(April-2003) Catering to corporate tastes

There’s plenty of action lately at the bigger end of town as master trust players gear up to cater for the expanding needs of larger corporate funds, especially those with defined benefit components.

The latest to enter the fray is Towers Perrin, which plans to launch by the middle of the year a master trust specially designed to cater for the needs of very large corporate funds.

According to managing director David Solomon, large funds now demand from their master trusts the ability to administer defined benefit plans and specific tailored solutions that suit their individual needs.

And in a bid to claim its stake in the market, ING has awarded KPMG a contract to do the defined benefit administration for its master trust. BT formed a similar arrangement with KPMG last year and according to KPMG superannuation services partner Guy McAliece, his firm is currently considering four or five other proposals to provide this type of service.

McAliece says KPMG has identified defined benefit administration as a niche area of expertise. “It requires a different mindset because instead of having large numbers of people pushing a lot of information, you need to have a particular focus on the trust deed provisions and the rules that apply to different categories of members, and you need to keep a close eye on the solvency of the assets and liabilities.”

These organisations’ moves into defined benefits are hardly surprising given that the outsourcing rush into master trusts and industry funds continues unabated, and a growing number of the corporate funds that haven’t outsourced yet have defined benefit components.

According to the latest statistics from the Australian Prudential Regulation Authority (APRA), 2161 corporate funds existed at the end of September. That’s a drop of 472 — or 18 per cent — of the funds that existed at the end of June 2002.

While tender consultant Warren Chant describes this market movement as “more of the same”, it is clear that the size of the funds taking the plunge just gets bigger and bigger. Having just completed the tender for the $300 Leighton/John Holland/Thiess fund, Chant says he has several more in the pipeline involving funds with assets of between $100 million and $500 million.

The tone has already been set by news that employers like BHP Billiton, which had a $1.7 billion fund, Coles Myer, with a $900 million fund, and Orica, with its $550 million fund, have outsourced their stand alone super funds.

Chant predicts that over the next 12 to 24 months, many more funds will follow as companies realise they can’t match services offered by the better master trusts and industry funds. Other drivers of the trend, according to the experts, are an increasing focus on costs by companies and growing member demands about the services they expect to receive.

Head of the Mercer Super Trust (MST) Peter Promintz adds that a high proportion of trustees of stand-alone funds have not yet addressed the impact of the Financial Services Reform Act (FSRA) and he expects a big rush in outsourcing in the third and fourth quarter of this year when they realise what’s actually involved. Around that time too, the rules of APRA’s new licensing regime will also be clearer, creating a double whammy for super funds.

“It’s the lull before the storm,” warns Promintz.

Head of BT Corporate Superannuation Geoff Peck agrees, noting: “If funds are going to outsource, they will want to do it before the end of this year and will have to make a decision by June because the FSRA transition window ends at the end of March.”

Compounding this, says Towers Perrin marketing director Dianne Cleary, is “that clients are starting to think about choice-of-funds and what that means for them”. “They are questioning whether they want to be running a fund in competition with others and this will be crucial when deciding whether to remain a stand alone fund or move into a master trust.”

Plum CEO Jane Cutler adds that potential changes in accounting rules, which could see the under funding of defined benefit funds appear on company balance sheets, are increasingly forcing defined benefit schemes under company executives’ microscropes. And, she says, sagging share prices and profits aren’t making it easier to deal with defined benefit liabilities.

“Poor returns don’t help the decision,” says Promintz. “They bring the corporate fund deeper onto the financial director’s radar screen.”

Ironically, he notes: “The reality is that a company has as much exposure to defined benefit whether it has a stand-alone fund or is in a master trust.”

Promintz says those funds that were going to make an easy decision to go into a master trust have already done this. He calls these the “low hanging fruit” because they have been easy to pick and a large proportion of this first wave were not defined benefit funds.

Now, however, there’s a second wave of the corporate funds asking themselves whether they should be outsourcing and a higher proportion of these are defined benefit or hybrid funds.

ING employer superannuation marketing manager Sue Mieog says: “Potentially the market is quite large because there is a lot of momentum in the industry. A lot of defined benefit funds are outsourcing at the moment, particularly hybrid funds where the defined benefit part might be closed, so the trustees want to move into a master trust.”

Master trusts are not alone in their ability to cater for defined benefit funds, with numerous industry funds — including Superannuation Trust of Australia, Quadrant Super and equipsuper — also providing a service, even at the smaller end of town. Indeed, REST’s master trust Acumen Super recently announced it had wooed over the $4 million fund of the Royal Institute for Deaf and Blind Children, which has both defined benefit and accumulation members.

While many of the remaining corporates with defined benefit components are larger funds, there’s still a core of anywhere from 200 to 400 small defined benefit funds out there. And these funds are getting harder to administer as stand-alone funds.

“The running of a small defined benefit plan is inefficient and master trusts will charge for this,” says Promintz. “Small defined benefit funds face rising costs and have no obvious solution but to go the defined contribution route... They normally change into defined contribution funds and go into a master trust at the same time — or they remain stand-alone funds and pay much higher fees.”

Australian Superannuation Advisory Services managing principal Stephen Moore says: “Generally speaking, master trusts find it difficult to accommodate defined benefit funds. These funds are complicated and [master trust] products have been set up to handle straightforward accumulation funds.

“Each defined benefit fund requires separate programming and there are costs involved. It is a distracting business. You need actuaries and separate reporting and reviews.”

According to Moore, among the many reasons why it does not pay to be a defined benefit member in a master trust is that most vendors operate a two-tier member fee system. In one case, he says, defined benefit members are paying more than five times as much as their accumulation counterparts.

One master trust is charging a defined benefit programming fee of $4000 a year while another discriminates against defined benefit members by charging an additional annual asset administration fee of 0.02 per cent.