February 21, 2017

CIPR: A strategic leg-up for industry funds

Industry funds have been stealing the march on retail funds for some years now – our Tria Super Funds Review will reveal that large industry funds have stolen a full 4% market share from the rest of the system, whilst retail funds’ share has gone backwards by 1.7%.

But the prospects for retail funds – with their extensive advice arms adept at assisting clients retire – should be on the turnaround as the number of people retiring each year increases, playing into the traditional hunting ground for advisers. This should be retail funds’ time in the sun.

But one regulatory reform – the somewhat awkwardly named Comprehensive Income Products for Retirement framework (‘CIPR’) has the potential to change the growth prospects of industry funds, and therefore harm the trajectory for their retail peers.

CIPR introduces a new combined advice/product concept that has the potential to disrupt the status quo. As currently proposed, instead of members having to seek out advice to work out what to do as they near retirement, trustees will be able to proactively recommend a default solution to members. This process must address flexibility, longevity and a better income profile throughout retirement for the average member. But not necessarily each and every individual member.

There are 2.1m members in industry funds today aged between 50 and 65, with a total of $179b in FUM. Whilst that is an average balance of only $85k, around 25% of members in APRA regulated funds currently have over $200K at retirement – meaning many will fall squarely in the target market of many financial advisers.

Absent any change, many of these members would naturally have converted to the retail funds segment over time. However, thanks to CIPR, industry funds should have a much better chance to retain:

  • ‘high value’ members as they move into drawdown phase, and
  • the ~75% of members with less than $100,000 at retirement who classically cash out their super balance.

Clearly, this introduces a huge challenge to retail funds’ traditional competitive advantage. However, the outcome is far from a lay down misère – industry funds will need to achieve new heights in product design, and do a much better job of engaging and retaining their existing members, both of which require significant investment.

And you can expect retail funds to defend aggressively. On balance they have stronger capabilities in product design and customer acquisition; these will be invested in and further enhanced to counter the strategic advantages CIPR otherwise delivers to industry funds.

CIPR creates a new opportunity for industry funds to win, but it will not be easy or cheap, and not all industry funds will be able to take advantage of the opportunity. Don’t expect the CIPR tide to lift all industry fund boats equally.

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