RSE licences - The big and the small of it

According to the Australian Prudential Regulation Authority (APRA), around 320 superannuation funds had applied for their Registrable Superannuation Entity (RSE) licences ahead of the regulator’s February 17 cut-off date.

What APRA’s announcement did not detail was the actual size of those funds that applied for RSE licences, although the anecdotal evidence suggested that most fell broadly into the medium-to-large category.

Nor did the APRA announcement reflect the fact that even some of those who had applied for an RSE licence would not ultimately be proceeding with the licensing process, having opted instead to either outsource or roll into a master trust.

But while the earliest funds to achieve RSE status were predominantly large, plenty of smaller funds have indicated that they intend to continue providing services to members regardless of the challenge presented by factors such as choice and trustee licensing.

A constant advocate of the ability of small funds to cope with the more onerous regulatory environment is the chair of three smaller Queensland electrical industry funds, Bob Hendricks, who believes that while there are some obvious merits to be derived from getting bigger there remains a place for what he describes as “boutiques”.

“The benefits with respect to size are well-known, but we should not underestimate the value of a boutique in terms of familiarity,” he said. “In a boutique, members often feel more comfortable in the sense that they know how their fund runs and who to talk to. They aren’t just one of 500,000 members.”

And in an environment where one of the primary reasons given by funds for getting bigger is generating bigger returns, Hendricks points to the fact that each of the funds with which he is involved has never generated a negative investment year, and that includes the downturn which occurred in 2002-03.

“Basically, we’ve managed to keep generating positive returns even through the tough times, and how many of the larger funds can claim that,” he said. “When it comes to investment performance, there is no reason why the smaller funds can’t perform just as well as the large funds.”

Perhaps surprisingly, there are few in the superannuation sector who would disagree with Hendricks, with Australian Retirement Fund chief executive Ian Silk and Mercer Human Resources Consulting principal Russell Mason agreeing that size isn’t always everything.

However, Mason believes that the questions confronting trustees become more challenging for trustees when they have less than $200 million in funds under management.

“Does a $600 million fund have a future in the current environment? Very probably,” he said. “But that future depends on what the fund is trying to achieve — whether it is trying to be a financial institution or simply aiming to service a particular sector.”

Silk, despite being the man who headed up the merged ARF/Superannuation Trust of Australia entity in the new financial year, is adamant that size is not everything in the superannuation arena.

“It is very superficial to say size is everything,” he said. “Size itself does not dictate the quality of the results that superannuation funds achieve and there are probably just as many poor performing small funds as there are large funds.”

The problems confronting smaller funds in the new regulatory environment were highlighted by the decision in early March by ACAST, a 14,000 member, $280 million fund, to outsource to a Mercer Master Trust after initially applying for its RSE licence.

According to ACAST manager Paul Rubessa, the issues that confronted the trustees were familiar enough — serving the best interests of members in terms of continuing to operate in a tougher regulatory environment.

In the end, the ACAST trustees decided that they could improve the offering to their members at less cost by rolling into the Mercer fund.

“The risks associated with the status quo were outweighed by the benefits of outsourcing,” Rubessa said. “However, it was a decision that would have been much harder to make a year or so ago.”

While the ACAST trustees may have decided to take the outsourcing route, Hendricks maintains that such decisions do not need to be a fait accompli for smaller funds in the new regulatory environment.

The funds with which he is associated have all applied for their RSE licences and Hendricks is not particularly concerned at the processes the funds will need to follow to stay compliant.

He said that while some funds had expended large amounts of money in pursuit of their RSE licences, the fund with which he is involved had banded together with some other smaller Queensland funds to meet the relative standards.