It’s time to embrace industry funds

Industry funds are here to stay. There is no doubt they have established their presence in the market and, according to the latest Australian Prudential RegulationAuthority (APRA) statistics, comprise over 17 per cent of total superannuation assets, with this percentage clearly set to grow in an environment of choice and an increasing brand awareness of what industry funds have to offer.

When industry funds were established in the late 1980s they were fairly simple and straightforward: 3 per cent award accounts; basic death and disability insurance cover; no websites; no financial advice; and little or no investment choice.

Members had no flexibility about their benefits and were largely in these funds as a result of award negotiations or the fact that their employer had agreed with the relevant union to contribute to a particular industry fund.

Almost 20 years on, industry funds are very different vehicles and have, in many cases, the same level of sophistication and service as many master trusts and corporate funds.

Investment choice, flexible insurance arrangements, web and member account access and an increasingly appealing brand and image make industry funds a potential superannuation option for a significant proportion of the Australian workforce.

For some time now, the financial planning industry has had an uneasy relationship with industry funds.

While some planners, particularly those who work on a fee-for-service basis, have accepted industry funds as a viable superannuation alternative for their clients, many still do not understand or accept industry funds as a potential offering.

In my view, it is far preferable for planners to get to know industry funds than stay in the dark and risk being accused of not being fully aware of the superannuation and investment options open to their clients.

This is not to say that the industry funds will be the vehicle of choice for every individual or that master trusts and self-managed funds do not have an important role in the market.

However, an ‘ostrich’ approach to industry funds is not going to benefit either advisers or their clients.

Industry funds have, when it comes to product offerings for members, been the innovators rather than the followers. Examples of this include:

1. Member investment choice

Fifteen years ago, if you were in the typical corporate fund there was little or no investment choice.

Industry funds started with a limited range of choices, usually growth, balanced and capital stable, and since then many have developed an extensive and flexible range of investment options. For example, AustralianSuper members can choose, as one of their investment options, which shares to invest in from the ASX 200.

While advisers may argue that this degree of investment choice may not suit many of their clients, there is no denying it is an appealing option for the more sophisticated investor, and AustralianSuper’s experience with this option bears this out.

2. Flexible insurance arrangements

Again, if we went back not so many years most people had some level of death and disability cover calculated on a formula with little ability to vary the insured amount upwards or downwards depending upon their financial circumstances.

Industry funds, on the other hand, were quick to adopt arrangements whereby, while there was a default level of cover, people could increase this cover with minimum underwriting or, if they felt they had alternative cover elsewhere or did not need the cover, could opt out.

While there may be some criticism that the default level of cover in a typical industry fund is still too low and that the simple accept or reject underwriting that many funds still have means it can be difficult for some members to obtain additional cover, there is no denying that many members prefer this type of arrangement and flexibility to the alternative of purchasing their own insurance cover separately and outside of the superannuation system.

3. Value-add services are also the hallmark of many industry funds

Super Member Home Loans, introduced in the early 1990s, is the first time a superannuation funds were able to offer discounted home loans to members without breaching the sole purpose test.

While many may argue as to the competitiveness of this product in today’s market, there is still no doubt it set a benchmark for innovation and is still an extremely popular service to many industry fund members.

Since then, many industry funds have gone on to offer full banking services, health insurance and other value-add services as an adjunct to the core superannuation benefits.

The success of some of these offerings has been focused, and at the same time has allowed industry funds to promote a full financial services image.

If we went back six or seven years, one of the weaknesses of industry funds was their lack of identity and brand recognition.

Many members did not know they were in industry funds and did not appreciate the benefits or strengths of these funds.

Following the ‘Compare the Pair’ advertising campaign together with some of the marketing and sponsorship initiatives taken by some of the larger industry funds there is now a far stronger brand awareness, with people now knowing they are in industry funds and recognising the benefits these funds have to offer.

HostPlus sponsoring the Melbourne Storm is an example of how industry funds have re-positioned themselves to increase their exposure to the mass market and to build brand identity in order to compete with the far more established brands of the retail superannuation industry.

These advertising campaigns will continue as the funds grow in size and so will their desire to establish their identity and brand in order to compete with the advertising and promotion of their retail competitors.

While many may argue that the choice of fund legislation has started with a whimper rather than a bang, it is clear that, over the long-term, this is going to give industry funds a huge advantage over many of their competitors.

Consider that many school and university students have their first jobs in the retail or hospitability industries, and the advantage this gives funds such as REST or HostPlus in being these individuals’ first exposure and contact with superannuation.

Previously, when these people entered the workforce they would join the fund of their employer’s choice.

Now they have the opportunity of joining the fund of their choice.

More and more I am hearing new entrants to the workforce say they are satisfied with the industry fund they previously remember as a result of casual and part-time work, and as a result there is the strong possibility that they will stay with this fund throughout their working life.

This ability for industry funds to connect and establish relationships with their membership from a reasonably young age again gives them a distinct advantage over many of their competitors.

Many industry funds perceive, rightly or wrongly, that they have not been given a fair hearing by the financial planning industry and that the playing field is far from level.

In response we are seeing industry funds establishing partnerships with fee-for-service financial planning organisations or setting up their own financial planning companies.

While in these early days the level of penetration into industry funds’ membership is low, as their members increasingly retire with higher and higher account balances as a result of Superannuation Guarantee contributions, these in-house financial planning arrangements are going to increase their market share.

From the financial planning industry’s perspective, one of the short-term weaknesses of these arrangements is that, as a result of the sole purpose test, much of the advice given relates to retirement planning and not broader financial planning.

For some funds, this may well prove an impediment to members getting global and all encompassing advice that would take into account their non-superannuation investments.

However, with the establishment of in-house financial planning companies owned by the superannuation funds, this impediment will over time potentially be overcome.

Again, another perceived drawback of the financial and retirement planning offered by industry funds is that the advice tends to relate only to the fund and the products and services it offers.

Independent financial planners, on the other hand, should be able to offer a broader range of advice encompassing all superannuation investment and strategy vehicles, and not just a limited range.

Whether this is actually borne out in practice is one of the criticisms the industry fund movement has of some elements of the financial planning industry.

Industry funds are not the enemy.

Like the retail market, they are simply financial institutions keen to increase their market share.

My experience is that these funds are generally willing to work with the planning industry and in many cases have established sound commercial relationships with financial planning organisations and dealer groups.

Both sides need to approach one another with an open mind and not with preconceived notions. The two groups can work together, and should work together, for the mutual benefit and interests of their respective clients and members.

If this attitude is taken then I firmly believe the future growth of industry funds, which is inevitable, can be seen as a positive for the financial planning industry, and that partnerships and commercial relationships can and should be established over the long-term just as they have been established with many other financial institutions in the Australian market.

Russell Mason is the Australian/New Zealand head of industry superannuation consulting at Mercer Human ResourceConsulting .