Industry funds are one of the big success stories of Australia’s world leading superannuation system. They have done tremendous things for the mass market, delivering a basic but quality product at a low price.
It has been a clear, simple and valid value proposition that appeals to the mass market. Tria is an employer sponsor of an industry fund.
The original low-cost super
The industry fund value proposition has put tremendous commercial pressure on incumbent competitors – mainly big retail brands – and industry funds have steadily gained market share.
At the same time, considerable political and regulatory pressure has been placed on competing business models, especially planner-based distribution involving the payment of commissions.
It has been a well-prosecuted battle that has seen industry funds take great strides towards winning the market share war, especially for employer contributions.
But every war has its unintended consequences, and this one is no different.
For example, the biggest market share winner, perversely enough, has been the self-managed super fund (SMSF) sector. SMSFs are a material drain on industry fund assets as high-value members seek control and planners shift their business models. It’s a terrible outcome for industry funds as it’s a value proposition they have little chance of competing with, and there is little prospect of those assets ever returning to the fold.
It’s also a reminder that notwithstanding the validity of the industry fund value proposition, there’s also a valid place for premium propositions, both retail and SMSF.
Taking the eye off the low-cost ball
But something else has been happening within industry funds. Slowly – well actually not that slowly – and very surely, industry fund prices have been rising.
Tria has researched the prices faced by a $50,000 account balance member in the default option for the top 12 industry funds.
Five years ago, this was a bargain at around 65 basis points, but since then it has been all one-way traffic. By 2007, the figure was nearly 90 basis points. And by last year it had broken through the 100 basis points barrier – an increase of about 9 per cent a year.
This is a big problem for a couple of reasons.
Firstly, it’s a departure from the original value proposition. A core part of the industry fund promise is low price. Departing from that ground is dangerous. It risks undermining the entire proposition and forcing industry funds to compete on the terms of their competitors, which they are not equipped to do in most cases.
Secondly, big retail competitors have established a new price point at around 100 basis points. While AMP is the most recent to mark out this ground with its Flexible Super Core product, Tria can number five unbundled, branded, easily-accessible competitors in this area, and there are more to come.
The price gap has disappeared
How has this happened?
While we don’t have full visibility of how industry funds allocate their costs, two big sources of rising costs are reasonably clear:
. investment costs, which have risen as industry funds have embraced large allocations to alternatives and real estate, and
. other costs, which cover everything from the fund’s business and investment executives, through to marketing initiatives.
Many theories can be advanced on why has this been allowed to happen, including award protection and limited competition. In our experience, few funds have appreciated the need to build to a price point.
Note that we are not arguing, particularly in respect of investment costs, that increased costs have not been in the interests of members. They may well have been, but that’s not the point. The issue is, given the value proposition of industry funds, you can’t allow costs to get out of hand.
How far can the value proposition stretch?
Industry funds are no longer cheap. Some, frankly, are now expensive for what they offer. This has allowed big retail competitors to drop a new price point into the market, which has essentially eliminated any pricing advantage.
The retort is that we’re not comparing apples with apples; in particular, that industry funds offer sophisticated active portfolios with lots of alternatives, while the new retail competitors have substantial or totally passive portfolios. Fair enough, but the retail competitors can attack on other dimensions where the industry funds struggle, for example, brand, service or BT Super for Life’s banking integration. Having neutralised price, it allows retail competitors to change the terms of competition.
Whoever thought we would see the day where industry funds were forced to defend the value of their high price points versus low-cost retail competitors?
The industry fund price response is coming, for example, Hostplus recently signalled a new investment option based on something like Macquarie’s True Index approach. Investors are guaranteed the index return at nil price, while the fund manager retains any excess return achieved (and tops up losses).
This may be an effective response, but it would have been better not to get into such a position where such a response was necessary. Tough decisions loom.
