Australia’s more stringent regulatory environment and a heightened focus on cost management appear to be pushing super funds towards exerting greater vigilance over their optional service providers.
Although this applies largely to ‘stand-alone’ corporate funds, there is an increasing number of companies who outsourced to a master trust three to five years ago that are also prepared to review their arrangements.
If the busier tender advisers themselves are to be believed, the change is substantial — they witness super funds under more pressure to review and monitor their service providers.
Chris Butler, managing director of The Heron Partnership, says: “More trustees accept the need to review their service providers. APRA is increasingly asking questions about service provider reviews, forcing them to consider the review process more seriously and the low investment return environment is also focusing minds on cost savings.”
Brett Westbrook, CEO of the Local Government Superannuation Scheme and the Energy Industries Superannuation Scheme, cites rationalisation among service providers as a key force behind the trend towards greater reviews. “As service provider firms merge and come and go, funds are forced to reconsider their contracts with the provider.”
The bulk of the reviews are, notes Counterpoint’s Peter Williamson, around investment managers. “This is more a function of uncertainty around the financial markets,” he says.
Butler reckons that over the past year around 20 per cent of super funds reviewed all or their main service providers. This includes those funds undertaking broader strategic overviews leading to full or partial outsourcing. “One quarter of our business is in assisting funds with their reviews,” he says.
Wayne Walker at Rice Walker Actuaries is more damning. “Long held clients are treated like an old sock and left in the cupboard to hibernate. Meanwhile, new clients are negotiating discounts and benefits on the back of these old clients. This leaves a sour taste. To win business, funds are increasingly looking for a partnership and reward for loyalty.”
Russell Mason, the principal for industry fund and international practices at Mercer Human Resource Consulting, agrees that more funds are reviewing external providers. “There is increasing awareness among funds about what goes on in the review process,” he says. “It is also more ongoing. Gone are the days when funds will roll contracts without reviewing, or at least considering, the on-going role of a service provider. Gone are the days where funds have no service agreement.” He identifies the three main areas where this is changing as insurance, administration and investment consulting. “We even hear of funds regularly running tenders for their auditors. This was unheard of a few years ago.”
Walker adds that, more informally than through full-blown tenders, a lot of rethinking is going on, not only around costs, but the structure of the contracts. “Service providers are hard to hold accountable, so performance standards are being set. Benchmarking is used far more widely and broadly. This is not so much to get rid of the service provider, but rather, to improve service standards and modernise. Hollow and shallow agreements with service providers are still around but are less prevalent.”
Westbrook considers this a “maturation of the super industry where trustees are more focused on due diligence issues”. “A few years ago it was unheard of for funds to have a sizeable secretariat, let alone the internal expertise to complement that of the service provider,” he says.
At the very least, all agree the review process is becoming far more thorough if not more regular.
Super funds have grown accustomed to using a whole range of service providers. REST, Australia’s largest industry super fund, is not unusual among the large funds in contracting 10 different providers for different services — administration/accounting, group life/income protection insurance, trustee liability insurance, investment consulting services, legal advice, audit services, internal audit services, credit management services, tax agent services and custody services.
REST CEO Neil Cochrane believes that awarding tenders to these service providers “is one of the most important functions for the fund’s board”.
He does not detect any rise in the frequency of service provider reviews, but he says: “We have never undertaken as comprehensive a review of our service providers as we are now doing. Providers are surprised at how comprehensive the tender process has become.”
To Walker, the fundamentals behind any tender review process contain three elements — an awareness of the options available in the market (“there is no substitute for thorough and detailed data”); the capacity and service levels of the service provider; and an understanding of how the service provider works.
“Generally, the agreement is prepared by the service provider, not by the client, so the fund must be vigilant,” he says.
Cochrane concurs that the basics have remained the same: “Always look at what is available in the market and ensure one is not locked into a single provider for a long time. Look into the service standards and quality controls,” he advises.
For Cochrane, the primary issue is not price. “To ensure a good service the provider needs to be profitable and financially secure in its own future,” he says.
Major services contracts are typically signed for three years.
The tender advisers, on the other hand, are heavily influenced by the potential for cost savings. “We are finding savings can amount to 25 to 40 per cent of total service provider costs for funds maintaining their “stand-alone” structure,” says Butler. Through outsourcing, he believes savings can amount to 15-35 per cent overall.
“We report against a benchmark to see where opportunities arise for the greatest cost savings. This said, most clients are not solely focused on costs. Other issues, such as value for money, service performance, business to business interactions, organisational reputation and market standing are just as critical.”
Mason adds that monitoring service providers is now an integral part of a fund’s risk management strategy. “The costs associated with service providers are a substantial item in risk management.”
Jack Diamond, vice-president of institutional business at Nicholas Applegate, argues the importance of keeping up to date with modern trends and services. “This does not necessarily imply changing providers but revisiting what they are providing. This is part of the duties of trustees.”
Australia’s super industry operates in a highly competitive market that is pretty healthy and strong. There have been no major collapses among service providers that reflect any great deficiency in the contracts they have entered into with super funds. But there is a growing recognition within the funds that these contracts are not sacred, should not be taken for granted and that a lot is to be gained in improved services and better costs by monitoring the contracts more vigorously, if not conducting full-blown reviews more regularly.
The growing regulatory burden faced by super funds and the expected super fund licensing regime is only adding to the pressure.
