Super prices: retail starts to undercut the not-for-profits

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Not-for-profit super funds = cheap, retail super funds = expensive.

That’s the traditional perception, and indeed the chosen positioning of the industry funds segment, with the “Compare the pair” campaign being the best known example.

But the facts were never as simple as the marketing, and it’s a lot less simple now, as today’s chart indicates. The average price of new generation retail funds is now less than the average price of major industry funds.

What do we include in new generation retail funds?

AMP Super Easy CFS FirstChoice Wholesale
ANZ Smart Choice Super ING Living Super
BT Super for Life Virgin Super
CBA Essential Super

 

The chart looks at the average total cost facing a member of a large fund with a $50,000 balance – including investment, administration, and trustee costs – and how that has moved through time. Excluding the major moves of 2013, the major trends have been:

– Public sector fund prices have been largely flat.
– Industry fund prices have gradually trended up.
– Retail new generation products have been falling.

To be clear, most retail players have legacy super products at much higher prices. However, these are not the go-forward products that the not-for-profits will increasingly be competing with.

The drift up in industry fund pricing has been concerning for a segment which has positioned on low cost. An attribution of industry fund pricing points to two issues:

– Little evidence of economies of scale – investment and administration costs are little changed since 2007 in bps terms, despite considerable growth in assets and member numbers over that period.

– Significant increases in trustee costs – which have nearly doubled in bps terms despite the growth in assets.

Part of this is the imposition of steadily increasing regulatory obligations. But the inability to cap, let alone cut total costs to members, is arguably also a result of the limited competition that industry funds face for members and contributions. Without the full force of the lash of the market, price discipline is perhaps not what it should be.

This was threatening to become a dangerous issue even before FoFA and Stronger Super. The prices of industry funds and new generation retail funds were getting so close that retail could start disputing price leadership. From a marketing strategy point of view, permitting key competitors to muddy your key point of differentiation is bad news.

FoFA and Stronger Super have made a bad situation worse. Stronger Super has added costs for public sector and industry funds, lifting their prices significantly in 2013. While it has done the same for retail, FoFA has had the opposite effect in stripping out commissions and related costs.

Moreover, some retailers have taken their regulatory medicine – and redesigned products and business models around the disruption in advised channels. Even ignoring ING Living Super’s zero price, the average new generation retail price is falling as new low cost products are brought to market.

As a result, major retailers are now armed with the “same” product as everyone else (ie a MySuper standard), but increasingly offering it at a lower price. This removes a significant part of the differentiation historically enjoyed by not-for-profits. The irony is that it was done so by an ALP government.

There is an argument mounted that retail MySuper products are inferior to the not-for-profit MySuper products. The retail products often have significantly or entirely passive portfolios, while those of the not-for-profits are significantly or entirely active, with lots of alternatives; the implication being that retail prices may be lower, but performance will be lower yet again, leaving members worse off in net terms.

Only time will tell. But there are a couple of problems with this argument. Firstly, even if it’s right, if MySuper members really are disengaged, they will neither know nor care. Secondly, MySuper is a commodity concept which invites price competition, at least for a period of time, and FoFA has enabled it. Members could be worse off as a result, but that’s a flaw in the policy design, not in how market participants respond.

Posted In: Trialogue