MySuper unleashes competition and value

Streamlined .. keeping track of super will be no more complicated than keeping track of savings.
Streamlined .. keeping track of super will be no more complicated than keeping track of savings.

It's amazing what a kick in the pants can do. Having fought tooth and nail against the introduction of MySuper, retail super funds are providing some long overdue competition for their competitors in the default super market.

MySuper is the government's answer to the fact that most Australians neither know nor care where their super is invested - at least until something goes wrong.

From early 2014, super funds that want to be used as default funds (the fund that employers put you into if you don't select your own fund) will have to meet requirements that basically ensure non-engaged members are getting a simple fund that focuses on providing value.

When it was proposed, the retail funds came up with a string of reasons why MySuper would be a disaster. It would push up costs, encourage apathy, dumb down super investing … the list went on.

But now that it's about to become a reality, retail funds are answering the challenge with a new generation of products that will bring some much-needed competition to the market.

Earlier this month, ING Direct launched its Living Super product, which has been hailed by many as a game changer in bringing low-cost super to the retail market.

Its balanced option, which it intends to have licensed as a MySuper product, has no administration or investment fees - a first for the market.

There's a catch, of course. Half the fund will be invested in cash deposits with ING Direct and the margin it makes on these deposits will effectively form the ''fee'' the investor pays. However, as the cash will earn the same interest rate as investors get in its popular online Savings Maximiser product, that shouldn't prove too much of a deterrent.

The other catch is that the remaining 50 per cent will be invested totally in indexed share funds - a low-cost strategy that gives you the same performance as the market index, but without any potential to add value through active funds management.

Like BT's Super for Life product, which was arguably the forerunner of the new generation of lower cost retail super funds, the ING fund will also be able to be accessed and managed online along with your bank accounts. So keeping track of your super will be no more complicated than keeping track of your everyday savings.

Research released this week by SuperRatings shows retail funds will also be the leaders in adopting new strategies such as life-cycle investing. The chief executive of SuperRatings, Nathan McPhee, says the company surveyed a mix of retail and not-for-profit super funds about their intentions for the introduction of MySuper and found that while about 80 per cent of not-for-profit funds intended to simply retain their existing products, big changes were planned in the retail market.

He said about a third of retail funds had indicated they intended to provide a life stage MySuper product, which, instead of offering a single investment strategy, offers one that changes as you get closer to retirement. So while someone in their 20s might have a high proportion of their money in assets like shares, this would gradually be reduced as they got older. McPhee says the number of retail funds introducing life-cycle investing could increase even further given a government decision to allow funds to charge different fee scales for different life-cycle stages rather than insisting on its original one-price-for-all approach. This would have meant older members, more conservatively invested, would be paying more than they should and subsidising younger investors in more expensive investments.

SuperRatings also found that, like ING Direct, retail funds were also more likely to provide indexed MySuper accounts. It found 40 per cent of retail funds surveyed intended to use these ''passive'' investments compared to less than 10 per cent of not-for-profit funds.

McPhee says this is likely to mean that while not-for-profit fund fees stay about the same, retail fees are likely to drop, on average, by at least 40 per cent. Some funds, already have lower fees but McPhee says lower investment costs and administration fees and abolition of commissions will make retail funds much more competitive on a cost basis. While they're likely to introduce more transaction fees, these will only be allowed on a cost-recovery basis.

Of course, as former chair of the Stronger Super peak consultative group, Paul Costello, pointed out at a hedge fund conference this week, cost isn't everything. The big question for retail funds offering indexed products will be whether they can match the performance of their not-for-profit competitors, which have historically produced higher returns by diversifying more widely - particularly into higher-cost alternative investments such as infrastructure and direct property.

Costello said he was concerned about the fixation on costs prompted by MySuper, rather than investing in a manner that produced the best net return for members. He said not-for-profit funds needed to promote why it is worth running a more diversified investment strategy.

SuperRatings also found that not-for-profit funds are more likely to offer MySuper members free or subsidised simple or ''scaled'' advice than their retail competitions. The majority of not-for-profits said they will offer scaled advice compared to about half the retail funds.

McPhee says while all funds will offer death and disability insurance, not-for-profits will also be more likely to offer income protection insurance. But, basically, it seems the not-for-profits see no real need to change their products for the introduction of MySuper while the retail sector is likely to make big changes, including the launch of more new products.

You could argue that it is the more expensive retail funds that need more reforming to meet the MySuper targets of being simple and good value, but let's not quibble.

Greater competition can only be a good thing for fund members.

This story MySuper unleashes competition and value first appeared on The Sydney Morning Herald.