Superannuation sector moves to get its house in order

The superannuation industry is continuing to change and, as Damon Taylor reports, governments and trustees boards are being forced to make pivotal decisions about future directions and the best interests of members.

As Australia’s superannuation industry continues to prepare for the upcoming MySuper environment, its three dominant players continue to be industry funds, retail master trusts and the rapidly growing self-managed super fund (SMSF) sector.

Yet the players often forgotten in the Federal Government’s super industry overhaul are actually the very public sector funds in its own backyard — and recent developments indicate that both the Federal Government and state governments are keen to position them well.

The most recent of these developments has come with the recent outsourcing of administration for the Federal Government’s Public Service Sector accumulation plan (PSSap) to Pillar Administration.

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Commenting on the successful tender, Pillar chief executive Peter Beck said that it had been was important win, since the Government sector of superannuation was considered to be an area of expertise.

“Our main market segment is the Government sector, and PSSap is one of the two accumulation schemes for Federal public sector employees, the other being AGEST,” he said. “We already administer AGEST and so it was really important to us to get PSSap as well.

“It’s a natural fit for us, given that we’ve got the NSW Government accumulation scheme and we’ve got one of the two Federal Government schemes,” Beck continued. “We see this as an area of specialisation.”

Ruthless efficiency

But while the acquisition of PSSap’s administration is undoubtedly significant for Pillar, it is also significant with respect to the fund’s own positioning.

With the Stronger Super initiatives, the Minister for Financial Services and Superannuation, Bill Shorten, is pushing hard for a super industry that is both competitive and efficient.

However, at some point the focus must turn to whether the Government has its own house in order.

It would, after all, be an interesting turn of events if the efficiency the Government has been such a proponent of was not observable within the day-to-day running of its own public sector funds.

Commenting on the motivations behind outsourcing PSSap’s administration, Mercer worldwide partner Martin Stevenson said that efficiency had undoubtedly been the key driver in the Government’s decision-making process.

“A report from PricewaterhouseCoopers found that the PSSap administration could be delivered more cost effectively by accessing the available competitive market,” he said. “And my understanding is that the cost savings involved made the decision a simple one.”

“The efficiency argument was compelling.”“And my understanding is that the cost savings involved made the decision a simple one. It was an efficiency thing, pure and simple.”

In a similar vein is the Federal Government’s recent establishment of the Commonwealth Superannuation Corporation (CSC). Designed to consolidate the trusteeship and modernise the administration governance of the Commonwealth’s main military and civilian superannuation schemes, such a move again seems aimed not just at efficiency but at increased investment scale.

Commenting on the passage of legislation that allowed the creation of CSC, the Minister for Finance and Deregulation, Senator Penny Wong, said that the trustee consolidation was an important reform that would benefit all scheme members.

“The establishment of Commonwealth Superannuation Corporation as the consolidated trustee will help secure increased superannuation benefits for thousands of military and civilian scheme members,” said Wong.

Similarly, the Minister Assisting on Deregulation and Public Sector Superannuation, Senator Nick Sherry, said that the changes would combine more than 680,000 members and pensioners, with funds totalling more than $21 billion.

“Consolidation of the funds will produce a more efficient trustee operation and better services for all members,” Sherry said.

Once again, the focus for the Government seems to be getting its house in order by obtaining scale and efficiency in whatever ways are most effective.

The final development of note for public sector super funds comes in the form of a review into a number of superannuation reforms that were proposed by public sector fund, GESB.

Commissioned by the Western Australian state Government and undertaken by Federal public servant Rod Whithear, the focus of the review was the proposed mutualisation of GESB, an initiative which was subsequently abandoned based on Whithear’s recommendations.

Learning from experience

But the interesting thing to note is that despite the way in which mutualisation was undertaken, a precedent exists for this kind of change.

After all, New South Wales-based First State Super, which became a public offer fund in 2006, has effectively become an industry fund — and it continues to thrive as a competitive force within the industry.

And this, of course, is the opposite end of the public sector spectrum. Where funds such as PSSap are open only to Commonwealth public servants and, prior to PSSap’s outsourcing, were also wholly administered by public sector entities, First State Super has for some time operated with entirely different means and objectives.

So is this an equally valid direction for public sector fund positioning?

Reflecting on First State Super’s history, Stevenson said that he doubted its trustees even thought of it as a public sector fund anymore.

“The thinking in the NSW Government back in 1992 when they started First State Super was pretty much to move out of the superannuation business,” he said.

“So they created First State Super, which was initially staffed by the same executive that did the large defined benefit fund, and then, as time went on, the two funds’ different objectives meant that separation became a good idea.”

“Obviously, First State Super is now a public offer fund and is less and less a public sector fund,” Stevenson continued.

“For all intents and purposes, it's an industry fund; it just happens to have the NSW Government as an employer that uses it as its default fund.”

According to Stevenson, though that position as major employer gave the NSW Government a measure of power and influence, it was a market power and not a power by legislation.

“Then, of course, we’ve all seen that First State Super has just now merged with Health Super,” he said. “And that demonstrates First State Super’s strategy as being one of looking to the future.”

“If you look at where the industry is headed in the next 10 to 15 years, it is likely that there will be five or six large funds remaining plus a number of niche players and I think First State Super has made it clear that it would like to be one those large funds and a major player.”

Consolidation

Clearly, the challenge facing all funds is how to compete and how to survive in an industry where rationalisation has become a certainty. And though MySuper and broader legislative change may, at times, be blamed as the cause of this new reality, super fund consolidation and mergers are hardly new.

In fact, in seeking mutualisation, there seems little doubt that GESB was looking to face that very challenge.

Yes, the numbers and justification for such a reform have been called into question and yes, the fact that former chief executive, Michele Dolin, has since departed show that the means with which the fund pursued that direction were probably less than ideal.

But pursuit of a model similar to that of First State Super — a fund acknowledged as having good performance, strong economies of scale and some of the lowest costs in the industry — was hardly inadvisable.

However, while First State Super is undoubtedly proof that a move from public sector fund to public offer industry fund is one through which scale and efficiency can be achieved and achieved well, the question both state and Federal Governments will be asking themselves: Is making super funds efficient core business?

Is this something that Governments, irrespective of whether they are Federal or state-based, need to be doing?

And the answer, if recent developments are any indication, is no.

In choosing to outsource superannuation administration, in choosing to consolidate trusteeship and, in the case of Western Australia, in choosing against mutualisation, state and Federal Governments have made it clear that while they are cognisant of the necessity of efficiency, they are also intent on sticking to the basics.

It seems public sector funds are to become focused and efficient retirement vehicles and, according to Beck, administration provided from a position of scale can enable that.

“There’s scale at different levels and there’s no questions that there’s scale efficiencies in administration,” he said.

“But I guess the issue for super funds is whether that’s enough or whether they need to get more efficiencies across the funds they’re managing.

“Let’s say there are people in the middle, who may be able to survive this drive of scale and efficiency by outsourcing,” Beck continued.

“There are still going to be those that are too small even when they outsource.

“They may have to look for mergers and look for merger partners, but certainly there’s that middle group that clearly won’t have efficiencies if they don’t outsource.”

So in terms of where these developments place the super industry as a whole, it seems pertinent to examine what the industry’s makeup is now and, more importantly, what it is likely to become.

From industry fund to retail master trust to SMSF to public sector fund, for a number of years now the lines between super funds have been quite clearly delineated. But are these developments, on the part of public sector funds, a sign of further delineation?

For Beck, quite the opposite is occurring.

“No, if anything I think the lines between industry funds, retail funds and public sector funds are starting to blur,” he said. “In many cases, the public sector funds are morphing into public sector/industry funds.

“Take, for example, the merging of First State Super and Health Super; Health Super does have public sector health employees in it, there’s choice and so they can go to funds like that, but its also got a lot of private sector health workers in it,” Beck said.

“So in that merger we’ve actually got a fund starting to morph into a combination of a public sector fund and an industry fund.”

Blurring the lines

Certainly, the lines between specific sectors of superannuation are getting harder and harder to define. And with MySuper products yet waiting in the wings, that is a trend unlikely to reverse.

The position taken by both state and Federal public sector schemes is that they are first and foremost the default funds for all public sector employees.

Yet just as evident is the fact that they are benefiting from the Government’s push towards efficiency, lowering costs and increasing scale with MySuper.

According to Beck, like it or not, efficiency is currently the main driver in superannuation.

“All industries go through this development where there are a lot of players because it’s an attractive market,” he said.

“But as the competition heats up and the pricing points come down, the smaller funds find it harder and harder to compete and then industries do rationalise.

It’s a natural cycle in a market that says competition is good and it drives prices down, but it also means that the smaller and weaker players in the market, unless they’ve got a particular niche in the industry, probably won’t survive,” Beck continued.

“You’ve either got to find the niche or you’ve got to grow and get efficiencies.”