Removal of surcharges and double digit returns mark 2005

When the super industry looks back at the year 2005, there is little doubt that choice of fund will be front of mind. Whether you love it or hate it or simply don’t care, it is representative of a newly competitive superannuation market, a market that Australia is now very aware of.

Yet while super choice may have taken the limelight, Philippa Smith, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), is quick to remind us that there were other important changes to take place this year.

“Choice has obviously taken a lot of the focus in 2005,” Smith said. “But the implementation of APRA licensing and many of the features of FSR [Financial Services Reform] was just as important.”

Smith added that in many ways the new APRA licensing regime was the most significant structural change the industry had seen for some time and that many were only just coming to this realisation.

But everyone has their own highlights, and for Fiona Trafford Walker, chief executive officer of Frontier Investment Consulting, 2005 was another year of good returns and strong equity performance.

“Obviously we have an investment focus at Frontier, but the good returns we saw across the board were good for funds and fund members alike,” she said.

For Richard Gilbert, chief executive officer of the Investment and Financial Services Association (IFSA), investment returns were also pleasing. However, Gilbert found equal satisfaction in the Government’s response to the changing superannuation industry.

“A major highlight for us was finally seeing the bogey of the super surcharge killed off,” he said. “As well as the kick along that the co-contribution scheme received. In many ways, 2005 was the best year in the last 15 for the Australian super industry.”

Unfortunately, not everything in super is a bed of roses following this year. Many industry experts are still concerned about how the industry is handling many of the changes that have so recently been wrought.

According to Trafford Walker, choice has been handled well on the whole.

“However, it has led to a lot of ‘looking over your shoulder’ behaviour,” she said. “In many cases there is too much focus on short-term returns. People need to remember that super is about long-term returns with investment strategies backing them up.”

In hindsight, Trafford Walker believes that such behaviour was inevitable in a market that had suddenly become so much more competitive.

“Broadly speaking, the market has handled the change well,” she said. “Despite the returns focus, there hasn’t been much member movement. But the real test is to come, particularly if the market falters.”

Smith is also content with member attitudes following choice’s inception and cites fund-to-member communication strategies as the reasons behind such a measured response.

“The communications and retention strategies of funds are working,” she said. “Funds are realising that a more personalised approach is necessary and as such, there is a high level of confidence industry-wide.”

The major issue for Gilbert, however, is the industry response to APRA licensing.

“As matters stand, there are hundreds of funds out there that have either not yet obtained their licence or that aren’t intending to do so,” he said.

Gilbert’s concern is one shared by Smith.

“There are still only around 35-40 funds that actually have licences, and time is running out,” she said. “That leaves roughly 135-140 funds that have indicated an interest in a licence but have yet to obtain one. My concern is that those funds and trustees may have underestimated the time and work required.”

The head of corporate superannuation with AMP, Greg Healy, said the highlights through 2005 had been the improvements in dollar disclosure, another solid year of investment returns and the removal of the superannuation surcharge.

Healy believes that the introduction of choice of fund and the associated advertising campaigns have been positive in terms of raising peoples’ awareness of superannuation.

What he found surprising in 2005 was the continued indecision of some corporate superannuation funds with respect to trustee-licensing and the amount of money expended by the industry superannuation funds with respect to their choice of fund campaigns.

So with the superannuation industry undergoing what is arguably its greatest period of change, what is the outlook for the future?

To Trafford Walker’s mind, there are interesting times ahead and the shape of the industry five years into the future is difficult to predict.

“I have been quite surprised by the pace of change recently,” she said. “This year alone there have been numerous mergers, with smaller bodies joining the larger players as well as some of the industry heavyweights joining forces themselves. There are obvious parallels to the banking industry but it is hard to know what the super industry will look like in five years time.”

Smith’s belief is that the short-term future holds a shift for the industry back towards its roots.

“The market reaction and the pan out after choice was pretty much as we expected,” she said. “And we knew that APRA licensing would be hard yakka, exactly as it has proven to be. But I think that moving forward, there will be a shift from these compliance issues back to the real business of member oriented super. That is, encouraging people to save and making sure they have the dollars they need in retirement.”

On the other hand, Gilbert admits that he was surprised by the lack of movement that resulted from the advent of choice.

“I expected there to be more movement but perhaps its lack has been better in the long run,” he said. “It may mean that people are waiting to make more informed choices next year.”

Healy said a number of issues remained to be resolved including addressing issues of high levels of regulatory documentation and simplifying access to financial advice so as to ensure members could access such advice at reasonable rates.

For Trafford Walker, the challenges ahead lie in the industry’s operation in the increasingly competitive market that has evolved.

“At the moment, it looks as if the increased competition is leading to short-term returns focus in a long-term industry,” she said. “I’m not sure what the solution is but maybe it’s as simple as focusing less on the many surveys that are released throughout the industry.”

Trafford Walker continued by saying that such surveys were clearly the basis for a lot of the competitive decisions made by funds.

“Fund members don’t actually read them,” she said. “But of course the media does. The information is passed on and is suddenly given far more weight, making the need for responsible reporting on super far greater.”

Trafford Walker said that investment markets were also a concern and that when looking at the strong and prolonged performance of domestic equities, she couldn’t help but think that the market was borrowing from tomorrow to pay for today.

Short-term concerns aside, 2005 has been a year that has witnessed much change within the super industry, and yet maintained the confidence of industry experts and fund members alike. But if choice is the metaphorical stone dropped into the industry pond, then it is certain that the full extent of the ripples and challenges ahead has yet to be seen.