Company super funds must standardise investment choices or face loss of members

Company superannuation funds must standardise investment choices, otherwise they could lose members after choice of fund comes in next year, warns John Smith, Executive Director, The Heron Partnership, independent superannuation consultancy with over $1 billion of super assets under advice.

Mr Smith warns companies and trustees that they must take action this year: "investment choice is a major weak point for those employer-sponsored superannuation funds that don't offer investment choice and for many that do, the structure of their choices creates member confusion. Funds in these situations will not be able to face real competition in a choice of fund regime. Get your "house in order" or find that choice of fund exposes inappropriate or outdated investment offerings is our message.

"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 offerings under investment choice.

"Our research shows that for consumers, investment is the key differentiator and is the major factor that will lead to members moving from one fund to another. Unless trustees are on the ball they will lose members and therefore the buying power on behalf of their employees that remain in the companies "default" fund.

"Right now comparing one fund investment performance with another for consumers is a magical mystery tour. One fund talks apples, another talks pears and it is completely confusing for most members. The challenge for superannuation funds is to standardise investment options, as much as possible, and at the same time to keep it simple.

"This confusion over investment choice occurs when an employee incorrectly thinks he is comparing his fund's performance with another on a like with like basis. This will not be the case unless the investment option he has selected has the same, or close to the same, weighting to the equity market". Mr Smith said.

To counter this problem, Heron proposes that over the next twelve months the "investment language of superannuation" must standardise towards core descriptions, such as:
High growth (90% growth assets)
Growth (80-90% growth assets)
Balanced growth (65-80% growth assets)
Balanced (45-65% growth assets)
Conservative (less than 45% in growth assets)

The "FOUR IMPERATIVES OF INVESTMENT" for trustees and companies are: (with comments from John Smith, Heron.)

1. Ensure you have in place a rigorous investment construction process

"Superannuation funds will need a well constructed range of investment options (5 will be the norm), from Conservative through to High Growth, so that any member can find an appropriate investment home.

Good construction means choosing the 3 M's, multi-manager, multi-sector and multi-style options as foundations, rather than taking on single manager risk."

Using the 3M's provides the driver to consistent and sustainable investment outcomes.

2. Provide well constructed investment options

"Once these construction foundations are right, then the fund can travel with confidence. The way to ensure overall good construction is through rigorous manager research, robust portfolio construction (combining managers) using the right combination of managers, plus precise execution so changes occur without emotion and when needed."

3. Educate members about performance and risk

"Performance should not be the indicator for the future, and it will take a lot of communication and education of members to achieve this fundamental understanding. There are two key messages for members: don't choose single managers and don't chase performance. That is, the best option is to choose the 3M's multi-manager, multi-sector and multi-style options."

4. Choose the right default option

"Most members will go for the default option, so it is vital that the company/trustee choose the default option that is right for the nature of the employee.

"No two company circumstances are alike, 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 average age of 50."