DIY funds account for $135 billion of super assets, making them the largest segment of the industry. They also have the highest average balance, at $67,000 per fund compared with $58,000 in the corporate funds, $23,000 in corporate master trusts and $9000 in industry funds. With the report saying it was inefficient to operate a DIY with less than $250,000 in assets, however, and the average life of a DIY running at something less than three years, the introduction of choice may not lead to profound long-term shifts from the managed super system to self-managed vehicles. In the short term, of course, some accountants and advisers will do what they can to convince fund members to shift funds into a higher fee-generating environment. The combination of the introduction of choice of fund and APRA licensing will amplify and accelerate the structural changes occurring within the sector. The good news for fund members - and bad news for fund managers, advisers, platform providers and others locked into the torrent of savings pouring into the system - is that falling fees and costs may decide the winners and losers in the new environment. bartho@smh.com.au
© 2005 Sydney Morning Herald