Executive summary

The Local Government Superannuation Scheme (LGSS) has an objective of signing

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:

1. Re-brand Local Government Super to GreenSuper, aligning the value

proposition of LGSS to its name;

2. Develop a Green MySuper product to reduce complexities and choices of

current superannuation schemes; and

3. Merge with another fund to create size and reduce member fees.

These recommendations have been formulated by analysing the overall

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

Superannuation Scheme (LGSS). We have been engaged to provide a growth strategy

for LGSS and create value over the next 5 years.

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

have recommended the following along with a time frame:

 1. Re-brand the LGSS name to reflect the Sustainable Investment (SI)

philosophy of the Scheme (6-12 months);

2. Implement an industry first Green MySuper (12-24 months)

3. Merge with another superannuation scheme (24-60 months)

Superannuation industry current and future trends

Compulsory contributions to employee superannuation came into effect in 1992.

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

future growth and attractiveness of the superannuation.

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

In addition, forecasts indicate that by 2024:

• Total assets will approach $7 trillion;

• Not for profit funds will grow from $398 billion to $1.1 trillion (38.3% share
of market);
• Commercial funds will grow from $350 billion to $1 trillion (37.2% share of
the market); and
• SMSFs will grow from $335 billion to $668 billion (24.5% share of market)

Overview of LGS

To provide a framework for developing a growth strategy for LGSS, the current status

has been summarised below.

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 • LGSS is a not for profit arrangement established in 1997, providing

superannuation services to employees from Local Government bodies in

NSW. It is their default fund under Choice legislation.

• LGSS operates a high member service model, providing free financial

planning services including seminars and private meetings.

• LGSS invests on a sustainable and socially responsible investment philosophy.

LGSS is a signatory to the United Nations Principles of Responsible

Investment and also the Carbon Disclosure Project.

• 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

incumbents. No internal targets have been set in regards to increasing market

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

formerly an employee of the Local Government sector.

A summary of the key membership statistics is as follows:

Table 5.0. Summary of LGSS

Total
Net Assets $5,201,915,000
Members 104,318
Investment options 11
Source: LGSS statistical data 30 June 2010

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Figure 5.0. Total member numbers LGSS

Source: LGSS, 2010

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

marketed, the retention rate is expected to increase to 35% however reaching a

retention rate of 70% will be a longer term prospect.

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

The LGSS positioning strategy is to be “the retirement scheme of choice for

employees of Local Government (both past and present), by providing above average

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[benchmark] sustainable investment returns, competitive products, quality

personalised service and non-commission driven financial advice” (LGSS, 2009).

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

targets stipulated above.

Recommendation 1 – Re-branding

It is recommended that LGSS re-brand to “GreenSuper” for clearer differentiation as

a niche player.

The re-branding of LGSS has been identified as a short term objective to extend and

defend the core business of providing superannuation services. According to

McKinsey, this strategy will fall under Horizon 1 of its Three Horizons model –

increasing profitability and sustainability of existing operations.

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

average fund asset size.

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.

Re-branding LGSS to GreenSuper, a niche fund, will allow it to compete on value

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

into consideration environmental, social and corporate governance (ESG) issues.

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

shows a commitment to our community and the environment.

As evidenced by the latest member survey (Woolcott, 2010), members are

“extremely” satisfied with the sustainable investment philosophy. Re-branding the

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

recommendation already exist.

When analysing this recommendation according to the Ansoff Product-Market

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

venturing into a totally new market.

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Figure 6.0 Ansoff Product-Market Growth Matrix analysis

New Products Product Development Diversification

Existing Products
Market Development
Market Penetration Re-branding
Penetration Penetration
Existing Markets New Markets

Considerations

The following points need to be considered prior to implementing the re-branding

strategy. These include:

• Cost of re-branding – The projected cost of re-branding to GreenSuper is

estimated to be $650,000 (LGSS, 2010). As LGSS is the default industry fund,

it is not expected that the change in name will result in a loss in new take ups.

Retention rates are expected to increase by a minimum of 10% per month,

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

anyone sharing the same values in sustainability are free to join.

• Member confusion over the change in name – The intention to change the

name should be communicated to members as soon as the board approves it.

This should minimise the confusion of existing members.

• Attractiveness of the Green superannuation industry to determine its viability.

Overview of Green Superannuation funds

Australia is one of the world leaders in terms of socially responsible investments

(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

attractive for Australian Superannuation funds to develop.

The SuperRatings’ Fund Sustainability Review studied over 70 major Australian

super funds and identified only 10 funds that can truly lay claim to being market

leaders in addressing environmental commitments within their funds. Of this 10,

LGSS is not a member yet. Australian Ethical Retail Super Fund is the only fund that

has a name that indicates its ethical/sustainable ethos.

Sustainable funds have held the stigma that performance was hindered due to the

restrictions on investments. An analysis against 2 indicis indicates an out-performance

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

not hindered by giving due consideration to environmental, social or governance

issues.

Figure 6.2 MACS Framework of Green super funds

When applied to the MACS frame-work,

LGSS is a natural owner of a Green super

fund as the current practice already

supports this investment style. It is also

perceived as having greater potential to

Value
value-creation compared to regular super.

Table 6.2. Sustainable fund option performance over last 5 years

Option Type 1 mth Qtly FYTD 1 Yr 3 Yr 5 Yr
SR Sustainable AUS Shares 5.53% 1.37% 27.35% 38.89% -1.69% 9.54%
SR50 AUS Shares Index 5.22% 1.22% 25.46% 38.92% -1.04% 7.99%

Option Type 1 mth Qtly FYTD 1 Yr 3 Yr 5 Yr

SR Sustainable Balanced Median 2.91% 1.31% 13.89% 19.52% -1.37% 4.89%
SR50 Balanced Index 2.90% 1.62% 13.95% 18.40% -1.47% 4.87%

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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

be invested in do not impede performance.

Recommendation 2 – Green MySuper

It is recommended that LGSS develop a Green MySuper option – a cheap, simple and

sustainable superannuation product to differentiate itself from other funds.

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

model – resourcing initiatives to build new businesses and models.

MySuper is an initiative from the Commonwealth Government commissioned ‘Super

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

workers who are in the default option in their current fund.

LGSS operates a high member service model, not a low fee model. The

recommendation of a low fee product, Green MySuper, contradicts this model

however has been made in anticipation of the Government implementing this

recommendation from the Cooper Review. Staging will be important as LGSS could

capitalise on first mover advantages. MySuper will be common amongst other super

funds, however Green MySuper would be disruptive.

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.

When analysing this recommendation according to the Ansoff Product-Market

Growth Matrix, developing the Green MySuper product borders between being a

product development strategy and diversification strategy. Green MySuper would be 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

MySuper climbs up the scale of risk as it is introducing a new product. However, as it

targets both new and existing markets the risk is somewhat mitigated.

Figure 7.0 Ansoff Product-Market Growth Matrix analysis

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:

• Cost of launching a new product – To reduce the cost of launching a new

product, it is recommended that Green MySuper replace the existing Balanced

option. This will maintain the number of options for LGSS at 11.

• Anger/confusion over switching existing members from a full service

Balanced fund to a no-fills Green MySuper fund – Members should be alerted

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

anyway (Lambert 2010, pers. comm.).

• 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.

• Competitors response – The barriers to entry will be low however, as LGSS is

already using ESG principals in its investments, a first mover advantage may

be available. Only the 10 funds recognised by SuperRatings as a leader in

environmental investments could be a direct threat if they release a similar

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

It is recommended that LGSS Merge with another superannuation scheme to increase

its size and reduce management costs.

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.

The future of superannuation is strong and permanent. The compulsory nature of

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

fund against LGSS.

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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

As the table indicates, LGSS is considered a large fund (>$1.5b), however in

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

increase accordingly and therefore profitability will not be impacted.

When analysing this recommendation according to the Ansoff Product-Market

Growth Matrix, merging is a market penetration strategy. It targets existing markets

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.

Figure 8.0 Ansoff Product-Market Growth Matrix analysis

Green MySuper
New Products Product Development Diversification

Merge

Existing Products Market Penetration Market Development

Re-branding

Existing Markets New Markets

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Considerations

The following points need to be considered prior to merging. These include:

• The merging strategy is contradictory to the niche player model recommended

above – A merger strategy has been developed in anticipation of the trending

superannuation industry. It may be inevitable that LGSS merge with another

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

with the value proposition.

• 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

deforestation, members would flee from the fund noticeably.

• Resources and capabilities – LGSS does not have the internal resources or

capabilities to handle a merger. External consultants would be needed to carry

out the due diligence and implementation.

• Organisational structure – Should a merger take place, the whole

organisational architecture will need to be reviewed. This would include the

executive team and make up of divisions. LGSS does not have the capabilities

in this field and external resources will need to be employed.

With these considerations in mind, a merger strategy would only be valid if the

superannuation industry moves towards consolidation. Merging should only be

considered an ALTERNATIVE growth strategy.

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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

the following 3 recommendations:

1. Re-brand Local Government Super to GreenSuper – a niche super fund. This

will re-align and reflect the value proposition of LGSS to its name. The re-

branding is considered a short-term strategy and will assist in recruitment and

retention rates.

2. Develop a Green MySuper product option. A Government review of the

current superannuation system has recommended that funds create a no-frills

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

product. To do this, we recommend a Green overlay by applied which aligns

itself with recommendation 1. The new option is expected to assist in retention

and also introduce new members outside of the Local Government sector.

3. Merge with another fund to create size. The superannuation industry is

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

with a niche strategy. As a merger strategy is contradictory to the niche market

that LGSS is targeting, this recommendation should be considered as an

ALTERNATIVE. Should the industry not consolidate, this recommendation

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/

Social Investment Forum, (2005) Report on Socially Responsible Investing Trends in

the United States. http://www.socialinvest.org/

Tower Watson, 2010. Local Government Superannuation Scheme, Issues to consider

in a Strategic Review of the Scheme

UN PRI 2009, Annual Report of the PRI Initiative 2009.

Woolcott, 2010. Member Satisfaction survey

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