Virgin Super may be emerging as one of the success stories of the new choice of superannuation funds regime but actuarial analysis has revealed that while its fee structure will generate strong returns for its owners, its underlying simplicity will limit member investment choice.
The analysis suggests that Virgin Super is best-suited to younger people with relatively low account balances who accept the assertions made by Virgin about the relative performance of indexed managers and active managers.
Furthermore, it suggests that as a members’ account balance grows and particularly if the person has access to an employer sponsored plan, Virgin become less attractive than the market.
Super Review asked leading actuary, Jeff Humphreys of actuarial firm, CHR Consulting to examine the Virgin Super offering and compare it with other public offer funds based on the Virgin Super PDS and the bottom line finding is that people considering transferring to the heavily-marketed new retail fund should do their homework.
The CHR analysis identified a range of short-comings including lack of investment options, some ambiguity with respect to fees and a lack of competitiveness with respect to its insurance offerings.
Of particular concern was Virgin’s claim that there are no switching fees when, in fact, it applies a “buy/sell” fee to any switch – something which the analysis suggests “makes it expensive to switch within Virgin and also expensive to leave in the short term”.
Looking at investment services, the CHR Consulting analysis said that Virgin had “delivered a product that is dominated by simplicity. However, this has limited members’ choice dramatically.
“The Virgin investment option range is very limited compared with alternative products, offering only four sector options or the Life Stage Tracker option,” it said. “All investment options are based on tracking a market index. Virgin does not access, nor offer as an option, any manager expertise in stock selection.”
The analysis said that Virgin argued the low-cost advantages of an index approach and, in particular, that stock selection does not work.
Further it said that Virgin’s only diversified option was its Life Stage Tracker which automatically shifted a member’s assets to a less aggressive mix at ages 40, 50 and 60.
“This is used by some other funds but is not appropriate for many members and there is no other diversified option if it is inappropriate,” the analysis said.
It said that asset allocation appeared not to be fixed so there might be some sector allocation decision being made within each stage, although it was not clear who made the investment asset allocations from time to time although the Trustee was ultimately responsible.
“Members who do not want the Life Stage Tracker option must decide their own investment strategy from the four sector options,” it said. “For most people this is not appropriate as they do not have the skills to consider this and should be receiving some level of investment advice before proceeding down this route.”
The CHR analysis said that investment advice, apart from a small general section in the PDS, was not provided by Virgin and was not suggested as required.
It said that one design feature that was particularly poor was that there was “no safe haven” – with the defensive option offered by Virgin being a mix of fixed interest and cash.
“Of course, fixed interest can fall and this option could produce negative returns in the future,” CHR said. The Virgin PDS confirms this.
Looking at fees, the analysis said that simplicity was the dominant characteristic of the fee basis and that there was a flat fee of one per cent of assets (covering investment and administration) and a buy sell spread of between 0.07 per cent and 0.5 per cent depending on the option involved.
However, it noted that there was no disclosure by Virgin of the treatment for the member of the tax deduction the Fund receives in respect of contributions tax for fees and premiums.
The CHR analysis said that index products cost very little to run as no investment professionals were required to make decisions about stock selection or asset allocation with the result that the Virgin options were “basically selling access to technology that tracks indices and shifts strategy based on age.
“Given this, are the fees competitive?” the analysis asks.
It concludes that when compared to other funds the fees can appear competitive but, when adviser commission is stripped out and allowance is made for Virgin only offering indexed options, the fees could be considered high.
What is more, the analysis points out that Virgin does not appear to discount fees for corporate clients and therefore represents an expensive option for a corporate, albeit it that it represents good value for personal investors with low account balances.
Looking at insurance the rates are generally expensive because the owners take a commission of up to 15 per cent and profit share both of which have to be loaded into the insurance rates by the insurer. Competitors do not generally extract this level of fees for the owner.
