Government’s strategic review into the future of RBF
It is with interest that the members of RBF await Stage 2 of the State Government’s soon to be released Strategic Review into the future of the state superannuation fund, the RBF.
Stage 1 of the report outlined significant justifications for the review including seeking to protect the interests of members, minimising financial risks to the government and ensuring sustainability of RBF into the future. Any credible business analysis would consider these criteria to be sufficient justification for undertaking such an important critical analysis.
As an existing member of RBF (and at one time, an employee), I am interested in the outcome of the continuing public discourse surrounding the fund’s future. This interest is no doubt enhanced by my status as a self-confessed lover of all things Tasmanian and as someone who enjoys seeing anything and anyone Tasmanian, mix it with the world’s best.
Upon reading the report, there appears nothing surprising nor particularly unexpected from a member’s standpoint.
However, one is drawn to a poignant discovery within the report that is interesting in a context of considering the appropriateness of public sector bodies actively competing in marketplaces where there are established, commercially savvy industry heavyweights that dominate market share and drive increasing commoditisation of product offerings
The report states in section 1.23:
“…Where the Government is considering remaining in the accumulation sector and attempting to grow, a clear competitive advantage would need to be demonstrated and evidence of a significant benefit to both members and the Government be evident.”
This is completely understandable and is based in common business strategy logic whereby market participants should aim to build market share by leveraging a unique competitive advantage that is not easily available to rivals.
One can assume, based on RBF’s very existence that it has benefited from such a competitive advantage, over many years. How else could it build market share in what is an extremely active and competitive marketplace?
In light of this, and in consideration of section 1.23 of the PWC report, there are arguably two distinct competitive advantages (based on publicly known information) that RBF currently enjoys.That is, assuming a practical, working definition of competitive advantage as something that is rare, difficult to replicate and is unique to the firm.
Firstly, as the default fund for new employees joining the public sector, RBF would appear to have benefited from a privileged position unavailable to any other fund in Tasmania. Arguably, this advantage may be diminished in value as a result of employees who leave the state public service being unable to contribute private employer monies into the fund as suggested by section 1.13:
“Without a change in the Act, the RBF’s membership base will continue to decline and the average age of the membership will increase. Members will continue to leave the RBF, either to consolidate their existing superannuation interests as a result of terminating employment within the Tasmanian public sector or to seek alternative, more competitive and enhanced product offerings, and its funds under management will be unable to grow to an appropriate level to achieve and maintain scale.”
Secondly, the RBF enjoys access to existing and potential members via State Government Agencies, State-Owned Companies and Government Business Enterprises. This would certainly place it in a favourable competitive position that is rare, difficult for competitors to replicate and is unique to RBF.
It is a commercial-in-confidence business matter for RBF’s Board and Executive Team to determine how best to leverage these competitive advantages and establish sufficient barriers to entry to protect against competitor rivalry. However, it would be in the best interests of members that a competitive and commercially advantageous strategy be employed.
It is in this context that the report’s most interesting finding is uncovered. Section 1.15 indicates that:
“…it is not clear what competitive advantage RBF may have, particularly given its relatively small scale in the broader superannuation industry.”
If the holy grail is to gain competitive advantage, then it is a natural expectation that a business will discover profitable ways to differentiate its product and service offerings from competitors, then leverage that advantage in order to create a unique and valuable market niche. The opposite strategy (aka irrelevancy) is to pursue a strategy that puts the organisation head-to-head with competitors who are much bigger, stronger and are admirable in their propensity to out-compete smaller rivals.
In the case of superannuation, there are a number of very large industry players that are many times larger than RBF and it would be a brave call for any smaller fund to tackle head on. These organisations are typically large industry funds or retail funds backed by major banks and which have huge capital resources to invest in product research and development (Section 1.15 of the report refers to RBF’s relatively small scale in the broader superannuation industry).
One cannot envisage that a viable competitive strategy for a small fund would be to poke a tongue to the ‘big boys’ and pursue a product development or innovation strategy.
To see just how competitive the market is one has to look no further than the game changing BT Super for Life product (BT Financial Group is the wealth management arm of Westpac with more than $107 billion in total investments, platforms used as an investment hub by over 10,000 advisers around Australia and corporate superannuation plans for over 23,000 employers across Australia, with around 550,000 plan-members, source: BT website, here).
With this in mind, it is interesting to note that section 1.15 also indicates that:
“…the RBF has sought to improve its competitive advantage through a project based program of change directed at product and service enhancement and seeking strong investment returns.”
This would appear to be a contradiction of the aforementioned generally-accepted principles of business strategy, that is, to compete on terms that are rare, unique and difficult to replicate, or at the very least are beneficial to the firm. Product and service enhancement and investment returns would undoubtedly be the domain of the large players.
One could argue that good business strategy should stand up in the face of new external threats or that the organisation should be able to respond to changed circumstances with a new, well thought-through strategy. However, section 1.15 also highlights that:
“Regardless of the funding constraints detailed above, we also understand from our discussions with the RBF’s executive management that it has been constrained in its capacity to develop a clearly articulated growth strategy given the uncertainty surrounding the Review process.”
It is insufficient and counterproductive to lay blame in scenarios such as that faced by RBF at this time. It may simply be too big an enticement for the government to transfer risk in an industry where there is no clear role for government participation. Further, in support of the RBF decision-makers, the report does indicate at Section 1.32 that:
“…Even with a clear value proposition in place, organic growth would be unlikely to provide the scale of growth required.”
It is to be lauded, that as a consequence of its efforts to gain regulation through APRA, RBF has been able to attain positive ratings from various superannuation industry sources such as Chant West and Super Ratings. These achievements bring RBF up to recognised industry standards and in no way provide any unique competitive advantage. As the report claims in Section 3.24:
“…these achievements do not address the strategic challenges being faced by the organisation.”
It would appear that the government review headlights have momentarily blinded the RBF decision-makers, who have been found wanting for a compelling, competitive reason to stand up and fight for the future of the fund in its current form, albeit with much needed amendments.
It may well be the State Government’s preference to tender the default fund status for the Tasmanian Government and transfer the pure Accumulation members to a new default fund, as outlined by The Department of Treasury and Financeis fulfilled, here. This may not necessarily be a bad outcome for members of the Accumulation Scheme, it does however, raise the question of the effectiveness of a competitive organisation that cannot adequately describe its own key competitive advantages.
Further, the decision by the government is made more complex given that section 3.71 highlights that:
“The Defined Benefit Schemes expenses are met by the Tasmanian Government, whilst the Accumulation Scheme expenses are met by the members”
and that:
“…from the financial year ended 30 June 2013, the total administration costs of the RBF are intended to be split 44.5% towards the Accumulation Scheme and 55.5% towards the Defined Benefit Schemes.”
Given that the Defined Benefits Scheme has been closed to new members since May 1999, it can be assumed that any costs incurred toward future development and growth of RBF would not be borne by the government and would instead be allocated to the Accumulation Scheme. This would include any of the costs for project-based program of change directed at product and service enhancement and seeking strong investment returns, outlined in section 1.15.
It is noted in the report that:
“We have discussed the activity-based costing model at a high level and have held meetings with the RBF to further understand the process behind the development of this model and we note that there are some potential limitations within the model, for example all staff costs are currently allocated based on the findings from the interviews held with the operations department but the activities of the operations department may not be indicative of the activities of the whole workforce of the RBF.” (Section 3.74).
There may yet be more work here for the bean counters.
Any business, private or publically-funded, has an incumbency to ensure that its strategy is sound and best positions it for the fight of business survival. This is a challenge all private businesses face as the invisible hand of the market wields its influence. Just because a business is afforded benefits by virtue of its affiliation with the public sector in no way diminishes the need for its decision-makers to craft strategy in the best interests of shareholders or members, as the case may be.
Whatever the future holds for RBF, one would hope that the final outcome of the review process remains unencumbered of party-based politicisation and is merited as an independent analysis of the best outcome for members.
We wait with bated breath the final outcome of the review process.
The publicly available findings into Stage 1 of the review are freely available on the Department of Treasury and Finance website herehere.
Ron Franks is a Hobart-based business consultant
