A golden opportunity for change

Any analysis of the success or otherwise of superannuation choice on its first anniversary would be incomplete without revisiting the industry speculation on its potential results and consequences in the months, and indeed years, leading up to its launch.

Even a cursory examination of the voluminous media reports generated by the new super regime reveals an enormous gap between some of the more apocalyptic speculation then and the sedate reality of the regime on the ground now.

A wholesale flight by members from one fund to another in the first hours of choice, laying waste to parts of the sector in the process, has not materialised — far from it, and nor is it likely to, based on current industry speculation, in the absence so far of any significant volumes of research data on fund membership under choice.

Investor apathy

In fact, some industry experts are now openly dubbing the regime a damp squib in terms of the number of eligible Australians who opted to exercise choice.

Falling squarely into this camp is Ross Bowden, ING’s executive director of employer super, who describes choice as having generally “failed to ignite the average Australian’s imagination”.

“If everybody exercised choice,” Bowden says, “then logically there would be no such thing as a corporate fund, but people haven’t done that. In fact, the number of people who have opted to exercise choice and make a decision to opt out of a corporate fund for a personal fund has been less than 5 per cent.

“This could be due to a combination of factors, including that the scale benefits are more than they could get individually, which is generally the case if they belong to a reasonably sized fund.”

What choice has achieved, he says, is to create more competition among fund providers, which now have to be on their toes in terms of providing solutions that members want. It has also made superannuation more attractive in general, in the sense that people now think more about super, about where they want to invest it and about the value it would have at retirement.

ING has two types of clients, companies and members, according to Bowden, and there is “certainly a far greater interest in super at the member level”.

“I think that’s demonstrated in employer-located education sessions, increased participation, gradually more take up in co-contributions, and increased activity in members doing their super going on-line,” he adds.

In terms of companies, he says ING’s research suggests there is a “preference under choice to keep employees in the company’s default plan. The reasons are simplicity, efficiency of processing, maximising insurance benefits and there are also some pricing discounts.”

Impact on corporate schemes

Bowden believes choice will be exercised more in future when people move between employers and choose to either join the new fund, or to contribute to their existing fund.

“There is evidence that at least a number of people are opting for the latter course of action. They are going to a new employer while opting to keep contributing to their existing fund.”

Corporate super is “all about scale benefits, which may be price or may be insurance benefits,” Bowden says.

“So if you can get access to these benefits, then as an employee you may opt for the corporate fund rather than exercising choice.

“Most corporate funds will offer a range of investment options very similar to that being offered by a retail fund, so the difference in returns will generally be fees. So, to the extent that you can pay a lower fee to get the same options, then why would you not do that?”

He acknowledged that in most cases the benefit will just transfer to the personal section of the corporate fund, but he disagreed with a prevailing contention that these fees are automatically at the retail level.

“In some cases, the fees do go up for members switching, although not necessarily to the retail level.

“In others, they will stay to half-way between a retail and a corporate fee.”

Consolidation of accounts

One of the characteristics of the corporate super sector in the post-choice environment has been the emphasis by providers in launching programs to try to consolidate member accounts.

“Choice has made companies more aware, firstly, that they need to retain accounts and grow existing balances and, secondly, that choice would inevitably mean people have more and more accounts around the place,” Bowden says.

Most corporate funds are fairly active, when notified of people leaving a company, to inform them of their options under choice at the new company, including contributing to their existing account, he added.

“And I think that message is now getting through to some extent, as people do understand now it’s not in their interests to have super accounts all over the place.

“Another characteristic is that you will find more consolidation among funds, and I think those people who are smaller in super may be acquired by those who are larger in super. This has started to happen with industry funds, and also applies to the corporate super sector,” he says.

“Industry funds have started to merge, and I think those funds that are smaller in super may be acquired by those that are larger, and that also applies to coporate super. Mellon was acquired about a year ago, for example. A couple of large industry funds have also merged.”

Choice has also spurred the rise of clearing houses.

“All of a sudden, companies have been faced with the issue of having to remit contributions to a range of different companies, and so clearing houses have come into being.”

Super competition

Chant West Financial Services principal Warren Chant says choice has had a “very positive effect on the super industry, notwithstanding there has “not been a lot of switching from one fund to another at this stage of choice, but whether people are actively switching funds is not really the point”.

The real significance of choice is that “virtually every fund now finds itself having to compete with every other fund in Australia,” Chant says.

“This new competition has led to a consistent improvement in the general quality of product provided to members over the past 12 months. In addition, funds have also been communicating much better with members, even as they have been looking over their shoulders at what other funds are doing.”

Chant adds: “Across the board, funds are looking at the investment options they are providing for members, at how many options they are offering and the structure of those options. Industry funds are looking at other industry funds, but also at master trusts, and at public sector funds. Public sector funds, in turn, are looking at industry funds and master trusts, and master trusts are looking at everybody.”

Corporate funds and industry funds are increasingly competing with each other under choice, he says.

“The big corporate funds are telling themselves that to be competitive with other funds they are going to have to be competitive on what they offer to members. They look over their shoulder at the asset allocation with industry funds and ask themselves how they can compete.”

Member fees

Chant says choice has resulted in both fee increases and decreases.

“Fees of retail master trusts have come down under choice, while fees in industry funds have gone up, for two reasons. One is that ASIC’s fee disclosure rules, which were launched simultaneously with choice, are now requiring [industry] funds to disclose fees they didn’t disclose before. Secondly, their fees have genuinely gone up a little bit because they have to offer members more in a more competitive environment.

“It’s been a bit of a furphy for some time, you know, the industry fund tag about fees of ‘a dollar a week’.”

Most funds are looking at offering better insurance options for their members under choice, Chant says.

“A lot of funds just offer insurance based only on age, but increasingly they are considering age, occupation and gender. They are saying we should not have cross-subsidies, but should be looking at different rates for males and females and different rates for occupations.”

A “big sleeper” in the industry, he says, is how the corporate master trusts will react when people leave their employer and transfer to the personal division, where the fees are retail.

Chant adds: “We think choice will put a lot of pressure on the personal divisions of corporate master trusts. They may well have to change [their structure] as people question the wisdom of paying these fees,” Chant adds.

Chant also believes choice is starting to put pressure on the concept of a default fund.

“Over time more and more people will say to their employer ‘please send my money to XYZ-fund’, so there will be fewer people in the default fund. It’s some way off now, but in five to 10 years you might see a lot of pressure on those funds, because they won’t be offering members anything that great.”

Retail versus industry funds

The ongoing rivalry between industry funds and retail master trusts has been “pretty fierce” over the past 12 months, Chant says, although there hasn’t been a “big shift” [of members] from one to the other.

“Our strong impression is that no one group can say it’s gained the advantage over the other,” he says.

“Furthermore, I don’t think you’re going to see that change over the next 12 months, but looking further ahead, based on current structures, I firmly believe industry funds have a big advantage.”

Chant says the key issue is whether the retail master trusts can respond to that advantage over time, which he describes as “portability when changing jobs, so that fees remain the same for members”.

Fees and insurance are the main factors that differentiate industry funds and retail master trusts, he says.

“You’re never really going to separate them on performance.”

On the other hand, he believes the retail master trusts have better relationships with the financial planning industry, giving them a big distribution advantage over industry funds. The latter will have to “embrace the financial planning sector in some form, because they just don’t have very good distribution”.

“No one is saying the planning community is as good as it could be, but there are some very good advisers out there. So, overall this is something the industry fund movement has not yet fully addressed.”

Chant believes self-managed superannuation funds (SMSF) have so far failed to live up to pre-choice speculation.

“A lot of people thought choice would mean a big increase in members to DIY, but it hasn’t happened. I think people realised DIY is quite expensive.

“Also, it takes a lot of time and effort and there are a lot of good alternative options out there. Not many people really need a DIY, and I don’t see that changing at all.”

“I suppose rolling in has been the most important feature. That seems to be pretty much across the board with the industry funds we do, they are reporting good roll-in activity,” Chant adds.

“I think a lot of people are getting the message industry funds have a very good product and the choice regime encourages more people to consolidate more funds into their industry funds.”

A change in market share

Executive chair of Industry Fund Services, Garry Weaven says the story of choice so far is the “determination of a lot of the funds to tell their story more aggressively, I think that’s a clear story”.

Secondly, Weaven believes it has resulted in some addition to the growth figures of the larger funds, particularly for the large public offer industry funds.

“I am talking about growth in employers enrolled, in active members enrolled and in funds under management which is, of course, a factor of the market itself, and this of course has been a boom market,” he explains.

Some of the large commercial funds seem to be “doing okay as well,” he says, “but certainly the industry funds are doing well.”

Weaven says if you do the “proper measurement of that in terms of net benefit to members, what is actually in a member’s account, there are absolutely no inroads being made so far under choice on the massive gap that industry funds have over retail funds”.

“This can be obscured if people just focus on headline investment returns, because in these boom markets everyone is doing so well it’s hard to distinguish,” he adds.

There is no sign of fees coming down for any segment of the super industry under choice, according to Weaven.

“In part, that may be explained by the increased competition, ironically, where we predicted that what might actually happen is that there would be some marketing costs experienced.

“So fees have been pretty stable across the board, and consequently the net benefit outperformance of industry funds is still massive.”

Weaven agrees that SMSFs have yet to experience a massive upsurge in popularity.

“The last APRA data I have seen on SMSF showed continued growth, although some slackening off of the rate of growth, and the reason I think for a huge part of the growth was simply avoidance of the tax and super regime, and the tax office has tightened up a number of the rules and it is now not as obviously attractive to use SMSF to avoid the super ruses now.”

Budget changes

John Trowbridge, chair of the Institute of Actuaries’ Super Tax Reform Committee, said the simpler super system announced in the Federal Budget this month would provide more impetus to choice by giving people the confidence to put more money into super.

“The big picture is that people will be concentrating much more on investment and less on the tax details and when they are concentrating on investments, choice will come into play. So, there will certainly be more attention focused on choice, and to the extent there is more concentration on investment then there is more concentration on choice.”

Trowbridge adds that in the short run, financial planners will have just as much to do, but once the new simpler super system settles down the emphasis will be more on investment and less on tax.

“The simpler super system will enable more people to operate without financial planners, although there could be a lot of one-off planner activity to help members with choice,” he adds.