While probably limited, the increasing and largely successful involvement of industry funds in providing master trust products is challenging the more established master trusts.
Following REST and State-wide Superannuation Trust, other large industry funds — SunSuper, Superannuation Trust of Australia (STA) and to a lesser extent, the Australian Retirement Fund (ARF) and HOSTPLUS — have introduced new master trust look-alike products as an alternative to what they perceive as the high cost master trusts and banks which have dominated the corporate superannuation market for so long. They are competing mainly on price competitiveness, investment offering and flexible product features.
Although they lack the marketing muscle of their for-profit counterparts, their huge scale enables them to piggy back off their traditional industry fund base.
SuperRatings finds industry not-for-profit funds have outperformed the major master trusts over 2003 with members in not-for-profit funds earning an additional 3.9 per cent a year on their money (net of investment fees and taxation) over the last three years which equates to additional investment earnings of 12.2 per cent over the period.
This is confirmed by research firm Plan For Life. For the year ending September 2003, non-super master funds reaped net fund inflows of $2.88 billion, which appeared to be at the expense of non-super retail funds given this sector suffered similar levels of outflows with $2.98 billion pouring out over the period. The pattern was similar for super master trusts and retail funds, with the former experiencing inflows of $7.36 billion and the latter outflows of just under $1 billion.
Still, price, service and administration competence are clearly not the only criteria considered by employers in purchasing the services of master trusts. As former Bridgeport executive director Robert MC Brown wrote last year: “It is a curious phenomenon that while the master trust sector has burgeoned in terms of market share, the self-appointed ‘conscience of superannuation’, the industry funds, have languished at around 10 per cent of the total market. This has occurred even though their fees are much lower, their returns are higher, their administration competence is average to excellent, and they are not seen to be connected to the big institutions which the community loves to hate.”
He offers a few explanations for this — the view that industry funds are only for award-staff with “small balances”; the perception that investment choices are limited and the “incorrect but understandable impression that industry funds are ‘owned’ by trade unions who will cause trouble for employers, particularly small employers, who are naïve enough to sign up”.
But, he says, “overarching all of these reasons lies the lack of a distribution network, the industry fund movement having decided many years ago to have no connection with commission-based financial adviser networks … This attitude, while commendable at one level, has cost the industry funds dearly in terms of potential market share”.
Still, The Heron Partnership’s executive director John Smith and Rice Walker Actuaries managing director Wayne Walker both note that the major industry funds look far more attractive when compared to many of the small to mid-size master trusts.
Smith believes this is because they “boast the economies of scale which enable them to offer a highly competitive package when it comes to pricing, performance and service delivery”.
Walker says it is “not until you compare the industry funds and the master trusts side by side that you appreciate what the differences, the benefits and deficits, really are”.
Smith notes a number of industry funds — particularly those perceived not to have strong union or political affiliations — are already being viewed favourably in the outsourcing scenario. Many also have an advantage in circumstances where they have employer trustees with strong external networks. He adds that “some industry funds, for example, SunSuper and STA, have clearly been able to capitalise on their foundations and what they offer the market today, for many employers considering outsourcing, is quite compelling”.
SuperRatings managing director Jeff Bresnahan agrees but questions why it has taken everyone two years to recognise industry funds’ competitiveness. “Even now, why aren’t they receiving their fair share of new business? There is more to this debate than lip-service”.
