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up 80% of new employees entering the Local Government sector and retaining 70%
of members leaving the sector. To achieve these goals, we have made the following 3
recommendations:
3. Merge with another fund to create size and reduce member fees.
superannuation industry and the trends since compulsory contributions came into
effect.
Purpose of report
This report has been prepared for the Trustee of the Local Government
Recommendations
To achieve the stated growth plan of acquiring 80% of new Local Government
employees and retaining 70% of Local Government employees leaving the sector, we
Since then, the industry has seen an explosion in superannuation assets and members.
The table below summarises the key statistics of the industry and also highlights the
Table 4.0. Summary of the superannuation industry * Self managed superannuation fund (SMSFs)
1990 2010
AUS Population 17 million 22 million
Aggregate super assets 116 billion 1.2 trillion
Number of super funds – except SMSFs* 17,500 457
Number of super funds – SMSFs* 58,000 421,671
Number of super fund members 10 million 34 million
% coverage of working population 52% 91%
Compulsory contributions 0% 9%
Source: Tower Watson, 2010
Overview of LGS
To provide a framework for developing a growth strategy for LGSS, the current status
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• LGSS is a not for profit arrangement established in 1997, providing
• LGSS has a public offer licence which is currently used to enable members
who leave employment in the Local Government sector to remain with the
Scheme.
• According to Peter Lambert, CEO of LGSS, the Scheme aims to retain 70% of
members leaving the Local Government sector and also acquire 80% of new
size, funds under management or member size. It is not the intention of LGSS
to increase member size solely through new members who are not currently or
3
Figure 5.0. Total member numbers LGSS
Figure 5.0 illustrates the total number of members from July 2006. Since then,
member numbers have increased on average 1.82% year on year. The current
acquisition rate of new members is approximately 75% whilst the target is 80%. The
current retention rate of members is 7% whilst the target rate is 70%. It should be
noted that LGSS has only become a public offer since June 2009. The public offer
status has not been marketed prominently yet. Once the public offer has been
In summary, the features that position LGSS well include it’s reason to exist – being
the default fund for all Local Government employees; it is the 14th largest fund; it has
the 29th largest membership size and provides a generally high quality of service.
Value proposition
employees of Local Government (both past and present), by providing above average
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[benchmark] sustainable investment returns, competitive products, quality
The scheme does not provide a low fee model and does not compete on this basis.
Table 5.0 highlights the trend of super funds merging, creating larger funds with the
ability to leverage economies of scale and offer cheaper fees. Differentiation will need
to be based on factors other than cost. The following recommendations seek to clearly
articulate its value proposition to members and achieve the growth and retention
Recommendation 1 – Re-branding
a niche player.
The re-branding of LGSS has been identified as a short term objective to extend and
McKinsey, this strategy will fall under Horizon 1 of its Three Horizons model –
There has been clear encouragement from the regulators for funds to merge their
activities on the presumption that this will reduce management costs and flow through
to members (Cooper, 2010). Significant mergers have occurred within the industry
and if this trend continues, the number of funds in this sector will fall, increasing the
LGSS has the option of competing with the average industry fund (focusing on fund
size and reduced fees) or to differentiate itself in the market and be a niche player. It
should be noted that niche does not imply small, but refers to being a unique or
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differentiated offering, targeted to a defined area of the market.
rather than cost. The current LGSS philosophy is to actively invest in assets based on
a sustainable and socially responsible investment policy. This policy specifically takes
The policy was developed as LGSS recognises that the long-term prosperity of the
economy and the well being of members, depends on a healthy environment and
social cohesion in the organisations in which it invests. The Trustee believes that it is
not only important to maximise investment returns, but also to invest in a way that
scheme will provide a better external fit between the values and philosophy of LGSS
and its members. Extra resources will be needed during the transition, however once
LGSS has re-branded, extra resources will not be required. The current operations and
investments of LGSS are presently green, implying the capabilities for this
Growth Matrix, re-branding is a market development strategy. This refers to LGSS re-
working the existing brand in an effort to organically expand it’s target market. The
existing brand can be leveraged to capture new members in the expanded “green”
market. The matrix also indicates that the level of risk is not extreme as it is not
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Figure 6.0 Ansoff Product-Market Growth Matrix analysis
Existing Products
Market Development
Market Penetration Re-branding
Penetration Penetration
Existing Markets New Markets
Considerations
it is not expected that the change in name will result in a loss in new take ups.
through marketing its sustainability message along with the ability to stay with
LGSS after leaving the industry. The scheme is also a public fund, meaning
• Member confusion over the change in name – The intention to change the
(SRI) policy initiatives. In the USA, SRI rose more than 324% from $639 billion in
1995 to $2.71 trillion in 2007 (Social Investment Forum, 2007). From 2005-2007,
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SRI assets increased more than 18% while the broader professionally managed assets
increased less than 3%. This is indication that the demand for SRI is substantial and
super funds and identified only 10 funds that can truly lay claim to being market
LGSS is not a member yet. Australian Ethical Retail Super Fund is the only fund that
Sustainable funds have held the stigma that performance was hindered due to the
of 1.5% during the last 5 years over the more favourable mainstream Australian Share
and Balanced options (see table 6.2). The results infer that long term performance is
issues.
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For periods ending 31 March 2010
Source: SuperRatings
These statistics clearly indicate the attractiveness of the SRI market. Demand for
these products is continuing to grow and the restrictions on the organisations that can
It is recommended that LGSS develop a Green MySuper option – a cheap, simple and
The development of a Green MySuper option has been identified as a medium term
objective as it identifies a future option and builds a platform for emerging trends.
According to McKinsey, this strategy will fall under Horizon 2 of its Three Horizons
System Review’ (Cooper Review). It aims to provide a simple, cost effective product
with a single, diversified portfolio of investments for the vast majority of Australian
LGSS operates a high member service model, not a low fee model. The
recommendation from the Cooper Review. Staging will be important as LGSS could
capitalise on first mover advantages. MySuper will be common amongst other super
The MySuper concept combined with a sustainability overlay is targeted at the worker
who has little interest or expertise in their super but has a concern over environmental
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issues. At this stage, this recommendation from the Cooper Review, it is yet to be
rolled out across the industry – hence the medium-term recommendation for growth.
Growth Matrix, developing the Green MySuper product borders between being a
new product for LGSS and another option to grow organically. It would also be
targeting the existing members who may want to switch to a simpler – low fee option
and it would also be targeting new members, conscious about being Green and
wanting to choose the MySuper features. The matrix also indicates that Green
targets both new and existing markets the risk is somewhat mitigated.
Green MySuper
New Products Product Development Diversification
Existing Products
Market Development
Re-branding
Market Penetration
Existing Markets New Markets
It is recommended that Green MySuper replace one of the existing products that
LGSS currently offers. The default fund for new members is the Balanced option. As
with all options in LGSS, free financial planning and seminars are offered to all
members. If Green MySuper replaces the Balanced fund, these member benefits
should not be made available for this product in order to reduce costs. Green
MySuper is expected to increase new member sign ups and especially retention rates.
Considerations
The following points need to be considered prior to implementing the developing the
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Green MySuper product. These include:
option. This will maintain the number of options for LGSS at 11.
of the intention to replace the Balanced fund with Green MySuper and given
the option to switch to a different full service fund. Statistics indicate that
default fund members do not use the full range of services offered by LGSS
• Resources and capabilities – LGSS has full time staff members who could roll
out the new product quite easily. It is converting an existing product to suit
MySuper regulations and already shares all the synergies with the current
LGSS setup. The administration of Green MySuper would last several months
and settle back down to normal levels. It also aligns with recommendation 1.
already using ESG principals in its investments, a first mover advantage may
product.
• The government may not proceed with the recommendation for a MySuper –
If the government does not implement the recommendation put forward by the
Cooper Review, LGSS would not proceed with developing this option. LGSS
does not work off a low fee model and should not pursue this option. Industry
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sources however indicate this will go through.
Recommendation 3 – Merge
The option of merging has been identified as a longer-term objective to create and
implement viable options. According to McKinsey, this strategy will fall under
Horizon 3 of its Three Horizons model – exploring and discovering options for future
opportunities.
super contributions means that by 2035, Australians are projected to have increased
their collective super savings to $6.1 trillion, an increase of 508% from today’s $1.2
trillion (Cooper, 2010). Overall, the industry will continue to grow, but the Cooper
Review has identified several key issues that need to be addressed. Of these issues,
the “Lack of Scale” and “Fees too high” apply directly to LGSS.
Table 8.0 highlights the super industry as at June 2009 and June 2035. The table
shows the forecast growth rates for the industry and it also compares the largest super
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Table 8.0. Forecast growth of the superannuation industry (including SMSFS)
1996 2009 2035
Overall industry scale $245 billion $1.1 trillion $6.1 trillion
Biggest fund - $41.5 billion $350 billion
LGSS fund size - $5.5 billion $7 billion
Average large fund size $40 million $1.5 billion $53 billion
Number of large funds 4,734 447 74
Source: Super System Review, 2010
comparison to the largest fund ($41.5b), LGSS is dwarfed ($5.5b). The Review
suggest that over the next 25 years, the number of large funds will reduce from the
current 447 down to 74 in a host of mergers between funds. This would leave LGSS
out of the large fund grouping if a merger did not take place.
The notion of merging is to increase the fund size and through economies of scale,
reduce fees to members. Although member fees are reduced, super funds will not be
worse off as fees are asset based. As funds increase in size, the asset base will
with an existing product. This strategy is simply to remain competitive in the market
place as the industry evolves over the next 5-10 years. The matrix also indicates that
merging is relatively low on the risk matrix compared to the other recommendations
provided.
Green MySuper
New Products Product Development Diversification
Merge
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Considerations
fund to remain competitive however if the industry does not trend towards
super funds merging, this growth strategy should be avoided as it does not fit
• Clash of values and culture – LGSS has a strong ESG philosophy that the
members feel strongly for. Any potential merger would need to be with a fund
that is complimentary and shares these values. If LGSS merges with a fund
that has total disregard for these principals and invests in coal, mining or
• Resources and capabilities – LGSS does not have the internal resources or
executive team and make up of divisions. LGSS does not have the capabilities
With these considerations in mind, a merger strategy would only be valid if the
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Conclusion
To achieve the objective of signing up 80% of new employees entering the Local
Government sector and retaining 70% of members leaving the sector, we have made
will re-align and reflect the value proposition of LGSS to its name. The re-
retention rates.
product that is simple and charges low fees. If this is implemented, LGSS
needs to differentiate itself from the host of other funds that offer a MySuper
and also introduce new members outside of the Local Government sector.
consolidating to fewer and larger funds. These funds are able to offer low fees
to members and should this continue LGSS may find it difficult to compete
should be disregarded.
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References
Ansoff, I., Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5,
Sep-Oct 1957, pp.113-124
Roca, E.D., Tularam, G.A., Wong, V.S.H. 2007. Australian Superannuation SRI
Funds: A Study on Systematic Risk using Markov Switching.
http://www.mssanz.org.au/
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