The superannuation industry’s smaller players claim that niche growth strategies, agility and superior member engagement will increase their chances of survival as the sector moves to consolidate spurred on by the prudential regulator.
At a roundtable titled “The changing landscape for smaller funds” hosted by Investment Magazine and Due Governance, participants agreed that Australia will likely see a two-tiered industry made up of a handful of giant funds and a number of boutique players.
Former Labor Party MP, Bernie Ripoll, who moderated the discussion, raised the issue of sustainability in an increasingly competitive environment and suggested that a merger made sense for some players. “There must be a point where every fund has to look at its own future and assess member inflows and outflows against competitive pressures,” he said. James Dick, principal of Due Governance said unless funds can rely on market dominance, they are going to have to embrace change to survive.
Industry figures agreed they face an uphill battle. Greg Cantor, chief executive of Australian Catholic Superannuation, said his fund will be forced to grow “to some sort of scale”. But with assets of $9.5 billion, he is unclear what is considered to be small or medium-sized fund now. This follows a suite of mergers including Equip Super and Catholic Super, First State Super and VicSuper and TasPlan and MTAA Super which have redefined scale.
New analysis from CoreData managing director, Jason Andriessen, underlined the view that the current number of superannuation funds is unsustainable. “Super funds are fighting over decreasing pool of money as more Australians begin retirement,” he said. CoreData figures revealed that the number of funds which recorded more outflows than inflows now accounts for almost half of the APRA regulated super funds.
Christian Super chief executive, Ross Piper, said that smaller funds are facing the challenge of scale and economies of scale. “We don’t believe there is a magic number, but certainly continued healthy growth is important for us,” he added. The $1.5 billion faith-based fund is seeing consistent growth of between 4 and 5 per cent per year. “So, clearly we are doing something that is resonating with our members,” he said. “We are attracting people who have made a conscious choice to see their funds invested in line with their values.”
Piper said that the fund’s licence to operate is predicated on its ability to achieve target investment rates of return. “It doesn’t matter how strong the ethics or the moral imperatives are of how you invest,” he told the roundtable. “You have to have fees and investment returns that are going to wash their face in the broader market.”
Wrestling with costs
Forced to take a hard look at the latest round of mergers, participants said they were concerned that the unintended casualty of the race to scale will be the death of innovation. They also said members’ interests will be severely compromised if the big funds get bigger and start looking the same.
Even so, all of them said they were wrestling with the management of rising operating costs. “We can’t stay static or stand still, we need to continually innovate and improve,” said Mercy Super chief executive, Wendy Tancred. We need to continue to focus on members’ best interest. Just because we have been looking after them well for 50 years, doesn’t mean we can continue to do so. We can’t let history dictate our future we have to operate in today’s environment with a focus on future sustainability.
She said the $1.4 billion fund for hospital staff has been a top performer for 10 years. “So, there is proof that small can deliver good net outcomes,” she said. “We definitely can at the moment. If competition drives innovation, if it drives efficiency, if it sharpens the value proposition then it’s entirely in line with the member interest,” she added. Tancred said there is far more opportunity than risk for smaller funds. She is also convinced that funds with a different philosophy and approach will achieve stronger outcomes and returns.
The roundtable also looked at how funds could collaborate in a bid to cut operating costs. Laura Wright, chief executive of $11.5 billion NGS Super, suggested the merging of back office operations as a way forward and indicated that several funds are discussing this as a way to offer lower fees.
Wright is no fan of mega funds having watched NGS go through at least four mergers to date. She said the big funds struggle with delivering on service. She is also a strong supporter of diversity in the sector and fervently believes there will be room for funds of NGS’s size.
Lachlan Baird, the chief executive of Prime Super, pointed out that the banking royal commission highlighted the problem of too much consolidation – that it is not necessarily the best outcome for members. “You need competition, choice and better designed products. You need variability – both big and small funds.”
This view jibes with Andrew Proebstl, chief executive of LegalSuper who argued that the debate on scale misses the point. “It doesn’t actually matter whether funds are big or small,” he said. “The reality is small funds can actually have a competitive advantage when it comes to accessing unique investment opportunities.”
Kate Farrar, chief executive of LGIA Super, picked up this point saying she has a strong strategy around harvesting mid-market yields which have generated solid returns for members. “Consequently, what matters about super, and where it’s going, is not scale, but outcome,” she said. “You can get the cost benefits of scale, by different means, whilst also maintaining the right level of investment size to invest in assets that other people can’t invest in.”
All agreed that smaller funds are able to target investments that the big funds ignore. Moreover, Christian Super’s Piper added that the alignment of values and beliefs has given the board enough room to forge ahead with an investment strategy that looks different to peers.
Further, the roundtable also agreed that they all have a much closer, personal and more meaningful relationship with their members than their larger rivals.
While the executives said they were very aware of the existential risks to their future, they all said that there is a rich opportunity for niche players with better engagement. “The cheapest is not always the best,” argued Prime Super’s Baird.
He said that it was very clear that superannuation funds need to evolve in very different ways in terms of how they connect with their customers. “There is an opportunity there for smaller funds to prosper by giving that communication and engagement, richer and deeper than the large funds can do,” he added.
Agility and the ability to think differently was cited as being critical to the survival of any brand along with reducing complexity. “While the big funds have lots of money, and masses of reserves, they also find it much harder to be agile,” said Mercy Super’s Tancred. “It is often possible to be more agile when you don’t have layers of complexity.”
The executives touched on the power of the big brands – AustralianSuper, Hostplus, SunSuper and REST – and reflected how they could withstand the impact of these juggernauts especially with the publicity and the media spotlight that they enjoy. The roundtable cited the massive publicity generated by the Barefoot Investor author, Scott Pape, who promoted Hostplus in his book because of its low fees and strong performance.
Keeping members happy
“We never used to lose money to Hostplus, but suddenly the fund is popping up on the top 10 that we lose members to – and we know from an insurance perspective, there is no way that the insurance product is anywhere near the quality of NGS’s product for members in education,” said Wright.
Wright also expressed concerns about a number of issues that have yet to be addressed by Canberra.
“So, that’s the thing that I am grappling with,” she said. “Obviously, you certainly spend time now building your value proposition, but the future is looking incredibly uncertain for me…depending on the outcomes of some of those things.”
Christian Super’s Piper added that member retention is critical – particularly in that phase between accumulation and pension. “Again, that was a traditional area of leakage for industry funds,” he said.
“It has taken a while for our members to even come to grips with the fact that we are there for their lifetime and there is still work to do in that space,” said Piper. “So, I think firstly we should work on keeping the members we’ve got and then see what opportunities are there for growth, both organic or inorganic, and where can we make a difference.”
Wright argued that staying close to members and being selective about targeting new members has become a niche growth strategy. “There is some uniqueness about niche funds. There is something that’s different,” she said adding that this message is not being communicated back to regulators.
Linda Vickers chief executive of BUSSQ, concluded the discussion by suggesting that the government is focussed on the wrong areas. “The issues with insurance, for example, are not to do with fund size. That’s whole industry issue. I think a lot of the issues aren’t to do with size.”