New superannuation option threatens commercial funds

COMPETITION for the hearts and money of superannuation members is heating up. Australian Super this week announced a major enhancement to the way its members can invest. It went as far as claiming that the option was almost as good as having a self-managed super fund. In reality it poses more of a threat to the continued existence of commercial super funds.

The continuing popularity of self-managed super funds was reinforced this week by the release of statistics by the Australian Taxation Office. They showed that the assets managed by SMSFs grew by 122 per cent over the five years up to 2010, compared with a growth rate of 60 per cent for the total superannuation industry.

Other statistics released by the ATO could prove embarrassing for the marketing team at Australian Super. In an information pamphlet about the new member-direct investment option, Australian Super stated that, on average, management costs for SMSFs ranged from 6.42 per cent down to 1.5 per cent.

The reality of the situation, as has been validated by the ATO statistics, is that, on average, the cost of a self-managed super fund is a lot lower. The report stated in 2009 that 64.5 per cent of SMSFs had an estimated operating expense ratio of less than 1 per cent, while almost 36 per cent had an estimated operating expense ratio of 0.25 per cent or less.

The new member-direct investment option, although not having anywhere near the flexibility of an SMSF, is a big leap forward for industry super funds. It provides a level of flexibility and choice for investing in the Australian share sector and term deposits normally only associated with commercial super funds.

Under the member-direct investment option, super fund members can invest directly in the top 300 ASX unlisted shares and exchange-traded funds. In addition, for those members worried about a major collapse in worldwide share and finance markets, there will be the option to invest in term deposits.

As would be expected, there are some conditions placed on members using the member-direct option and an increase in administration costs. To use the member-direct option, members must have a super balance of at least $10,000,with a minimum of $5000 invested in one of the other investment options offered by Australian Super. In addition, members must maintain a balance of at least $200 in their member-direct transaction account.

The increased flexibility comes at the cost of a portfolio administration fee of $15 a month. This fee is on top of the normal $1.50-a-week management fee charged by Australian Super. There will also be brokerage fees of at least $15 a share transaction.

With this enhanced investment option, Australian Super is providing a level of investment choice that comes closer to that offered by commercial super funds at a fraction of their administration costs. This option will only be available to members in accumulation phase.

By not offering this to members in pension phase, the fact that industry funds are more focused on members in accumulation phase is reinforced. In a self-managed super fund, and the majority of commercial funds, members can choose to have income earned from their super investments paid into the cash account that pays their pension.

Australian Super does not allow its members to have income paid into the cash account but instead requires the income to be reinvested in each investment. This can lead in pension phase to investments being sold at a loss to fund a pension payment.