(April-2003) Upwards and onwards: industry funds reinforce positions

By all accounts, industry funds are a success story. According to the latest statistics from the Australian Prudential Regulation Authority (APRA), their assets have surged from $10.1 billion at the end of June 1995 to a whopping $49.4 billion at the end of September 2002. Over the same period, the number of members belonging to industry funds has jumped 4.9 million to 7.4 million.

Gone, too, are the days when industry funds could be rejected because of their association with the union movement.

Many industry funds now compete successfully for the outsourcing business of corporate funds. They are appearing on more tender lists and they often put up a good fight against the more sophisticated master trusts.

And while they may not yet offer all the bells and whistles, they are making much progress.

Many have been quick to embrace the Internet and to expand their online offerings. The Australian Retirement Fund, for example, was rated second in a recent KPMG ranking of web sites of 30 public offer super funds, which also included most of the well known financial services brands. HESTA and REST were also placed in the top 10.

And a glance at Super Review’s annual survey of industry funds (see p20) will show how fast industry funds are adding on member investment choice. Funds like REST and the Superannuation Trust of Australia, for example, now offer members 12 options.

Industry funds have also been successful in keeping weekly administration costs low. As Super Review’s survey shows, these fees range from nil to $1.60 with the vast majority charging $1 a week.

However, according to Mercer HR Consulting principal and national practice leader for industry funds, Russell Mason, the growing cost pressures of offering superannuation are forcing many to reassess their position.

Mason says a number of merger talks are taking place between funds hoping to achieve better economies of scale and reduce the commercial pressures they are under.

“There is certainly a trend towards merging, with most industry funds of less than $300 million giving serious consideration to merging… I’m aware of six different industry funds that are having merger discussions, and they range from $20 million to $400 million,” he says.

Mason notes that those funds considering merging are assessing what their member’s expectations are and comparing the services they offer to what master trusts are offering. “They are saying: ‘We still want to be cost effective but we don’t want to charge high management expense ratios, so how do we do it? We do it by economies of scale’,” he says.

Industry Fund Services (IFS) executive chair Garry Weaven, however, questions whether all these discussions actually translate into mergers. “From what I can see, there are very few proposals for smaller funds to merge. A few may have got to the point of formal discussion but in general terms, the further the discussions go the less likelihood of a merger,” he says.

Nonetheless, CEO of the $4.2 billion Australian Retirement Fund (ARF), Ian Silk, warns that funds need to be aware of the potential downside of striving for scale and bigger economies.

“It is one thing to be large, but there’s no point in being large if you can’t convert that size into either cost savings or product benefits for members. Therefore, an issue for industry funds, particularly large funds, as they continue to grow, is to be conscious that they don’t go the way of the lost generation of mutual organisations and end up being run for the benefit of management and boards, rather than for members and customers,” he says.

Silk has had first hand experience of achieving greater size and scale through amalgamation. The $17 million Western Australian Legal Superannuation Fund, the $11 million education sector fund EdSuper and the $28 million Commercial Radio Industry Superannuation Fund have all rolled into ARF over the past 18 months.

CEO of the $1.7 billion equipsuper, Robin Burns, says some industry funds may be finding that despite having grown their member bases in the hope of generating greater scale and efficiencies, they still aren’t able to slash costs.

“The expected economies haven’t fully materialised as the business costs of running a fund are becoming more expensive. The cost of compliance and meeting legislative requirements have increased, and service providers such as administrators, which for a long time had been loss leaders, have become more profit driven,” he says.

CEO of the $4.6 billion Retail Employees Superannuation Trust (REST) Neil Cochrane notes that the costs of keeping abreast of regulatory requirements are adding to his fund’s burden. “We may be a big fund but all the costs add up, and the cost of meeting regulatory and licensing obligations have certainly risen,” he says.

Silk concurs. “I don’t believe most industry funds will have great difficulty in accommodating the changes outlined in the Financial Services Reform Act 2001 (FSRA), but significant resources will be required to address those changes.”

But Mason believes the issue of attaining a licence is secondary to actually ensuring it is maintained and thus argues that FSRA is causing many funds to seriously reconsider their position after facing issues such as whether they can find or even afford to employ people with the right qualifications. Therefore, according to Mason, the options facing those industry funds ‘under the kosh’ are either: continue the struggle, merge or roll the fund into a larger industry fund.

Despite the pressure on industry funds, Weaven points out that the burden of adhering to FSRA is the same for all funds. And while there are big and small industry funds, the smaller ones are usually much larger than the average corporate fund.

For large industry funds, such as his, Silk says an ongoing challenge is also to “win the battle of the public profile, in which we are competing against many of the organisations in the retail sector with enormous marketing budgets for television campaigns”.

Manager client services at the $1.4 billion Electricity Supply Industry Superannuation (Qld) Fund, John Simpson, believes a challenge for some industry funds, particularly those with a wide range of member balances, is how to cater for and service those with high account balances to prevent them from being poached by retail institutions.

He says: “We’re a little unique compared to other industry funds as the average account balance of our members is over $100,000 and we have about 15,000 members.”

ESI Super recently launched its own financial planning offering to members, joining other funds like Energy Industries Superannuation Scheme, VicSuper and Statewide Superannuation Trust as they strive to retain members in an increasingly competitive market, and to fight off attacks by traditional, commission-hungry planners. —