(May-2002) Locals are still in charge ... for now

The extent of Mercer’s domination among Australia’s fund administrators and asset consultants is glaringly revealed in Super Review’s TOP 300 survey. As both an administrator and consultant, the group’s stronghold has, if anything, tightened in a trading environment that has been affected by financial services reform and privacy legislation.

In terms of the number of funds, Mercer leads the way by servicing 78 of the 225 funds that provided details of their administrator. NSP Buck follows with 34 clients and then Australian Administrative Services (AAS) with 32. Together, these three administer 64 per cent of the funds in the survey.

The Government Superannuation Office and Mercer administer four public sector funds each, out of 22. Mercer administers 70 corporate funds (out of 151) and AAS administers 20 industry funds, out of 52.

In value terms, however, it is a different story. Mercer has $13.5 billion under administration, a 10.1 per cent market share, while Pillar (formerly SAC), with $30.5 billion in assets under administration, tops the list. Pillar’s 22.8 per cent share of the market is largely because it has the $25.7 billion NSW State Super and the $4.6 billion First State Super as customers.

It is followed by Superpartners (formerly Jacques Martin Industry Funds Administration) with $15.2 billion and AAS with $15.1 billion.

In value terms, the three largest administrators account for 45 per cent of the $134 billion under administration in the TOP 300.

Although we have analysed the administrators by their share of TOP 300 assets, member numbers are no less important in the world of administration.

Superpartners’ manager of industry fund and business development Sue Walpole points out that because Superpartners’ market is focused on industry funds, it services a relatively small number of funds, but it looks after more than 3.5 million members (which is similar to AAS).

For Superpartners, handling so many members and its 112,000 plus active employers entails dealing with, on average, 105,000 phone calls, 13,000 letters and e-mails, 3,500 counter enquiries and more than three million contributions each month.

Nonetheless, some shifts among administrators can be expected in what is traditionally an industry where change is painful and contracts are long-term.

Pillar, the state-owned corporation, is pushing for business outside the public sector, now that legislation allows it to tender for work from corporate and industry funds.

Mike Turner, Pillar’s general manager for marketing and business development, explains that last November’s name change was aimed at boosting the organisation’s profile. “We are now aggressively broadening our client base and exploring opportunities outside super administration and New South Wales.”

He suggests that a move into the industry fund and master trust market is possible, and says Pillar aims to boost its membership accounts to one million (700,000 at present) by the end of 2003.

Turner believes some players stand to lose market share given the competitive positioning of Pillar, as well as international players like Citistreet and Mellon, which have recently strengthened their positions in the Australian market.

Citistreet is the superannuation administration joint venture between US financial services giants Citigroup and State Street, which opened in Australia earlier this year. And, its managing director, Gary Cox, expects to become the second-largest player in Australia in the future.

The second foreign institution to boost its Australian presence is Mellon Financial Corporation, which recently increased its stake in NSP Buck to 100 per cent, from 30 per cent. NSP Buck itself is the product of the merger of six companies over the past three years, making it Australia’s second-largest fund administrator in number terms with its 34 clients.

CEO Martin Spedding says the group’s focus is on how it can further expand its service offering to clients. “Mellon’s involvement allows us to offer a broader range of benefits through Mellon’s global capabilities and expertise,” he says.

Spedding plans to double revenue over the next three to five years. Unlike Mercer, he is targeting industry funds, a part of the market he believes offers plenty of opportunity.

Stuart Korchinski, CEO of AAS, believes that Mellon and CitiStreet’s stronger presences “demonstrates that global players will continue to look for opportunities to achieve scale in both funds management and administration”.

He notes that both have entered Australia to build other aspects of their overall businesses. “In the current lower return environment where the level of management fees has gained more prominence, the capacity for administrators to reinvest in new processes and in supporting technology that provides further cost efficiencies and service improvements, will ultimately determine which administrators succeed,” he says.

“Smaller funds will more actively explore opportunities to retain their brand while operating collectively to reduce costs. Given the high level of investment required to provide an administration service that delivers value, new start-ups are unlikely to enter the Australian administration market,” Korchinski says.

Korchinski promises to expand AAS’s core administration service to support its clients’ increasingly consumer-driven needs to improve communication, and to develop new marketing initiatives.

“Industry funds are now positioning themselves to take on traditional corporate fund business. This will change the nature of our services and the dynamics of the market,” he says.

Most industry observers agree that companies providing administration services can only compete in the long run if they align themselves with a significant technology partner — such as KAZ or SunGard (which in Australia, is part of Citistreet).

Cox emphasises that traditional market segmentation is becoming less clear as industry funds offer wider services, different fee structures, defined benefit options, daily unit pricing, enhanced insurance capabilities and the ability for employers to badge their services under their own names.

Mercer is the only financial institution that dominates the top ranks of the TOP 300 fund categories as both an administrator and asset consultant.

Not surprisingly, Mercer anticipates its domination to continue. Mercer Human Resource Consulting principal Russell Mason says the company aims to grow its relative size in both the diversity and services it provides and to attempt to be the market leader in areas where it is not, such as legal services.

Mercer’s weakest market share is as a fund administrator for industry funds, where it has only eight per cent of funds. But Mason says: “We decided it is not in our best interests to dominate in this awkward market segment.”

Clearly, Mercer has made a choice to advise industry clients on investments rather than provide administration services.

Mason identifies master trusts, financial planning, multi-employer funds and human resource consulting as the group’s major growth area.