(October-2003) At least $1bn up for grabs

The corporate fund outsourcing trend is an ever widening river that keeps running faster and faster — and there’s no way of damming it up.

The latest statistics from the Australian Prudential Regulation Authority (APRA) show that 1922 corporate funds existed at the end of March 2003 — less than half the 4211 that were around at the end of June 1995.

Plum CEO Jane Cutler says: “The market is still moving. There are a number of tenders in progress with an estimated combined asset value close to $1 billion.”

These days, however, the size of the funds outsourcing gets bigger and bigger with the $340 million Woodside Superannuation Fund and the $220 million St George Bank staff fund among the latest to take the plunge.

Like others, Cutler has noted increased activity at the top end of the market — where funds have assets of between $100 million and $500 million — over the past 12 months.

“In three to five years, the vast majority of stand-alone super funds will have outsourced in one way or another… either to a master trust or an industry fund,” predicts AMP head of corporate superannuation strategy, Ken Lockery.

His view is shared by tender consultant Warren Chant, of Chant West Financial Services, who expects only a small number of in-house corporate funds to be left in a few years time from large organisations like Telstra, Australia Post and the banks.

Most experts say the key driver of the outsourcing boom at the moment is the looming introduction of the Financial Services Reform Act (FSRA) and the growing compliance burden faced by super funds.

Lockery says: “Anyone who doesn’t want to have a licence must make a decision about outsourcing. It’s virtually impossible for a superannuation fund to operate without an FSRA licence… There are very few super funds that don’t give advice.”

Looming next on the horizon is the introduction of a new APRA licensing regime, which Towers Perrin principal Steve Schubert says will focus the minds of employers on the outsourcing question. “Next year funds will have to start getting the process going. If they are ambivalent, they may start looking at alternatives,” he says.

But there are other drivers too. Among them, according to Cutler, are that corporate funds want to stick to their core business and are weary of the costs of management time and of running a fund.

Funds are also challenged to keep up-to-date with technology and with members’ demands. By outsourcing, they can piggyback on a collective buying power to improve benefits and keep their employee benefits packages up-to-date in order to retain staff.

“Part of the outsourcing drive is to leapfrog the gap and move to market leading from market lagging for your staff,” Cutler says.

Jack McCartney, head of corporate superannuation at Colonial First State (CFS), adds that there is talk that US firms are increasingly examining their defined benefit funds with a view to closing these, which could have spin offs for their Australian subsidiaries.

One US firm that recently did this was Ondeo Nalco, which has rolled its $25 million Australian fund into FirstChoice, CFS’s master trust.

While there is a steady stream of outsourcing corporate fund business up for grabs, several players report they are also picking up clients from other master trusts.

McCartney notes: “There is certainly movement from master trusts. We have over 150 funds in our master trust and around 95 per cent of these came from other master trusts.”

Neil Cochrane, CEO of REST, confirms that his fund’s master trust has also won funds from other master trusts and is picking up interest from those already in other master trusts looking to change.

But while there are plenty of potential customers around, most players say the master trust market continues to be very competitive. According to McCartney, the competition is focused on price and service, with most players concentrating on boosting their efficiencies.

While there are no start up new competitors, he says the industry funds are now increasingly honing in on the market, placing further pressure on pricing.

McCartney believes the top end of the market is the most competitive. “The bigger the funds, the more they discount and the more they chase them,” he says.

There is talk about some players being up for sale, particularly those that can’t build the necessary scale to achieve the required efficiencies. There has also been some early signs of rationalisation in the market.

Dexx&r managing director Mark Kachor says mergers and acquisitions have reduced the number of products offered by the life offices and banks. Indeed, master trust products from groups like National Australia Bank and MLC, Commonwealth Bank and CFS, as well as IOOF and AM Corp, have already been affected.

But not everyone believes achieving the right scale is critical in the master trust game. Snowball managing director Tony McDonald says: “Everyone lumps platforms into one pot at the moment and that is not necessarily right. You don’t need scale if you deliver at the front end and target a niche market.”

He says Snowball enjoys the best of both worlds because it leverages off other groups’ platforms when servicing large funds and has its own platform designed for niche small-to-medium companies.

McDonald says: “Our view is that the market is moving away from almost an obsession with platforms, which are what master trusts are, to a realisation that the adviser component is probably most important going forward.”

Schubert believes that member education is probably the fastest area of master trust development.

“People have to review their materials every two to three years. This is expensive and it puts pressure on smaller master trusts who don’t have the resources.”

Mercer Wealth Solutions’ investment in this area shows just how important it has become. National manager of investor and client services David Anderson says Mercer’s master trust has a team of 13 fulltime professionals who either have qualifications in financial planning or in education, and the group plans to add a further four to this number. The team’s sole job, he says, is to run seminars and develop education messages for the web site and print materials.

What is now being considered the norm, however, is multi-manager options.

Chant says: “Three years ago, fund managers would not consider multi-manager products. Now they are on every menu. And in the future, they will become a bigger part of these organisations’ culture and will be emphasised more in the documents they put out.”

While Chant believes that master trusts will offer less member investment options in the future, not everyone agrees.

Cutler says: “Some work done through our alliance partner Vanguard shows that a greater range of choice is initially appealing but too much choice makes decision-making harder. Still, it is hard to argue against choice. Plum’s challenge is around how choice is structured and on the education and knowledge that supports that choice. But we will soon be announcing some innovations in this area. Watch this space!”