POWERED BY MOMENTUM MEDIA
(October-2001) Standing up for stand alone corporate funds
What a dog’s breakfast — misinformation, disinformation, marketing hype, expert opinions, the self-interest and opportunism of commercially driven service providers make a messy combination for those corporates trying to decide on what superannuation strategy to follow.
The Corporate Super Association represents over $55 billion of the total assets in corporate provision of not-for-profit super in Australia, and our key mission is to advance the best interests of Australian employees, as well as their employers/sponsors, irrespective of which superannuation strategy they execute.
Corporates may choose which method to deliver SGC. Here we consider the options of outsourcing to a master trust or maintaining a stand alone arrangement.
The optimum decision path should focus on what is best for both employee and employer, since this relationship is (or should be) the central ingredient of any company’s core business, its core competencies and its sustainable competitive advantage.
The employee’s view
Provided that investment choice is available, there appears overwhelming argument confirming that stand-alone is a superior strategy for employees.
Through their trustees, employees have continual input into the design, quality, features and cost-benefits of their scheme: this is a unique tailor-made approach and the fund is their fund. Master trusts conversely are ‘off the peg’ arrangements, and the views and needs of members are marginalised. Members’ representation through their trustees is eliminated and the fund belongs to the service provider — until the next takeover, of course.
Employees can minimise their fund’s costs, and maximise investment returns and quality of service through the ability of their trustees to utilise the forces of open competition in selecting the ‘best of best’ service providers and to maintain these competitive forces year in, year out. The master trust option effectively eliminates the enormous power of open competition, which is an excellent business result for the service provider but adverse for the employee.
Worse still, actual costs are becoming an ever more visible and significant driver of end retirement benefits when investment returns are low or negative. Whatever charges or costs are put forward by service providers, the corporates should be able to improve on these rates — either directly through the trustee mechanism or indirectly through our association.
Through stand-alone funds, employees can benefit greatly from employer subsidised cost of administration (usually) and even free insurance (sometimes).
The employer’s view
With increased bottom line pressures, corporations are being forced to examine cost reductions and there is a superficial attractiveness in reducing corporate costs even in the area of superannuation.
Master trusts therefore appear somewhat attractive in that all the costs of running the scheme are borne by the employee/member. Currently, most large employers pay for the administration and sometimes insurance. However, such cost savings are relatively small and not worth the risk, as they carry enormous downside.
A company’s core business depends on its core competencies — expertise, capabilities, and ways of doing things that are unique to that company. These depend primarily on special knowledge and thus upon the employees themselves, or in modern management parlance, ‘knowledge workers’.
Everything to do with these key ‘knowledge workers’ should absolutely be the first priority of any profit driven corporation, particularly when it concerns their highly sensitive rewards and remuneration, and this is where superannuation fits. The master trust approach inserts a third party into the delicate nexus between the employer and its employees. This is high risk, because if employees become dissatisfied with this instrument, they risk becoming disaffected with their employer, and this instrument is beyond the control of the employer.
For the corporate, taking a master trust route is therefore a risky business proposition — as the risk/reward ratio is almost certainly adverse. You must be able to calculate how much the cost saving of x per cent of payroll is offset by y per cent loss of productivity plus z per cent increased staff turnover costs. If you cannot calculate this, you are working blind and that is no way to make a good business decision.
For a corporate to make a wise decision on whether to outsource to a master trust or not requires a proper consideration of what is in the best interests of both employee and employer.
Optimum superannuation benefits and sustained competitive advantage are inextricably linked.
Stand-alone is the stand out choice.
— Nicholas Brookes is CEO of the Corporate Super Association. e-mail: [email protected]
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