Defined benefit (DB) funds make up 22.5 per cent of the assets in this year’s TOP 300 survey, compared to 28.5 per cent last year. But are these funds a dying breed?
Rainmaker research director Alex Dunnin argues that “employers are wanting to reduce their super risk exposure and are thus moving away from DB funds”.
On the other hand, Ramani Venkatramani, general manager at the Australian Prudential Regulation Authority (APRA), believes that it is premature to forecast the demise of DB funds. “Any rising equity market stands to benefit employers who are hurting now and thus encourage employers to stay in their DB funds,” he says.
For his part, Christopher Butler at The Heron Partnership says low investment returns are slowing down the transfer of funds out of DB funds as the financial state of many DB funds means that employers are not in a position to offer “sweeteners” to transfer to accumulation.
He adds: “Most employers do not want to move their employees at a time where markets are low and very volatile. Once markets are more buoyant the trend out of DB funds can be expected to continue.”
There are 36 DB funds in Super Review’s TOP 300 survey, spread almost evenly between corporate and public sector funds. Only one is an industry fund and 44 per cent of the DB funds in our survey have assets of less than $100 million.
Longer term figures from APRA reveal that the $17 billion of assets in pure public and private sector DB funds at the end of September 2002 make up 4.5 per cent of the super industry’s total assets compared to 20 per cent (assets: $32 billion) in September 1995.
Over this period, the assets of hybrid funds grew from $58 billion to $137 billion, but remained reasonably static at around 36 per cent of total super fund assets.
While DB funds are in decline, few are prepared to announce its death. Says Dunnin: “There is still a hard core of members who will remain in DB funds.”
Venkratramani cites three factors underpinning this hard core. “There are employers attracted to providing more than the minimum requisite super benefit. There are also tax advantages and efficiencies and employers stand to benefit when the markets rise.”
One reason the demise of DB funds has been talked up is the growing liabilities employers face in sagging markets.
While Australia has been spared the spectacle of witnessing employers being forced to top up their DB funds with huge additional contributions, Australia’s DB funds are far from isolated from the world’s financial markets.
A “health check” conducted by APRA to identify the extent to which the downturn in equity markets is affecting the funding position on DB funds finds a 10 per cent drop in average solvency levels across the industry.
The situation is worse for smaller funds with at least 90 per cent experiencing drops in their capacity to pay all members’ current exit benefits from existing assets and to pay members’ accrued benefits in the future.
Another reason said to be putting DB funds on the endangered list is the rush to outsource due to the increasing costs and complexities of operating employer sponsored super funds.
Smaller DB funds, with their complex designs and no bargaining power, are expensive to administer whether they remain stand-alone or are outsourced. But because employers still have to meet their DB obligations whether they outsource their funds or not, the trend is often to first convert these to accumulation funds before outsourcing.
