KISS Principal requirements for super choice

Company superannuation funds risk losing members unless they standardised their investment options before choice of fund legislation takes effect next year, a superannuation consulting company warned.

Heron Partnership managing director Christopher Butler said employee-sponsored superannuation funds need to get their houses in order and remove confusing inappropriate and outdated investment options before members receive the right to decide where to invest their super from July 1, 2005.

"Brand identity and differentiation will come into play and a major way for employer-sponsored funds to defend themselves in the market is to standardise the language and offering under investment choice" Butler said.

He said investment choice was the main factor that would cause members to move to another fund, which could lead to a weakness in the buying power of a company's default fund.

He said the diversity of language and definitions used to describe investment options made comparing the performance of difference funds "a magical mystery tour: for more consumers.

"One fund talks apples, another talks pears, and it completely confusing for most members" Butler said.

"The challenge for superannuation funds is to standardise investments options as much as possible, and at the same time to keep it (relatively) simple."

To address the problem, Mr Butler said company super funds should spend the next 12 months reducing their choices to five main options that employ definitions commonly used in the equities market.

"If that were done a high growth investment option would have 90 percent of its money invested in growth assets, a growth option would have 80 to 90 per cent, and a balanced-growth option would have 65 to 80 per cent" he said.

The figure for a balance option - the usual default and the most commonly selected by company super funds members - would be 45 to 65 per cent, while a conservative option would invest less than 45 per cent of member contributions in growth assets.

In dealing with the challenged thrown up by choice of fund legislation trustees need to follow four investment "imperatives": including a rigorous investment-construction process, Butler said.

"Good construction means choosing the "three Ms" - multi-manager, multi-sector, and multi-style options as foundations, rather than taking on single manager risk," he said.

Investment options also need to be well constructed, members have to be better educated on performance and risk, and the right default for members has to be identified.

"No two company circumstances are alike" Butler said "For example an IT firm with an average employee age of 30 would need a different default and different education program from a manufacturing firm with an average age of 50."