“It’s a bit like rising damp,” says Wayne Walker, joint managing director of Philips Fox Actuaries, of the unrelenting flow of corporate super funds rolling into master trusts.
“It keeps accelerating,” he says. “Four to five years ago the typical master trust candidate had up to 50 members and a few million in assets. Two to three years ago, we were talking to funds with membership in the hundreds and assets of $10 million to $20 million. But today, some of the funds we’re dealing with have over a thousand members and more than $100 million in assets.”
Activity has also picked up. Anthony Lowe, a principal at William M. Mercer, notes: “Two years ago, we were responding to about 12 requests [for information on our master trust] a year, but these days we respond to about three or four a week.”
Thus far, the largest corporate fund to take the outsourcing plunge is the $650 million OneSteel superannuation fund. It did not, however, go to a master trust, but to Towers Perrin’s SuperSolution offering.
The largest tender actually won by a master trust — in this case, the Mercer Retirement Trust – was that for the John Fairfax and Age super funds, which had combined assets of around $350 million and 5,500 members.
Other large corporate funds to take the step recently include the $240 million Optus Superannuation Plan, the $205 million WMC fund and the $230 million Southcorp plan. And, the bounty is expected to keep getting bigger.
“I wouldn’t be surprised to see several large funds of a similar size to OneSteel, or even larger, outsource over the next year or two,” says Warren Chant, a principal at Chant West, who handled the OneSteel and WMC tenders.
Stephen Moore, managing principal of Australian Superannuation Advisory Services, says while the need to reduce costs is obviously part of the master trust story, most employers are outsourcing because “it’s pretty convenient. They can just offload [their fund] with the stroke of a pen”.
Other players do not agree. “I am yet to find a company that will go into a master trust because they are not interested in superannuation and members,” says Walker. “They are usually doing it because they can get better service and because they cannot keep up with the investments offered by others and the pace of technology.”
Chant says many large funds don’t have investment choice and want to introduce it, or they want to move from being interest rate based towards full unitisation. To offer this requires a large investment and much work, prompting many corporates to ask: “Do we really want our senior managers distracted by this?”
They realise that superannuation is a business in its own right and at the same time, master trust players have been boosting their own attraction with some hefty investments in technology, people and communication processes.
The good ones have sorted out the technology issues they may have had 18 months ago, so much so, says Lowe, that the competition has levelled out in this area and they all offer the latest in voice or Web access.
It’s the same for investment options. The Mercer Retirement Trust has 39 options and most good master trusts will have the same or even more, says Lowe.
Ken Lockery, head of corporate superannuation at Deutsche Asset Management, says: “A few years ago, funds looked to master trusts to get out of the regulatory environment, but when they examined them, they found that the master trusts could not do this and they could not do that. Now there are far fewer things that master trusts cannot do.”
To be able to better serve their clients, master trusts have been dividing themselves up into two different groups — those targeting small to medium funds and those who want to capture the lucrative medium to large funds.
Lockery says to be able to serve the big end of town well requires substantial funds under management. “You need at least $1.5 billion to be profitable and there aren’t too many players with assets of that size. Over the next two to three years we will see a small group emerge that is in that market. We will also see a large group of people too small that will simply walk away.”
David Coogan, a financial services partner at PricewaterhouseCoopers, says in the past, many master trusts have kept their options as simple as possible, but it’s a whole new ball game if they want to target the big corporate funds.
Larger funds are demanding sophisticated investment options and top quality services. But, most important, according to Lockery, is the master trust’s flexibility.
“Of all the funds that I talk to and know in this business, there are no two funds that are alike or looking for the same services,” he says.
Big funds are also asking for tailor made solutions. For example, when Mercer recently won the Age Fairfax tender, it was asked to build options that replicated the four Age options.
Walker says many master trusts targeting bigger funds are not making the default option manager specific and are offering access to investments managed by other institutions. A case in point is BT Funds Management, which is moving to a multi-manager arrangement.
“By offering a mix of investment managers you lessen the importance of investment performance as a buying criteria to some extent,” says Walker.
About a dozen master trusts targeting larger corporate funds now claim to be able to cater for defined benefit plans, but Lowe cautions: “It is becoming apparent that only a few players can really do that.”
Targeting the bigger end of town also requires a different marketing pitch. Walker says: “A lot of master trusts were originally marketed by financial planners and suburban accountants. To attract them, master trusts had to give them good commissions.
“Some master trusts haven’t yet worked out that this is not the way to market to the major corporates.”
Corporate funds with assets of $10 million or more usually go the tender route, which according to Chant, is so thorough that it easily separates the good from the bad, making life harder for the weaker players. “The good master trusts are self-evident,” he says.
Funds with assets of less than $10 million usually turn to advisers, who may not offer the same level of scrutiny.
Walker says some financial planners will run tenders free of charge, but there’s a catch. “Some corporate funds get offered a range of high commission master trust options and are not really getting a clear idea of what’s out there in the market.”
Walker also warns that master trust’s sales claims don’t always match reality.
Moore says fees are determined by the negotiating skill of the employer. But, the bigger employers with higher member balances still have the most clout in negotiations. “Those without clout pay the standard price. Fee comparisons are okay, but they are by no means the last word. There is always room to twist arms.”
