The numbers behind superannuation’s fund choice leakages

Rice Warner is putting the finishing touches on Part II of its inaugural Super Insights report, and the early findings give a window into the multi-faceted challenges facing Australia’s superannuation sector.

Super Insights derives from extensive data on some 9.1 million accumulation accounts, including retail, industry and public sector funds. Of particular interest in our Part II analysis is the areas of pension and investment data, but also the topic of member exits.

So-called ‘rollout’ statistics, in light of greater fund choice to members, has become a key metric in the retention planning of funds. It also gives a clear sense of the impact of self-directed investors taking greater control of their super.

In fact, the greatest exercise of fund choice has occurred in the last decade with nearly one million members now in their own Self -Managed Super Fund (SMSF).  Although the rate of growth has slowed, the roll-outs to SMSFs represent the single largest leakage point for the superannuation industry.

Rice Warner’s analysis shows the leakage to the SMSF segment, although small in relative membership numbers, represents about 0.8 per cent of the assets of these funds.

Across the industry, with less than 16 per cent of members effecting a rollover within 12 months of joining a new fund, the net outflow remains strong. Over the 2013 financial year, 26 per cent of the value of all roll-outs were to the SMSF sector.

Why is this occurring? Choice.

Most employees in the private sector and an increasing number of public servants can now choose their own superannuation fund.  This means that all funds now offer a broader set of investment and insurance options in an effort to keep their members satisfied.  Of course, all these choices add to the costs of running a fund – and many of the options have a low take-up which means they are cross-subsidised.

In combating the leakage, several funds have launched Member Direct Investment (MDI) options for those members who want a greater say in their investments.  Typically, these allow members to invest in the top 300 Australian listed equities, some Exchange Traded Funds (also listed) and some bank term deposits.

The funds also allow tax to be calculated at member level for these investments so members can access franking credits direct from shares and can avoid capital gains tax at the time they convert to a pension within the fund.  This facility is a retention tool – aimed to give those more likely to set up an SMSF a greater level of control over their retirement savings.  It is too early to see the effectiveness of this expanded offer but it shows how worried funds are about the SMSF segment.

Who is most likely to exit their fund for a SMSF option? Members above age 40 remain the main source of leakage, reflecting that it is not effective to set up an SMSF unless you have a reasonable balance – which younger members mostly do not have.  There is a trend for some young members to set up an SMSF in order to buy residential property.

As Rice Warner has stated previously, we can only hope that this shift to leverage – which is contrary to the spirit of the SIS legislation – can be curtailed.

There are salient lessons to be learned from investor experiences with highly geared property trusts leading into the GFC.  Let’s hope SMSF investors have heeded the lessons of downside consequences from the past.

Steve Freeborn, Head of Superannuation & Investment