Is the ‘true’ industry fund facing extinction? By ‘true’ industry fund, I mean one that primarily focuses on a single industry even though it may be public offer. Will it be subsumed by the multi-industry public offer profit-for-member fund?
Extinction is highly unlikely, but a hollowing out is quite likely. The balance of issues: ‘true’ industry funds have the potential to provide more tailored product and engagement strategies, but their business models inherently carry more risk because they are exposed to the cyclical and structural changes of a single industry sector. Risk doesn’t always impact negatively: witness the strong employment trends in some major industry sectors such as tertiary education, construction, health and hospitality services. Being a fund concentrated in a fast-growing sector equates to above system growth.
Clever engagement examples are numerous (a highlight being some models which showcase collaboration between funds, employers, employer groups, and unions) and promote financial well being. However, beyond insurance arrangements, there appears little tailoring in the area of product design. Consider the elements a fund can account for in its MySuper default design (age, balance, gender and contribution rate): a ’true’ industry fund could tailor default design to account for these features as they apply to their industry (for example, retirement age, career breaks, salary path etc.). I’ve not seen much hard evidence of funds reaching this level of sophistication.
‘True’ industry funds need to promote their case: it’s worth noting that the Productivity Commission didn’t place too much focus on the value of engagement and product design. Also, the PC trod very lightly when it came to the issue of lifecycle versus single strategy defaults.
The prudential regulator’s new member outcomes framework provides the perfect platform for funds to showcase the value of industry-specific engagement and product features. APRA’s recently finalised Prudential Standard SPS 515 is not overly prescriptive, providing a largely blank canvas for funds to put their best foot forward, along with supporting evidence.
This provides the opportunity for funds to demonstrate that it is not all about investment performance and fees: product design is important – this remains a thorny, unresolved and crucial issue. In my research I’ve been able to identify that it is possible for a modest performing, well designed product to deliver better outcomes than a good performing fund with an inferior product design.
Nonetheless, superior product design will need to be accompanied by, at least, acceptable investment performance. Recent changes to the SIS Act (1993) require trustees to promote the financial outcomes of members, where ‘financial outcomes’ appears to largely focus on investment returns and fees.
The combined message: being an efficient, good performer is the pre-requisite: beyond that, showcase your value-add for your cohort of members. If you are looking to comply with SPS 515, you are not making the most of your opportunity to shine.
Where does all this leave the house-of-brands model? In quite an interesting position: by preserving brand segments they maintain the potential for rich industry-level engagement models. That said, engagement models are assessed as part of corporate tenders, so it is not just the ‘true’ industry funds which focus on engagement and partner with employers. However, each brand will likely have the same underlying default design meaning the potential for tailoring is lost. And while business risk is diversified, it remains not as well diversified as an ‘open for everyone’ fund. It will be fascinating to see whether the model emerges with merit or is simply a vehicle for reconciling the agency issues which exist at some funds. Perhaps it is the beginning of a five or ten-year transition into a sustainable ‘open for everyone’ fund.
Within the profit-for-member space a mix of fund structures is almost certain to persist. Through SPS 515 ‘true’ industry funds have been provided the canvas on which to showcase the impact of their tailored strategies on the outcomes of their distinct membership. Complement the anecdotes with analysis that illustrates the delivery of better retirement outcomes. Make the most of the opportunity that SPS 515 provides.
David Bell is the former CIO of Mine Super