New, lower-cost superannuation fund era ahead

Super savers are set to become more aware of the cost of running funds, and are likely to be presented with cheaper alternatives.

With one exception, Senator Jane Hume’s superannuation changes make sense and prepare the total superannuation movement for a new era of importance.

That is why initially I was surprised at the ferocity of the opposition. Then the penny dropped.

These changes are going to attract new powerful entrants into superannuation (I detail two starters below) and will hasten its move away from superannuation being a craft-based movement.

This frightens the industry funds because they are based on the craft model, but their excellent overall performance in recent years makes them well prepared.

The one change that Hume proposes that I think is a poor idea is giving government or government bodies the power to stop a superannuation fund investing in a particular security.

Once there is proper disclosure then members are perfectly free to vote with their feet.

Government intervention is likely to create a dangerous precedent. But most of the other changes are long overdue.

For example, we currently have a situation where many people have a multitude of funds because they took on different jobs. Their scattered savings are absorbed in fees, which is a terrible waste.

The new system will see an employee in their first job booking into a fund and staying with that fund in different jobs. Each employer can make a quick check with the Australian Taxation Office to find out the relevant fund or the employee can choose. This is a defined task that the ATO should be able to do well. But I am wary. It will need to be a fast, efficient service.

The employee, of course, can change funds at any time. The alternative of an employee changing funds each time a new job is taken would be horrendously costly to the employee.

At the moment superannuation is not seen as relevant to many young people. But thanks in part to state government actions rents are going to rise sharply and young people will need to find a way to buy their own home. Increasingly in coming years superannuation will be used to help in this first step so it will have a new meaning to the up-and-coming generation.

And of course, although superannuation is important in retirement, a house is even more important.

The second change requires much greater fund disclosure including contributions to owners plus employer and union organisations. Marketing and a vast array of other costs will also be disclosed, along with the portfolio of every publicly available superannuation fund.

Members of superannuation funds will get the same sort of information that is available to self-managed funds. Again, this is a long overdue change because members are entitled to know where their money is invested and how much goes to the owners of a fund, employer groups and unions -- it’s their money that is being managed.

And the third major change is more controversial. Funds that don’t match an industry-based criteria may have to merge. The measurement is over seven or eight years and can be tailored to the portfolio structure of the fund. And so, totally theoretically, if a fund had 50 per cent of its money in one class, say infrastructure, the measure will be weighted accordingly. It is possible this will push funds towards indexation, but the simple situation is that funds managers that can’t perform over a long period need to be replaced.

What will become apparent to members of funds is the total cost of running their fund. Most large funds will come in with a cost basis of 0.8 to one per cent, but some will have much higher costs. These prospective extra disclosures are suddenly attracting new entrants into the superannuation race.

The big funds would justifiably believe they can compete, but we are looking at a new era.

The first and biggest new entrant is Vanguard. The giant index-based investing institution has developed a successful business in Australia by attracting small and large investors to low management-cost index-based returns over a wide area of investment alternatives.

It is now planning to enter the superannuation market. Employees can write down Vanguard as their preferred superannuation investment and Vanguard will be shouting from the roof tops that its costs of operations are in the vicinity of 0.2 to 0.3 per cent – well below other funds. It clearly believes there is a lot of business to be picked up.

Another new entrant is known as Flare, which is backed by global investors including KKR, Point72 and Westpac Reinventure. Flare is one of the largest providers of software to manage superannuation and human resource bookkeeping. Its network has exploded in the last 18 months and one out of five Australians who start a new job are enrolled via enterprises using Flare technology.

Flare gives its software free to enterprises but plans to use that software network to market financial services products.

Its first foray into this arena is set to be a managed global superannuation fund for Australians. It expects its costs to be in the 0.5 to 0.6 per cent range – higher than Vanguard - but the Flare fund will contain a managed selection of global investments.

Australian investments will be a comparatively small part. Neither new entrant would have made a move but for the Hume legislation. The fact that two have emerged so quickly indicates that there is more to come.