Superannuation is considered a chore for many HR professionals. While more organisations are outsourcing their super, they also need to be aware of the associated costs and fees. Ross Clare looks at the options for HR professionals and the steps to getting the best deal for both employers and employees
The superannuation landscape has changed quite markedly in the past couple of years, with many corporate superannuation funds winding up in favour of moving their employees’ super to master trusts or industry funds. There are about 40 master trust platforms active in Australia, with about 10 of these responsible for about 80 per cent of the master trust market, and nearly 100 industry funds specialising in specific industries or a range of industries.
Among other things, the changing regulatory requirements have made running a superannuation fund more onerous, leading employers to question the time and resources that have to be spent in running their own fund. More stringent regulation has also reduced the scope for smaller companies to make use of their corporate fund for tax planning and inexpensive business finance.
From a peak of more than 4,200 corporate funds in 1995, their number is projected to drop to fewer than 1,000 by 2005. While the decline of small corporate funds has been accelerating in the past few years, some larger corporates have taken a different stand. Some have decided to outsource, but retain a policy or strategic oversight of the fund.
According to unpublished Australian Prudential Regulation Authority (APRA) statistics, more than 800 corporate funds with assets of less than $5 million appear to have packed up in the past year or so. In addition, about 140 out of the 740 medium to large corporate funds (with assets of $10 million to $250 million) have closed. However, the population of corporate funds with assets of more than $250 million has remained relatively stable.
The Financial Services Reform Act has introduced the requirement for all organisations providing superannuation or advice on super, to be licensed by March 2004. This could include advice about investment choice or level of salary sacrifice, for example. This represents an additional burden on corporate funds, and the prospect of a service provider or master trust handling these issues is understandably appealing.
Member investment choice is increasingly being seen as a service that needs to be offered to fund members (although investment choice is not relevant for a defined benefit scheme). Master trusts and many industry funds offer multiple member investment options, and can also integrate a variety of member education tools. Education is (or should be) a prerequisite to member investment choice, and both are seen as adding value to employees’ super.
However, having delegated the responsibility to an outside provider, employers can’t entirely wash their hands of their employees’ super. Corporate sponsors still need to safeguard their employees’ best interests. Fees and strategic direction need to be negotiated. A policy committee is often formed to monitor the level of service, ensure the agreement is being adhered to, and expectations are being met.
It shouldn’t be assumed that outsourcing a corporate fund is the right decision for every company. It’s important for a company to weigh up the options and decide whether the outsourcing route is the appropriate way to go.
Industry funds v master trusts
Industry funds are increasingly being seen as a viable option for companies wishing to outsource their employees’ super. Sometimes erroneously viewed as “union funds”, industry funds are becoming increasingly sophisticated, and are competitive in terms of the investment returns they deliver.
One of the most compelling reasons to consider an industry fund as the preferred supplier is cost. While industry funds have been around for a long time, they have only been in the corporate outsourcing market for a year or two, yet with their not-for-profit ethos the cost differential is considerable. They may offer fewer “bells and whistles” than master trusts, but their inexpensiveness makes them an attractive option for many employers.
At the same time, a number of industry funds offer tailored solutions that can be significantly cheaper than other master trusts, yet with the capacity to deliver what the more sophisticated high account-balance members want.
It is fair to say that, in general, master trust providers usually offer more features and services and consequently cost more. Indeed, one potential downside of master trust arrangements is that employees are often subjected to higher fees compared to their previous corporate fund. Many companies with corporate funds contribute in-kind services or absorb some of the costs associated with running the fund, and this is usually lost on switching to a master trust.
While the master trust’s fee to members probably reflects the greater range of services they provide, it’s up to the employer to negotiate an acceptable fee at the outset.
Doing your homework
The selection process can be time-consuming and confusing. This is where a tender consultant can be useful. The rise of outsourcing in the superannuation industry has meant increased demand for tender consultants, who are generally appointed to oversee the task of matching a fund’s particular requirements with a suitable master trust or industry fund currently in the marketplace.
Generally, tender consultants have already undertaken extensive research of the major providers, which is considered a key component of their credentials to run a tender. Each tender consultant has their own approach and research, and each has a slightly different philosophy, even though the outcome may turn out to be the same.
There are, however, standard steps involved in running any tender, such as: identifying needs, formulating selection criteria, drafting a request for proposal (RFP), identifying providers to invite to respond to tender, the shortlist process, beauty parades, and the final decision.
This process needs to take place regardless of the size of fund because whether a fund is worth $1 billion, or $1 million, and ultimately assists in getting the best deal for employees. The main criteria to consider are investments, member services and education, cost/charges, administration, employer services, organisational issues and insurance.
Employers and HR professionals considering outsourcing their company super – as well as those already in master trusts and industry funds – should ask themselves the following questions:
• How do we ensure that the right decisions are made on behalf of our employees?
• How do we ensure that the outsourcing arrangements we have in place continue to be competitive?
• How can we be confident that any conflicts of interest are properly and appropriately managed?
Trustees of industry funds and master trusts have obligations that extend beyond the strict legal duty to ensure full compliance with the law and to fulfil contractual terms. They must proactively fulfil their ‘duty of care’ to support and advantage individual fund members. They must avoid sins of omission as well as sins of commission and monitoring by employers can help in ensuring that this is the case.
It’s also important to think about everyone’s interests in the long term. Even a well-managed transition involves some upheaval and a lot of work. Employers don’t have the time or the inclination to go through that every couple of years, so the arrangement has to be robust – one that works now and can evolve so that it still works in five or so years.
Finally, remember that outsourcing your company super does not allow the organisation to abdicate responsibility for their employees’ super. If they do, it could be costly for both the company and its employees.
As part of a due diligence exercise, it is appropriate for employers to review their superannuation provider every three to five years. This means checking providers are offering appropriate products and services, at a reasonable cost that is acceptable to the membership.
(by Ross Clare, principal researcher with The Association of Superannuation Funds of Australia)
