Heron’s 7th Half-Yearly Assessment of Super Products Released

Released: 8 February, 2010

Post-GFC puts fees and performance in spotlight

From the perspective of most members, the important issues they consider when deciding to join or remain in a super fund is investment performance, costs and to an increasing degree, insurance cover. The assessment of superannuation products undertaken by Heron covers about 130 key product features that are grouped under 5 Areas of Importance of Investment Arrangements, Insurance, Contributions, Ancillary Benefits and Communications. Investments and Insurance have the greatest impact on a product’s score with respective weightings of 55% and 30%. Costs are considered when evaluating a products "value for money".

In conjunction with the announcement of The Heron Partnership’s latest half-yearly assessment of major superannuation products, Heron has released some key research in respect to the operation of funds.

Heron’s Top Rated Superannuation Products for 2010

The 2010 assessment covered 115 retail products (56 master trust products & 59 industry fund products) and 38 master trust and industry fund products specifically designed for the corporate superannuation market.

Through this assessment The Heron Partnership has awarded 63 retail products and 26 corporate products with their highest general award of 5 Heron Quality Stars for 2010.

Chris Butler, Managing Director of The Heron Partnership said, "We are delighted to announce that Care Super and ING Corporate Super have once again achieved the highest numeric rating for their respective product category in our 2010 assessment and as a consequence received the Top Rated Product award".

Mr Butler said "This is the 6th occasion that CareSuper has been judged as the Top Rated Retail Product and the 7th consecutive occasion that ING Corporate Super has achieved this award."

Product Fees

Although most products will report returns around 15% for the financial year to date, the impact of the global financial crisis has resulted in continued focus on super product fees.

"The average investment fee for most default investment options is 0.71% of assets. This is about 0.04% more than we reported in the middle of last year. Fees range from 0.31% of assets to just over 1% of assets. The average fee is 0.78% for retail master trusts and 0.64% for industry funds. In addition, other fees, such as administration fee, expense recovery fee, trustee fee, etc need to be added to the investment fee. These other fees are today not structured in a consistent manner and vary from product to product. Comparison is therefore difficult. Typically these other fees range from zero to around 1.5% of assets. The average is about 0.35%. When added to the investment fee the typical total fee is around 1.0% to 1.3% per annum of assets. However, there is considerable variation." Mr Butler said.

"Based on the modeling undertaken by Heron, on average, the lowest priced "not-for-profit" and commercial products produce retirement benefits at age 65 around 40% or so more than the highest priced products in their classification. As a consequence, there is a considerable difference between the retirement outcomes of the various products. First State Super, followed by Unisuper, Super SA, AGEST and Statewide have the lowest cost structure when compared with all "not-for-profit" and commercial products, excluding corporate products, researched by us." Mr Butler said.

Heron’s analysis of administration and investment fees excludes any adviser fees an individual has agreed to pay their financial planner. Hence a like with like comparison.

The highlights of Heron’s latest research include:

• Continuing advancement in the structure of typical products insurance arrangements
• Aviva Navigator Access Super, ING Corporate Super and Local Government Superannuation Scheme achieve highest rating in their classification for Insurance Arrangements
• TOWER, CommInsure and ING Life have the highest exposure as insurer across all products
• Significant variance in number and type of investment options offered, yet most member select the trustee’s multi-manager default
• AMP Signature Super, Mercer Super Trust – Personal Division and Sunsuper Solutions achieve highest ratings in their classification for Investment arrangements
• JANA and Mercer Investment Consulting the most popular asset consultants across products assessed
• Catholic Super the only product to achieve top quartile investment performance for all 3 multi-manager options and time periods monitored
• Average product fees around 1.0% to 1.3% per annum of assets, but considerable variance
• Divergence in fees across products result in significant variations in ultimate retirement benefits
• First State Super, Unisuper, Super SA, AGEST and Statewide have the lowest cost structure

The Changing Insurance Arrangements

Mr Butler said "The uncertainty of the impact of the global financial crisis over the past 14 months or so has been a contributing factor for many people to consider safety/security issues. The type and level of insurance they have in place has therefore become an increasingly more important issue. The industry has responded in an innovative and positive manner, with many products reviewing their insurance arrangements over the past 12 months. The most significant being AustralianSuper with their appointment of TOWER Australia as their insurer for death, total & permanent disablement and salary continuance insurance. AustralianSuper’s new arrangements come into effect from the end of May.

AustralianSuper’s key improvements are:

• Increased (up to 31% more) death and disablement cover for the same cost;
• Default cover that includes a 2 year income protection benefit;
• Up to 10 times more death and disablement cover under the Automatic Acceptance Levels (AALs) up to $1.5 million;
• Halved waiting period for total and permanent disablement claims (from six months to three months); and
• Reduced waiting period for income protection (from 90 days to 60 days with a choice of 30 days), with both options at much cheaper rates.

Of the 153 products assessed by Heron, TOWER and CommInsure, followed by ING Life, are the most dominant insurers for death and total & permanent disablement (TPD). CommInsure, ING, TOWER and AIA are the most popular salary continuance (SCI) insurers. All but 4 products offer death and TPD insurance and all but 16 offer SCI. Although there has been an increase in products offering TPD only insurance, the number is still small at 10. All are commercial products.

Another trend, Mr Butler commented on, is for products to offer long term salary continuance to age 65. "Almost 50% of the products assessed by Heron now offer this benefit period compared to about 40% when our last assessment was released in July 2009. Of those that offer this benefit 80% are commercial products."

Just over 20% of products offer SCI with a 5 year benefit payment period. All bar 4 of these 33 are commercial products.

As part of the insurance reviews being undertaken by products one of the main changes to insurance offerings has been the steady increase in maximum levels of insurance cover.

Mr Butler said, "There has been an increase in the number of products that offer members an unlimited amount of cover for death. Indeed, over a third of products now have no maximum. The next most common maximum is $5 million. Three products now offer a $10 million maximum and a further 36 products offer $2 million or less."

The case with total and permanent disablement cover is somewhat different.

Mr Butler said, "At the time Heron undertook its assessment mid last year no fund offered unlimited TPD insurance and $5 million was the highest available through 1 commercial product. No product assessed for the 2010 ratings yet offers unlimited TPD cover. However, 2 now offer a $5 million maximum. The most common maximum is $2 million. However, almost as many products have a $3 million maximum. By the time we issue our next assessment we would not be surprised to see $3 million as the most common limit."

There has also been a doubling of the number of products offering a maximum SCI benefit per month of $40,000 – from 1 to 2! The insurers are AIA and ING. Although the most common maximum continues to be $20,000 per month, there has been an increase in the number of products offering a monthly benefit maximum of $25,000 or $30,000. A majority of products now offer $25,000 or more. The most common benefit waiting period for SCI is 30 days, closely followed by 90 days. The least common is 120 days with only 10% offering this period. A few products offer 180 days.

In respect to nomination of beneficiary, there have been an increasing number of products that offer Binding nominations, although Non-binding continues to be the most prevalent option offered.

"Of the products assessed by Heron, 133 offered Non-binding nominations, 113 offered Binding and 97 offered both. However, 36 offered Non-binding only and 16 offered Binding only." Mr Butler said

In respect to Insurance Arrangements the following products achieved Heron’s highest ratings:

Investment Arrangements

Notwithstanding that most members super assets are invested through their fund’s "default" option, which invariably is a multi-manager option, many products offer a vast range of investment options, including multi-manager, single manager, diversified and sector only. A key question for product developers is "what are the optimum arrangements that will appeal to members and their advisers and be cost effective?"

In respect to the number of investment options available through each product the variations are interesting.

Based on Heron’s latest research the number of options available through the products assessed by Heron range from 1 to 525, excluding direct share options where this facility is available. The average is 51, but the median is 16. Industry products, on average, offer 10 investment options, corporate products 53 and retail products 101.

The number of investment options a product offers contributes to operating costs. Heron’s research shows that the 10 lowest cost products offered, on average, 8 investment options, whilst the 10 most expensive products offered, on average, 76 investment options.

Mr Butler said, "Most product default options are multi-manager arrangements with a weighting to growth assets in the range 65% to 79%. All products assessed by Heron offer a good range of multi-manager options. Most offer between 6 and 19 options and the average is 12."

"The number of single manager options offered range from 0 to 485. The average is 38 and the median is 4. Twenty-one products have more than 100 single manager options. No "not-for-profit" product has more than 10 single manager options."

A further investment option offered by some funds is the opportunity to invest in direct shares. Of the products assessed, 29 offer this facility, all bar 7 being commercial products.

To assist determine a product’s investment objectives and strategy to achieve the objectives many fund trustees engage an external investment consultant. The investment consultant is also usually involved in manager selection and ongoing monitoring of performance.

"Based on Heron’s most recent analysis, of those that utilise an external asset consultant, JANA Investment Advisers continues to be the most popular investment consultant amongst trustees, as they are the appointed adviser to more superannuation products than any other investment consultant. JANA is followed by Mercer Investment Consulting, Frontier Investment Consulting and Intech. JANA’s exposure is principally to industry funds, whilst Mercer advises the greatest number of retail and corporate products" Mr Butler commented.

When considering investment performance Heron’s emphasis is on the longer term results and consistency of performance. The 2010 assessment is based on performance to 30 September 2009.

Heron measure comparative investment returns over 1, 3 and 5 years for each product’s multi-manager Balanced Option (45% -64% growth assets), Balanced/Growth Option (65% - 79% growth assets) and Growth Option (80% - 90% growth assets). Of the 153 products assessed, 22 achieved top quartile investment performance, based on the Heron universe of products, for at least 1 investment option and for all 3 time periods monitored. Catholic Super was the only product to achieve top quartile performance for all 3 investment options monitored.

In respect to Investment Arrangements the following products received Heron’s highest rating:

The Heron Partnership’s product research and assessments are provided through their Heron Advisor internet based research service. This research service is utilised by an increasing number of product issuers, dealer groups and financial planners as a superannuation research tool, for superannuation advice and corporate super tenders.