ERFs not up to scratch

Publication Date: 11 April 2007
Publication:: SuperReview April 2007

Only two eligible rollover funds have emerged as meeting the appropriate criteria for members, according to the latest research from The Heron Partnership.

 Australia’s eligible rollover funds (ERFs) continue to suffer from considerable shortcomings, according to the research undertaken by Melbourne-based consultancy The Heron Partnership.

The research, covering all 15 ERFs operating in Australia, not only concluded that there were too many such entities operating in the market, that that is led to the overcharging of members because ERFs were not achieving economics of scale.

The managing director of The Heron Partnership, Chris Butler, said his view fees should not exceed about 2 per cent of assets, which was comparable to retail fund with active managers and investment choice.

However he said that the average fee charged by ERFs was 3.57 per cent.

“For an EFR to charge above 2 per cent of its assets is, in our view, excessive,” he said.

“The average balance in ERFs is about $1,100. For a balance of this amount, the average fee charged is 3.57 per cent, with 12 of the 15 ERFs charging total fees in excess of 2 per cent of assets,” Butler said. “For a $10,000 balance, the average fee is 2.51 per cent, and the number of the ERFs charging over 2 per cent drops to nine.”

He said The Heron Partnership believed that a contraction in the number of ERFs would result in reduced fees.

“There is a strong correlation between fee charged and number of members,” he said. “The economics of scale certainly deliver lower costs without necessarily sacrificing investment aggression or services to members.”

Butler pointed to the structure of the ERF sector as being a problem in circumstances where the largest three funds accounted for 73 percent of total combined ERF assets of around %5.4 billion.

“The Largest ERF has assets of about $1.5 billion, whilst the smallest has $1.36 million,” he said.

Butler said the selection and appointment of an ERF was undertaken by superannuation trustees on behalf of fund members – something that placed a particular onus on trustees.

“As we see it, the onus is with the trustees of the ‘feeder’ funds the ensure they make a careful selection of the most appropriate ERF, and then monitor it on a regular basis to check the adequacy of its performance, as it should for all of its outsourced service providers,” he said.

Butler said in these circumstances it was important for trustees to find a match with an ERF’s investment philosophies.

“We found there are four general classifications for investments – growth, balanced, conservative and cash – so each trustee can easily find the one philosophies for their lost members,” he said.