Being asked to explain the reasons for the dramatic changes to Super Review’s Top Super Funds feels a little like being a coroner brought in to sift through the evidence at a suspicious scene.
The signs of decline were there in black and white. The latest APRA statistics reveal more than 400 corporate super funds disappearing over the year to September 2003 — a 19 per cent reduction. So it was hardly surprising that the Super Review Top 300 Funds would become a shadow of its former self.
In the last survey, there were 190 corporate funds ranging from $35 million to nearly $4 billion in assets. But since then, funds run by such household names as Coles Myer, Boral, Hewlett Packard and AGL have simply ceased to exist.
And the cause of the decline? The obvious suspect is the highly publicised master trust bug that has been sweeping the industry. But the coroner’s report has revealed a few surprises.
Some corporate funds are proving resilient to the bug and have a strong pulse. Over the period of decline in fund numbers, many companies reviewed their superannuation strategies and chose to retain their fund under a different management model. Generally, this involved a rethink about which services are retained in-house and which are outsourced.
Some very large funds chose to outsource the day-to-day administration and member services. After decades of successful in-house management, they found an outsourcing model was better equipped to keep up with the rapid pace of improvements in member services.
Others moved to an implemented approach for investment management. This allowed them to retain control of the higher level decisions while using professional fund-of-funds managers to make the call on which managers to use and when.
Perhaps the most interesting development was where companies chose to retain their own stand-alone fund but to outsource all services including the role of the trustee.
This allowed finance executives to focus on critical issues like cost and defined benefit funding. Member representatives and human resources executives could use the policy committee to monitor member services. Meanwhile, a professional approved trustee handled the day-to-day compliance activities, the assessment of disablement claims and the determination of death benefit beneficiaries.
A second finding is that some of the decline in the Top Super Funds was caused by companies choosing to rationalise their funds. The Super Review Top Super Funds included many companies running two or more funds — either as a result of takeovers or through the historical practice of running separate ‘wages’ and ‘executive’ funds. With the run down of surpluses in some funds and the looming threat of licensing, there have been plenty of incentives to merge funds.
Of course, countering this trend is the effect of ‘demergers’. For example, the former BHP is now three companies (OneSteel, BHP Billiton, BlueScope Steel) and each has its own corporate fund — all three using Towers Perrin’s SuperSolution rather than maintaining their own separate trustees.
However, the coroner was able to confirm that the single largest contributor to the decline of the Super Review Top 300 Funds was the master trust bug. The effect of the master trust phenomenon outside the Top 300 is well known and well understood. After all, the average corporate fund outside this group has assets of less than $10 million and can’t hope to provide the range of services that fund members now expect.
But the average assets of corporate funds in the Top 300 are $250 million — surely enough to remain viable! So what are the factors driving this change? We think they can be summed up in three words.
Cost. The master trust market is highly competitive right now. The Top 300 are very attractive targets for providers and there are efficiency gains to be had through economies of scale.
Risk. Licensing requirements, regulatory and compliance risks make it very attractive for companies to seek to transfer risk.
Services. Members want more say in how they save, the investments they use, the insurance protection they need, and the way they access information.
Evidence indicates that many employers and members are looking to master trusts to deliver the mythical universal panacea: lower costs, less risk and better services. Unfortunately, as we all know, such a miracle cure simply cannot exist over the long term.
So our coroner’s report also comes with a strong health warning. Before choosing your medicine, each fund should develop its own formula of acceptable cost, risk and quality of member services. Remembering that if it sounds too good to be true, it’s likely to be a prescription for disaster. And beware the snake oil salesmen!
