Regulators should not judge super funds on size alone, Russell warns

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  • Recommends trustees use comprehensive test to meet scale requirements
  • Know your fund first – evaluate before reacting to scale concerns

Russell Investments is calling on trustees and industry regulators to consider more than just current assets and membership when applying a “test of sufficient scale”. Russell suggests a scale test which incorporates assets, membership, growth, net investment performance and operating reserves. This follows the government’s support of the Cooper recommendation for fund trustees to assess whether they have sufficient scale to support a MySuper product. Many are expecting regulators to step in with scale requirements based on size of assets under management (AUM) leaving the industry divided as to what the requirement should be.

While Russell thinks size can bring cost efficiencies, looking at size alone could potentially close down some high performing funds. This could leave the market dominated by large funds or force unnecessary mergers.

“While we agree trustees should ensure they have the scale benefits to support a MySuper option, focusing purely on current size may cause the industry to lose some of its better performers, to the detriment of members, ” said Tony Miller, senior consultant for Russell Actuarial.

Mr Miller said that without careful consideration of the issues, many medium sized funds run the risk of falling below an arbitrarily selected size limit (depending on where it is drawn) but have other features which make them competitive and good value for money. For example they may know their members particularly well, have good cost structures and performance and can tailor services accordingly.

In addition, basing scale on size does not recognise new or growing funds. For example, a fund could potentially fail under size requirements even though its projected member growth means it could comfortably pass a size test in three or four years’ time.

“Not everybody values service quality to the same degree when it comes to rationalising on cost. Big does not always lead to better service quality and therefore better overall outcomes for members. The cost to a member of inappropriate, slow or poorly executed advice at a critical time may be more than all the cost efficiency gains of a larger fund,” he said.

He also suggests long term investment performance credited to members, net of fees, could also be objectively examined by trustees to ensure persistent good performance is adequately recognised.

Mr Miller also believes scale is about the capacity to absorb market shocks and meet future contingencies without drawing heavily on members, so also recommends fund specific liquidity and other tests around the ability to sustain a certain level of operating reserve.

Knowing your fund first

The expectation of ever increasing regulation has left funds considering how they will respond to this new set of challenges.

Mr Miller says that “before trustees become overly concerned about lack of scale we urge them to first examine what they really need by assessing a variety of factors including future growth potential, member retention levels, age demographics and liquidity as well as their objectives and relationship with their members.”

There are many aspects to “scale” and Mr Miller affirms what is already being seen – that for many funds there are alternatives to a merger such as outsourcing operating functions like administration to cut back on costs and arrangements to gain access to investment scale.

Last year Russell launched its Total Fund Evaluator, a comprehensive tool that allows a super fund to model future cash flows based on member movements including investment choice decisions and market conditions. Russell’s modelling tool allows a highly complex analysis ideally suited to providing much of the information needed by trustees to undertake a test of sufficient scale.

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