Funds facing change

INDUSTRY-BASED funds have been outperforming their superannuation counterparts in recent years, but are set for changes some say could affect their comparative attraction.

These funds have generally out-performed corporate and public offer funds due to leaner cost structures.

Sceales & Co partner and superannuation expert Jocelyne Boujos said many industry funds also performed well because their trustees were often more conservative and balanced investors, attuned to cycles and not phased by them.

But as these funds grow, maintaining good corporate governance and ensuring the chosen trustees have a good mix of skills and knowledge – in superannuation, investing and risk management – is becoming more critical, according to KPMG partner and managed investments and superannuation group WA leader, Grant Robinson.

When industry funds were first established there were not as many retail funds or master trusts as now available.

However, with a comparatively high focus on service standards, many members have remained with the industry funds, a significant number of which have introduced attractive benefits such as discount cards and loan facilities through alliances.

Since the introduction of compulsory superannuation payments by employers, industry fund members, like others, accumulated significant amounts at a younger age and demanded more from their funds, Mr Robinson said.

Industry fund ‘profits’ are generally put into services or further investments, and some industry funds have been attracting more members as corporate funds wind up.

However, many of the corporate funds have opted to move into master trusts, and to attract even more members, several industry funds were considering becoming public offer funds, Mr Robinson said.

But potential changes debated in Federal Parliament, to introduce total choice of fund for every employee, plus the need for consolidation to achieve relative economies of scale, could further change the nature and membership of some industry funds.

If the choice of fund legislation is passed, Mr Robinson believes the industry funds are more likely to lose members than gain them.

In the UK, when initially given choice, many superannuation members reportedly made poor decisions in transferring out of good funds, on the whim of marketing campaigns or induced by those promoting products on commission.

State-based funds could achieve savings in amalgamating with their counterparts in other States and, for example, share IT platforms, Mr Robinson said.

Ownership of Westscheme, the largest WA-based non-government industry fund, was transferred from the CCI WA and UnionsWA to fund members in 2001. Westscheme CEO Howard Rosario described this as rare, if not unique.

Membership grew in 2002-03 by 10.36 per cent, funds under management by 20.3 per cent, and the performance result was small and positive.

Mr Rosario said Westscheme had its origins in award superannuation, including more than 100 WA industrial awards.

With WA awards losing some of their impact during the 1990s, and the 1998 introduction of employee choice of superannuation fund for those under WA industrial awards and agreements, Westscheme has had added imperative to be competitive in returns and service.

Industry funds were traditionally regarded as funds for award and other blue collar workers, and when the investment markets were performing much better than recently, the comparative impact of low fees and charges was negligible.

However, with the downturn in markets, people were now questioning the value of fees paid with other types of funds.

Research had shown that even a 1 per cent saving in costs and charges would produce a considerably larger lump sum over 40 years, Mr Rosario said.

As Australia’s $508 billion of superannuation assets grow to a more prominent position in the nation’s finances, so will the concentration risk, Mr Rosario said.

Hence the Government will increase its efforts to prevent fund collapses.

But Government changes to improve superannuation safety for members may come with increased costs, Mr Rosario believes, and some small funds will need to consolidate to continue in the long term.

"This is not to say that there will not be a continuing place for boutique operators and self-managed funds where the members understand and accept the costs," he said.

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