Industry super funds face off against SMSFs

Industry super funds appear to be making desperate attempts to retain those members most likely to break away and set up a self-managed super fund, as Damon Taylor reports. 

In an Australia with more than 500,000 individual funds and around $440 billion in funds under management, there are few who could deny the impact self-managed super funds (SMSFs) have had on this country’s wider superannuation community. 

Irrespective of which sector one looks at, control and flexibility are now top of mind for fund members. But Multiport technical services director Phillip La Greca believes that for prospective SMSF trustees, both the focus and points of attraction of SMSFs have shifted. 

“I think the focus has shifted slightly,” he said.

“Obviously, the reasons for setting up an SMSF have always been around control and flexibility, and there has been an additional argument about cost. 

“But where I think the focus has shifted is that it’s now also looking at this question of customisation,” La Greca explains.

“This means customisation to the individual level, which of course large funds – and it doesn’t matter which side of the fence in large funds you are – are limited in catering for. 

“People want a superannuation solution that suits their personal circumstances precisely.” 

Alternatively, David Elia, chief executive officer of HOSTPLUS, suggested it was not the perceived benefits of SMSFs that had changed but rather the marketplace. 

“There is no question about it, SMSFs have grown in popularity amongst Australian investors,” he said.

“And while we believe SMSFs will appeal to a certain group of investors that seek more control over their investments, they’re not for everyone. 

“For some, SMSFs are very suitable, particularly if they have the time, skills, knowledge and funds to make managing their own super affairs worthwhile,” Elia continued. 

“For many people though, SMSFs have the potential to be an expensive and time-consuming minefield of regulations, fees, audits, analyses and investing. 

“The benefits of SMSFs haven’t changed significantly over recent years but the marketplace has – and this has certainly helped drive increased demand.” 

Indeed for Elia, while control and flexibility – and specifically the ability to invest in non-platform assets – are still major factors, it is the size of account balances that has made many Australians truly take note. 

“The desire for investors to have increased control over their investments probably remains the primary benefit,” he said.

“But as superannuation balances grow bigger, we are seeing more and more members take notice of and engage with their super investments. 

“More members are taking a keener interest in the way their money is invested and managed. They’re seeking more education and advice, and it is that which may make an SMSF-type solution a suitable investment structure.” 

The reality, of course, is that as a result of the SMSF sector’s growth, competition within the super industry has never been greater. In the wake of innovations by industry funds and retail master trusts alike, direct investment options (DIOs) abound, but are these simply in response to SMSF growth and success?  

For Elia, the rationale behind such innovations was far simpler. 

“As an industry fund, we have a fiduciary responsibility to provide the best possible retirement savings outcome for our members – and developing quality products that achieve this objective is all part of it,” he said.

“Industry super funds like HOSTPLUS are run to benefit members, so every decision we make is with our member’s best interest in mind. 

“We make it our priority to understand what our members want and develop products and services that suit them but, with over one million members, no two members are alike,” Elia continued.

“We have cohorts of high-balanced, engaged members and, at the other extreme, low-balanced members who are starting their first job in the workforce. 

“For this reason, our fund needs to understand its members and adapt and respond to their varying and changing needs as they go through various life stages.” 

But while the focal point of SMSF competition has undoubtedly been industry funds, Robert Jackson, director – SMSF for Deloitte Private, was quick to point out that SMSF leakage was a concern for all APRA-regulated (Australian Prudential Regulation Authority) funds. 

In fact for Jackson, the current interplay between SMSFs and pooled superannuation arrangements is largely based on financial advice, and members need to consider aspects of their financial lives that go well beyond superannuation. 

“As it stands, a number of the reasons for why you needed an SMSF in the past are now being addressed by both industry and retail funds with direct investment options,” he said. 

“So yes, there is certainly some control and flexibility that is now built-in, but what I see as the main issue and the main point of difference is how people access their advice and education. 

“People will turn to a financial planner for advice but when they do, it hasn’t necessarily been triggered by super,” Jackson continued. 

“It may be a major event in life – purchasing a house, requiring a debt product, renovating or refinancing, acquiring some investable assets, looking at your insurance, having children, receiving an inheritance – but whatever it is, they’ll turn to a financial planner who is looking at their whole of wealth picture, superannuation included. 

“Of course, the issue for industry funds is that they’re not in that whole-of-planning discussion and therefore often superannuation is being talked about without the industry or retail funds being involved.” 

According to La Greca, it may even be that Australian superannuation has reached a tipping point in terms of member engagement and awareness. 

“It’s all about engagement if you think about it,” he said. “We’re sort of at that tipping point because more and more people now have superannuation account balances with a significant value. 

“So if you look at the average balance, it’s somewhere I think around the $45,000 mark across the industry generally,” La Greca continued.

“And $45,000 is a significant asset for most people, significant enough that they cannot help but pay attention to it.” 

La Greca pointed to an average Australian in their mid-30s as the prime example. 

“If you’ve got someone who starts contributing to their super at 25 and they’ve got 9 per cent going in, if they’re on the average wage that’s about $4,000 a year,” he said.

“So by the time they get to their mid-30s, you’re talking about a $40,000 or $50,000 balance and suddenly it becomes an issue. 

“The only thing that they have worth more is their home, possibly their car, but that’s basically it,” La Greca added. “And that’s why I think it’s been a natural progression in that regard. 

“We’re at that tipping point where many people are saying to themselves ‘my super’s worth how much? I’d better get involved.’”  

Of course, it is arguable that by providing direct investment options in domestic equities, exchange traded funds (ETFs) and term deposits, industry funds are allowing their members to do exactly that. 

And while there may have been challenges with respect to implementation, Julie Lander, CEO of CareSuper, said that such products were already gaining traction. 

“We had a shares option that we then expanded, putting it in a new platform and creating a DIO, and we’ve probably got two different types of people taking it up,” she said. 

“Firstly, there are those who are really conscious of downside protection and are looking for the defensive play, especially term deposits where they can know that it’s not going to go backwards. 

“They know the rate they’re going to get and they know it upfront, and while those people might previously have taken their money to an SMSF or out of super altogether, I think they’re now happier that they’ve got that option within our fund,” Lander explained. 

“But then the other type of person is someone who’s perhaps taking a bit more risk or looking for extra return and thinking that they have the background or expertise or knowledge to beat the managers. 

“They’re trying to make their own investments and they’re the ones interested in stocks and ETFs and so on.” 

Yet for Lander, the big challenge and the one requiring a change in mindset, was related to a super fund’s fiduciary duty. 

“While we do have a direct investment option, we do have limits – so I suppose that’s where it’s not quite as flexible as an SMSF,” she said. “And I suppose that’s where the paternalistic mindset of trustees comes in. 

“Not surprisingly, our trustees have their fiduciary obligation top of mind; they’re trying to act in members’ best interest and, in a sense, they’re also very risk averse,” Lander continued. 

“I think trustees realise that they need to allow members to make their own decisions because, at the end of the day, they can do that anyway – they can take their money out and do that, so why should we stop them taking more control over their own investments? 

“The point, though, is putting safety barriers and limits in place to make sure members are protected.” 

Also seeing trustees’ fiduciary responsibility as the key factor separating the direct investment available in pooled superannuation from the true flexibility of an SMSF, Russell Mason, lead superannuation partner for Deloitte, said that industry and retail funds could only offer so much. 

“There’s a big difference between an industry or retail fund and an SMSF, in that if I’m the trustee of an industry fund, I’m acting in a fiduciary responsibility for someone else’s money,” he said.

“And that’s a far higher standard of directorship and responsibility than most other roles. 

“In an SMSF, on the other hand, the trustees are effectively managing their own money and so the regulators, rightly or wrongly, have taken a different attitude to the trustee of an SMSF,” Mason added. 

“They feel that they’re making investment decisions for their own money and therefore have a different duty than the trustee of an industry fund. 

“So I think industry funds have, in the main, been very prudent in saying ‘look, we’re not going to allow Joe Bloggs to put 100 per cent of his balance in Telstra shares,’ for instance. Telstra shares may be a very good investment, but they’re going to feel that it’s in Joe’s best interest to have some degree of diversification.” 

Yet if there is one issue in this debate that goes beyond control and investment flexibility, it is that of cost. And it is not just cost in terms of administration fees and the cost of investment, because for Elia, superannuation costs go well beyond dollars. 

“While an SMSF might give an investor more control, it comes at a significant cost in time and money that some investors wouldn’t ordinarily pay, especially if they are with an industry super fund,” he said. 

“And even then, increased control doesn’t automatically translate into better returns. 

“If you have a lot of super, for example half a million dollars, and you’re very experienced in financial and legal matters, then SMSFs may be suitable,” Elia continued. 

“But people who use an SMSF generally spend a lot of time tracking markets – usually more than two hours per week – and you also have to deal with more red tape. 

“There are strict ATO (Australian Tax Office) rules about setting up and managing your own super fund – and even if you receive incorrect advice from a professional, the ultimate responsibility for the fund still rests with you.” 

However, for Mason, the cost question was largely tied to account balance. 

“If I’ve got $2 or $3 million in my SMSF, I can probably create a very cost-effective vehicle in terms of administration and audit costs,” he said. “If I’ve only got $100,000, its going to be a struggle. 

“One of the weaknesses for some is the lack of group insurances or death and disability insurance,” Mason added. 

“But again, some providers are now looking at arrangements and have put in place arrangements with group insurers to say, ‘as long as you join under these conditions, you can buy death and disability insurance cover through our platform.’ 

“It’s horses for courses, but there are a large percentage of SMSF members who leave a balance with an industry fund for that very reason.” 

Indeed, given that sort of context, Elia said that there were any number of investors considering starting an SMSF who might find an industry fund’s member direct investment option preferable. 

“(They get) greater investment control and expert support without the administrative and legal burden or cost of an SMSF,” he said. 

“Industry funds are run to benefit members, which is why we keep our fees low and we approach all the products and services we deliver to members under this philosophy,” Elia continued. 

“Our industry fund heritage and ‘run to benefit members’ focus, coupled with competitive investment performance, makes industry funds like HOSTPLUS a compelling choice to manage super.” 

So in the midst of SMSF growth, industry and retail fund innovation and the commencement of MySuper, it seems the one guarantee is that competition will continue.  

At face value, the industry is starting to close the gaps between sectors, but while the list of similarities is undoubtedly increasing, Jackson said that the sectors represented by SMSFs, retail master trusts and industry super funds could not help but remain distinct. 

“I think there’s certainly a closing of the gap in relation to platform products and around execution capability,” he said.

“However, the gap remains in relation to non-platform assets, being real assets, predominantly either business real property or residential property. 

“The gap is also still there in relation to who it is trustees turn to for financial advice,” Jackson continued. “And I think that, more than anything else, will be critical as time goes by. 

“The question is whether more Australians choose to take financial advice themselves or whether they effectively outsource that advice to an industry super fund.” 

Yet irrespective of each sector’s differences, Mason said that the super industry’s continuing evolution had been enormously beneficial for members. 

“As the gap narrows and the differentiation lessens, it’s providing healthy competition and it’s providing individuals with a huge range of choice,” he said.

“I look back to when I entered the superannuation industry 30 years ago and there was very little choice between what were essentially inflexible and expensive products. 

“Now, though, different people will look for different things from their superannuation, and within any of the SMSF, retail or industry fund sectors, most people’s needs should be able to be met,” Mason continued.

“But the other thing to keep in mind is that it doesn’t necessarily have to be a choice of either/or. 

“Perhaps the ideal solution is taking the best of both worlds and saying, ‘well, maybe I have an industry or retail fund for certain of my investments or needs and I’m in an SMSF for others’ – perhaps it’s about blending the best of both.” 

Taking Mason’s suggestion further, La Greca said that with the advent of MySuper, many fund members would be able to track a journey through MySuper to an industry or retail fund and then through, ultimately, to an SMSF. 

“There’s this progressive element to it. It’s almost like superannuation becomes a journey in that you will start out in MySuper and then over time, you will move along the chain from MySuper to choice and possibly to an SMSF,” he said.  

“It’s interesting because the only thing we haven’t actually formalised is whether or not we should ensure that someone who makes the step from one of those three elements to the next has received appropriate advice about what they’re getting into going from one to another. 

“We sort of have it because we’ve got requirements around switching, but we don’t really make it mandatory,” La Greca continued.  

“Maybe that’s part of the problem, maybe we should – and maybe that’s one of the things we will get. Because this is all about information and making sure people are going into whichever option they choose – having had that conversation and being aware of what they’re doing.” 

In fact, for La Greca, information and advice was something the super industry was obliged to step up on, regardless of sector. 

“This is something the industry has to start stepping up on but it has to step up with a less biased viewpoint,” he said.

“What I am most concerned about and what we don’t want to see is name calling. 

“At the end of the day, every sector has its valid place and that’s what we need to be focusing on.”