(July-2002) ... steady as she goes

Public sector superannuation funds accounted for 47.3 per cent of the recent Super Review Top 300 Super Funds survey’s total assets. Eight out of 10 of the biggest funds in terms of asset size are public sector funds, with the largest, State Super (NSW), in pole position with assets of $25.7 billion. As the pressures to deliver a top class superannuation product to members mounts, trustees are focusing on delivering the goods, and are not being weighed down by their history of being gentle giants.

Public sector funds are an important part of the industry. They are subject to a high level of scrutiny, which means that there is a lot of pressure on the various boards to ensure that the funds are run well. There is a stable employer base from which the funds derive their membership. They enjoy economies of scale, which has a positive impact on their fees and administration. And, they have a critical mass in terms of funds under management, which lends well to their ability to make use of strategies that smaller funds cannot.

A recent Rice Walker survey showed that the expenses of public sector funds average 0.43 per cent of assets, compared with the superannuation industry average of 1.2 per cent of assets. According to Rick Harper, CEO of Funds SA: “All in all, the public sector superannuation funds stand out as a well-managed group of funds.”

“Public sector superannuation funds look, feel and operate very differently than they did five years ago,” says Steve Gibbs, CEO of the giant Public Sector Superannuation and Commonwealth Superannuation Schemes (PSS/CSS).

Many have introduced products and services of a level akin to those available in the more nimble corporate, industry and public offer funds.

While in some ways this means that public sector funds are looking more and more like other funds, from a benefit design point of view, this is not the case.

Over the years, public sector superannuation has often led the super industry in respect of new initiatives, particularly in terms of benefit design, says Martin Stevenson, executive director of Mercer Human Resource Consulting.

“In past years, public sector funds led the way when superannuation was ‘needs oriented’ and was based on the concept of an employee remaining with one employer nearly all his or her working life. Thus public sector funds were the leading proponents of indexed pension benefits — providing complete protection for employees and their dependents on retirement or death.

“When the superannuation environment shifted to a ‘deferred remuneration’ concept, again it was the public sector that led the way, with NSW and Victoria being early providers of Superannuation Guarantee only accumulation benefits,” Stevenson says.

Often the public sector funds are quite complex, especially the defined benefit component. While many of the defined benefit funds are closed to new members, they are still dealing with the need to adapt certain aspects of the fund in order to meet member requirements.

But, according to Mark Thompson, manager of the Melbourne practice of Towers Perrin, there hasn’t been a great deal of change in these funds overall in the past 12 months.

While these funds are looking like they did a year ago, their major challenges are coming from areas such as changes in superannuation legislation. And, issues such as changes to family law and the surcharge are proving difficult for these larger, more complex funds to adapt to quickly.

Another critical issue for these funds is that they are in a position where the age profile of their membership is maturing, and hence they are paying out a lot of money. Add to this the low returns in recent years and increasing pressure is being put on funding levels.

Unfunded liabilities are in the order of $100 billion. The concern regarding unfunded liabilities is leading governments to incorporate superannuation into their balance sheets, and to ensure that they are managed very carefully.

Within the public sector fund arena, the accumulation funds are where most of the action is. These funds are increasingly competitive, with some of them opening their doors to people outside the funds’ original target audience.

Electricity Supply Industry (ESI) Superannuation (Qld) is a case in point. While the fund does have public sector origins, as the industry becomes more regulated, it tends to view itself as an industry fund. Its sister fund — equipsuper — has gone through a similar evolution. It has opened its doors to tenders and actively recruits corporate funds looking to take the outsourcing plunge.

ESI Super accommodates employers predominantly in the electricity supply area, and while it doesn’t publicly advertise itself, it is open to business from outside the electricity industry, says the fund’s manager of client services, John Simpson.

While funds such as these may not be driving change, they are certainly not far behind.

A significant area of growth within many of these funds is that of retained membership - members who have retired but have chosen to keep their money in their particular superannuation fund. To meet the growing needs of this sector of members, funds are introducing various post-retirement products, including draw down facilities.

Well aware of the need to move with the times, many public sector funds are introducing additional features and benefits to their schemes. These include innovative investment options, investment choice for defined contribution members, home loans, and a swag of online information and interactive services. Many have also employed their own financial planners in order to better serve members.

While there has always been an emphasis on the long-term nature of superannuation, one of the significant challenges for public sector fund trustees is educating members in the current environment of low returns. With many funds expecting to post slightly negative returns for the past 12 months, public sector funds are preparing to meet various levels of concern from members.

“We are conscious of the need to manage our members’ expectations,” says the State Superannuation Fund’s Griffiths. “People have been conditioned to expect good returns.”

And in a low return environment, this can pose some problems.

The Military Superannuation and Benefits Scheme has produced a series of videos over the past 12 months covering topics such as member benefits and good corporate governance. The videos have been received well, says fund chairman Kiefel, especially as the funds membership is geographically diverse.

Some funds, such as ESI Super, are undertaking member research to see how the fund can better meet members’ needs.

Public sector funds have a solid history and face an array of challenges going forward. These include competing with industry funds and master trusts at the leading edge, coping with ever increasing legislative complexity, the question of whether or not to become licensed, managing their unfunded liabilities, educating members and deciding how to respond to the changing investment environment.