Niche strategy needed for small funds

If small funds stop getting new members they would need to adopt a successful niche strategy, according to Rice Warner.

In a response to the Productivity Commission’s draft report on alternate default fund models for superannuation, the research house said if small funds failed to adopt a niche strategy, they would decline in size and be forced to merge.

“The PC appears to believe that the scale test has not been applied effectively by APRA [Australian Prudential Regulation Authority]. These models start to do this indirectly,” Rice Warner said.

Citing the four models of consideration – assisted employee choice, assisted employer choice, multi-criteria tender, and a fee-based auction – Rice Warner said new entrants to the super system could be considered based on their strengths outside MySuper and perhaps in other countries or other financial services.

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It said there would be an immediate saving of $150 million for members by halting the proliferation of multiple accounts.

“While REST and HOSTPLUS look like being winners as most first jobs are in retail and hospitality, the separation of the decision from unions/awards means that any fund on the short-list could pick up people in their first job,” Rice Warner said.

The research house noted that funds not on the default list would seek choice members and could lead to widespread advertising for choice members.

For a fund that was not retained and replaced by another on the short-list, existing members would not change (unless they then exercise choice).  This removed the risk of a run on the fund but would leave many members in a sub-optimal position.

Rice Warner said the adoption of the assisted employer choice model would see a return to a system similar to the one that existed prior to the introduction of compulsory superannuation, but with protections for member/employee interests.