The search for value

It is still early days but big public-offer superannuation funds are beginning to improve their pension offerings, in an attempt to stem the flow of wealthier individuals into self-managed super funds in the lead-up to their retirement.

The most recent figures from the Australian Taxation Office reveal that about 30 per cent of self-managed funds starting pension payments in 2010 were less than two years old. In other words, people are waiting until they are close to retirement when their savings are at their peak to take control of their super.

"[Public-offer] funds are making a huge effort to keep members with high balances and they are structuring products to make sure the differences between self-managed funds and public-offer funds become smaller over time," says the research manager at SuperRatings, Kirby Rappell.

Industry fund Sunsuper has done more than most to improve its retirement offering, boosting funds under management to more than $1 billion and winning the SuperRatings Pension Fund of the Year award three years running (see box).

"We're very conscious of retaining members because we believe we have a good value proposition," says the chief executive at Sunsuper, Tony Lally. But he is pragmatic about what is achievable.

"We will be able to meet the needs of up to half of the self-managed superannuation market, but not all. We can't offer real property, but we can compete in listed assets," he says.

A survey of self-managed funds by fund administrator Multiport found that the average allocation to direct property was 15.4 per cent of funds under management as at last December.

A further 43.1 per cent was invested in shares and 26.7 per cent in cash and short-term deposits.

To give members more flexibility and control over their savings, public-offer funds are beginning to offer direct shares and term deposits on their investment menus.

Term deposits are an important tool for retirees who want to manage their cash flow with the safety of a capital guarantee, while direct shares allow investors with an interest in the market to manage their own share portfolio. Industry funds Maritime Super, Club Plus and Local Government Super offer term deposits as part of their investment menu at no extra charge, as do retail pension products from most major institutions.

Funds offering direct shares include AustralianSuper, Care Super and Legalsuper as well as Asgard, AXA, BT, MLC and netwealth.

AustralianSuper charges $180 a year for access to the service on top of brokerage so only members who use the service pay for it, while retail master trusts generally charge only brokerage.

Rappell says funds are also beginning to tinker with their fee structures to increase the appeal of pension products, with some industry funds fee-capping above a certain account balance and many master trusts offering tiered fees.

For example, AustralianSuper charges an administration fee of 0.22 per cent of funds under management for account balances up to $500,000 (a maximum of $1100) and nothing on amounts above that. It still charges a member fee of $52 a year and investment fees on your actual account balance.

By comparison, Cbus charges a $400 member fee but imposes an administration fee of just 0.08 per cent of your full account balance.

A tiered fee structure might charge an administration fee of 0.8 per cent on the first $500,000 you have invested and 0.6 per cent for amounts above that.

Other funds are introducing options that automatically reduce exposure to high-risk growth assets as a member ages. BT Super for Life, Virgin Super, ANZ and Mercer are among those offering so-called target date or life-cycle options to their members.

Some funds go a step further and make an age-based investment mix their default option. Industry funds Auscoal, AustralianSuper, Club Plus, EmPlus, First State Super, Local Government Super and Health Super have some form of age-based default, as do Asgard, Plum and Telstra Super.

The tailored approach to retirement

Industry fund Sunsuper is attempting to retain members by offering "one fund for life" so people move seamlessly from the accumulation phase into a retirement pension without the usual paperwork and with the support of financial advisers.

The chief executive of Sunsuper, Tony Lally, says members are segmented according to their age, super balance and contribution levels. Members deemed most likely to have enough savings to support an income stream in retirement are offered free over-the-phone financial advice, or face-to-face planning sessions for a fee, with follow-up checks every three years.

Members are first contacted in their mid-40s and asked about the lifestyle they envisage in retirement, from whether they want private health insurance to how often they dine out and where they want to holiday. With the help of an in-house financial planner, they look at their current contribution levels to work out if their dreams are achievable and, if not, what can be done about it while they are still working.

Lally says members are presented with lifestyle descriptions they can relate to rather than dollars and cents, because most people don't have any idea how much money they will need in retirement.

Once members retire, the first two years of pension payments are invested in cash so they won't be forced to sell assets in the event of a market downturn.

Unless members decide otherwise, the remainder is invested in the default retirement option with low levels of volatility.

This is achieved by reducing growth assets and using derivatives such as options to minimise the impact of market falls.

"We're doing research now on the next iteration [of our retirement products]," Lally says. "Some people want a self-managed fund because they want more control over their portfolio, so we are working on that. In future we may offer individual shares and so on."