Rainmaker Benchmarking: Superannuation
Fees: just part of a super fund's value proposition - Sep 2015
What does a member want from their super fund? As the industry continues to aim to uniformly articulate the purpose of the superannuation system, it may well be that the purpose for each individual is slightly different and this is what product designers are really grappling with.
And while some industry segments might pitch to a membership base as a collective, innovative funds are increasing their breadth of services and customizing their fees structures to appeal to individual within this base.
With competition within the industry increasing for the hearts and minds (and wallets) of members, superannuation are looking at the range of services that funds offer, from investment options to insurance provision to online services. However, what members pay for these services (ie, fees) continues to remain a key element of the value proposition of a fund.
Fees paid by members to super funds in Australia in 2015 were $23 billion, a significant amount of money by any measure. It is not surprising therefore that fees are consistently on the radar of industry bodies and observers.
Nor it is surprising that fees are an important feature to members. The average fee paid by a super member in 2015 was 1.2% of their assets, and over a 40-50 year working life any excess in the fee can legitimately be seen as an anchor dragging on the accumulation of retirement savings.
Fees have been dropping in recent times spurred on by the creation of the MySuper product space, a product aggressively adopted and adapted by retail and not for profit (NFP) funds alike.
The innovation and adaption of product and fees has highlighted that a member needs to look beyond the industry segment averages if they are to obtain the most customised and cost effective solution. Perhaps this is why it's really not surprisingly these product and fee innovations at the moment being led by the retail sector.
One retail provider even offers a personal super product with 'zero' fees. Nil. The product is constructed around a cash hub held by the associated bank, and the product documentation highlights that zero fees are partly made possible via the bank capturing the interest rate spread benefit in the cash component of the fund - which is how fees work in bank interest products.
Another retail provider offers a product which discounts the ongoing membership fee to a flat $50 per annum and a flat 0.5% investment fee across all investment options including lifecycle, multi asset or single class asset options.
[As an aside, while for a growth mix option this 0.5% is fairly sharply priced, for a conservative investment mix it is above the odds which suggest that that some life stage products may be at best cross subsidising between members of varying investment choices and at worst gaming the system.]
Putting aside the byproduct of cross subsidies between members, this pricing structure creates a headline fee which can puts such products amongst the market leaders.
Such product fee offerings constructed by retail providers indicate a willingness to leverage the infrastructure and brand of a larger bank wealth group, and willingness to offer broad pricing structures that may have cross subsidization, and which often create a compelling option to a cost sensitive consumer.
While they may not be best solution for all members, they do offer a new floor to the fee debate.
By now most product developers know that the ability of retail providers to offer streamlined super fees has been significantly aided by their unbundling of adviser fees from their fund fees. These fees are now typically negotiated between the member and the advisor and charged separately from the base super fund fee. This is another step in the splitting out cost for service.
These industry developments challenge of the provider of low fees mantle held and proclaimed by the NFP segment. While they certainly do still offer the majority of members an average lower fee than the retail sector, it is not the case for every member. They will however no doubt encourage NFP funds to talk of value in a more holistic sense in defining themselves to members. And they are doing this in areas of board composition, responsible investment, additional investment options and other services.
These choices and product developments are good for consumers, especially when operating in an environment of disclose and transparency. The associated competition also appears to be underpinning the fall in superannuation fees.
We are seeing an accelerating market call for super funds to define who they are, and the value they offer. Put another way, NFP funds and industry funds in particular who lead the push for competition in superannuation now have some serious competition of their own to deal with. It's now their move.
Food for thought.
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