Heron's 9th Half-Yearly Assessment of Super Products Released

Released: 3 February, 2011

Finds super fees continue to rise but at a slower rate

Leading independent superannuation consultancy, The Heron Partnership, has released some key research regarding the operation of superannuation funds as part of its half-yearly rating of major superannuation products.

Heron’s 2011 research covers 157 superannuation products, including 120 personal products (51 master trusts & 69 industry funds) and 37 master trust and industry fund products specifically designed for the corporate superannuation market.

The focus of the research is product fees, investment arrangements and insurance, the key aspects investors consider when deciding to join or remain in a superannuation fund.

The highlights of Heron’s latest research include:
Fees

• Average product fees around 1.0% per annum of assets, but considerable variance.
• Investment fees continue to increase.
• First State Super, Super SA, Club Plus, AGEST and Unisuper have the lowest cost structure.

Investments

• Health Super the only product to achieve top quartile investment performance for the 3 multi-manager options and time periods monitored.
• JANA, Mercer and Russell the most prevalent asset consultants.
• AMP Signature Super, Asgard eWrap Super and CareSuper achieve highest ratings in their classification for Investment arrangements.

Insurance

• Continuing focus on improving insurance access and features.
• OnePath Corporate Super, Macquarie Super Accumulator and Local Government Superannuation Scheme achieve highest rating in their classification for Insurance Arrangements.
• TOWER, CommInsure, AIA and OnePath Life are the most predominant insurers across all products.

Product Fees

Over recent years there has been an increasing focus on superannuation fund costs.  Indeed one of the government’s objectives for the introduction of MySuper is cost reduction, through product simplification, less member engagement, complete electronic processing and removal of commissions.

The Heron Partnership’s Managing Director, Chris Butler, said “If the targeted cost reductions are to be achieved then considerable product restructuring will be required as evidenced by the fee levels that currently apply. 

“Product managers are already scratching their heads as to how they can lower costs to the targeted level but at the same time ensuring that they don’t come up with a product that looks the same as everyone else’s.  We need to ensure that the focus on fees does not result in homogeneous products and in particular, lower returns that disadvantage investors.  Real competition is to every investor’s advantage.”

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

Investment Fees

Investment costs invariably represent the greatest component of total fees.

Heron has noted that the average investment fee for the most common default investment options, those with a 65% - 79% weighting to growth assets, has increased slightly from 0.71% of assets to 0.73% over the last 12 months.  The rate of increase is less than recent years.  (The 2009 calendar year saw increases about 50% more than last year.)

For the most common default options, fees range from 0.31% of assets to just over 1% of assets.  The average fee is 0.79% for retail master trusts and 0.65% for industry funds.

Management Fees

The investment fees above do not include other fees, such as administration fees, expense recovery fees, trustee fees, etc, that are imposed by some products.  Typically these other fees range from zero to around 1.5% of assets.  The average is about 0.35%. 

Unlike investment fees, these other fees, in particular administration fees which represent the greatest component of “other fees”, are usually more clearly disclosed to investors.  Investment fees are normally included in the investment unit price and are less obvious.

Total Fees

From the research undertaken, Heron says that the typical total fee continues to be around 1.0% per annum of assets.  The lowest total fee is about 0.35% up to over 2.0%.

Mr Butler said, “The proper comparison of fees continues to be a difficult task and is beyond many fund members.  Hopefully in a post MySuper environment there will be consistency in the manner fees are structured across all products.”

Of the products researched by Heron, First State Super, followed by Super SA, Club Plus, AGEST and Unisuper have the lowest cost structure when compared with all industry funds and commercial products, excluding corporate products.

Based on the modeling undertaken by Heron, over a 40 year membership period, the lowest priced industry fund and commercial product, on average, produce retirement benefits about 28% more than the highest priced products, assuming the same investment return.  As a consequence, there is a considerable difference between the retirement outcomes of the various products. 

The Improving Insurance Arrangements

There has been a continuing trend over the past 12 months for products to review their insurance arrangements

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

Of the 160 products assessed by Heron, TOWER and CommInsure, followed by OnePath and AIA, are the predominant insurers.

All but 2 products offer death and TPD insurance and all but 14 offer SCI.  Although there has been an increase in products offering TPD only insurance, the number is still small at 14.  All are commercial products.

Heron has identified some other trends since their last assessment was undertaken.

Mr Butler said, “There has been a move to open up insurance eligibility provisions, including an increase in the age that automatic cover without underwriting applies to older individuals.  We suspect this may be in preparation to cater for a workforce that needs or desires to work longer, or may be encouraged to work longer by the government or their employer.  At the same time there has been an increase in the exclusions that apply for pre-existing conditions.”

The maximum limits on death, TPD and monthly SCI benefits have also continued to rise.  It is now quite common for products to offer an unlimited amount of death cover, $3m on TPD (with some offering $5m maximums), and a monthly SCI benefit maximum around $50,000.  “We see some small print accompanying the TPD maximums of $5m, whereby an Activities of Daily Living definition may be introduced for the portion of the TPD benefit that exceeds, say, $3m.

Also there has been a move, albeit small at this stage, to offer a constant unit rate for SCI cover.”

The Heron research identified a number of other trends, including:

• An increase in the number of products offering TPD only insurance;
• 50% of the products assessed now offer long term SCI to age 65 and 24% offer SCI for a 5 year term;
• There has been an 18% increase in the number of products offering unlimited death cover, a 38% increase in the products offering $3,000,000 or more TPD cover and a 33% increase in the number of products offering a maximum SCI benefit of $30,000 per month or more.

Investment Arrangements

As we often lose sight of, the purpose of superannuation is to enable the community to sustain a reasonable standard of living in retirement.  The MySuper initiative is being introduced to cut back, in time, on costs and to simplify the structure of default arrangements.  Yet investment performance is the principal contributor to enabling retirees to sustain a reasonable standard of living.

Mr Butler said, “It is just as well that an ever increasing number of people are able to defer retirement beyond age 65 as the impact of the global financial crisis and generally low investment returns is resulting in many people realising that they have insufficient funds to maintain the standard of living they desire in retirement.  We do not believe the intended MySuper investment default will make a material difference, particularly if we see a move away from well diversified arrangements to a more narrow indexed option purely driven by cost considerations”.

No doubt a key driver for the MySuper default is that the absolute majority of members, 80% plus, either deliberately selects or is automatically placed in the investment default, invariably a multi-manager option.  However, many products offer a vast range of investment options, including multi-manager, single manager, diversified and sector only, all of which add to the costs that all members currently pay.

Based on Heron’s latest research the number of options available through the products assessed range from 1 to 525, excluding direct share options where this facility is available.  The average is 51, but the median is 15.  Industry products, on average, offer 10 investment options, corporate products 65 and retail products 87.

Heron says the 5 lowest cost products offered, on average, 9 investment options, whilst the 5 most expensive products offered, on average, 88 investment options.

A further investment option offered by some funds is the opportunity to invest in direct shares.  Of the products assessed, 30 offer this facility; all bar 7 being commercial master trust products. 

Many trustee boards engage an independent external investment consultant to provide research services, strategic advice, manager selection and ongoing monitoring of performance and managers.

“Based on our latest research JANA Investment Advisers continues to be the most prevalent investment consultant, being the appointed adviser to more superannuation products than any other investment consultant.  JANA is followed by Mercer Investment Consulting and Russell Investment Management.”

Regarding investment performance, Heron’s emphasis is on the longer term results and consistency of performance.  The 2011 assessment is based on performance to 30 September 2010.

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 products assessed, CareSuper, Government Employees Superannuation Board (GESB), Health Super, HESTA, NGS, QSuper, REST, Vision Super and Wealthpac Superannuation Service achieved top quartile investment performance, based on the Heron universe of products, for all 3 time periods monitored for at least 1 investment option.  Health Super was the only fund to achieve top quartile investment performance for all 3 investment options and for all 3 time periods. 

In respect to overall Investment Arrangements, not just performance, 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.