Productivity Commission sets out Four Models for Default Funds in Superannuation

The Productivity Commission (PC) published its draft report relating to allocating default contributions to superannuation funds, a few weeks ago. Their focus was around the issue of competition, and their core finding related to information problems in the market, i.e. buyers are disengaged because they don’t have enough information.

Currently, the Employer selects a default fund, unless this is specified by an Industrial instrument of some kind (an award, agreement, contract, etc.), and this is the receiving fund for SG contributions for employees who exercise no choice (default members).

The PC points out that competition can be promoted either through competition in the market or competition for the market. In the market, competition requires consumers to engage and choose. In the market competition is preferable, but where this is difficult to achieve, an auction or tender approach may be necessary.

The paper defines the “default market”, essentially, as first time contributors, and suggests that on change of employment, the current fund should be used by the new employer, unless the member directs otherwise. This significantly reduces the instances where a default fund needs to be identified, and will over time address the “many funds, many fees” problems that are well documented.

Their focus was around the issue of competition, and their core finding related to information problems in the market

It is worth noting, the PC will be recommending that any fund that wins default status will need to offer the same fees and services to any current default members, not just the new ones after the implementation date.

The PC’s assessment framework consists of five criteria:
• Member benefits
• Competition
• Integrity
• Stability
• System-wide costs

The baseline model that alternatives are considered against is one where there are no defaults, but where employers, unions etc. would be able to bargain with superannuation funds for group discounts.

The alternate models are briefly described below. The first two are in the market competition plays, the second two are for the market plays.

Assisted Employee Choice, wherein consumers would be strongly encouraged to exercise choice with information and nudges. It envisages a non-mandatory shortlist of good products, a voluntary product accreditation process for funds to make them eligible for short listing and a fund of last resort.

Assisted Employer Choice, where two lists would of suitable funds would be available and employers must select a fund from one or the other. The first list would be a “light filter” for large informed employers, requiring funds to meet mandatory minimum standards. The second list would be a “heavy filter” list for smaller less able to choose employers, with stricter criteria around investment performance and other product features.

Multi-Criteria Tender, which contemplates a pre-qualification stage, a tendering stage, a comparative evaluation stage resulting in up to 10 appointed winners, and a performance monitoring and enforcement stage post-appointment. This is analogous to how KiwiSaver appoints work in New Zealand.

Fee-based Auction, wherein a pre-qualification stage is conducted, a bidding metric (composite fee) is constructed, and a first-price sealed-bid auction is conducted to determine the winners. Again, monitoring and enforcement would be a key aspect of the system.

It is proposed that the first three stages in the latter two models be run by a government appointed body, established every 4 years for the purpose and then dissolved.

I think that the eventual public policy conclusion will be that employers should be relieved of selecting a default fund for their staff. “Employer involvement” is an anachronism that springs from the 1970s when employers did the works, including wearing the investment risk for the relatively few employees lucky enough to have super. In a world where the SG is seen by many as analogous to a payroll tax, employers will likely not want to be involved at all. And in a world of clearinghouses, there’s no employer overhead arising from diverse membership, so Assisted Employer choice is, in my view, unlikely.

Governments have, for years, been seeking ways to get people to engage, and what better way than Assisted Employee Choice?

The latter two models require a very complex process to be developed and performed every four years. Given that these kinds or processes are so unfamiliar in this marketplace, there are real risks that even a valid process would be misunderstood by the market and result in poor outcomes. That is something no government of any flavour wants to associated with.

Governments have, for years, been seeking ways to get people to engage, and what better way than Assisted Employee Choice? At base, I think most of us value living in a free society where we can each make our own arrangements, and our economy reflects that. Of the 4 models offered up the first seems the best fit with that.

All four models contemplate that default funds should meet some higher standard than other MySuper products, which I continue to find baffling. I cannot understand where the implied shortfall in the MySuper standards is that requires attention before making a fund a default fund

Balancing the Trust Deficit. Is 2017 the year?

Successive Australian Federal Governments, and indeed many others around the world, have seen economic deficits balloon over the past decade to levels so staggering, that the numbers involved seem impossible. Still, these deficits will be addressed through prudent fiscal policy. The gap is quantifiable, although immense, and proven strategies for dealing with the complex nature of balancing spending with earning can be employed to achieve balance. Or so the theory goes.

The past year saw a different type of deficit balloon across most aspects of the Australian financial services landscape. A deficit in trust.

Cynics would argue that trust is perpetually in deficit where it relates to matters financial. But, even by their standard, 2016 was an exceptionally poor year.

With superannuation, advice, insurance, lending and retail banking all sharing the gong for trust erosion through scandal, the question is whether they can collectively turn it around.

It’s not an easy problem, or suite of problems, to solve. They vary by sector and they vary in scale. But, when viewed in aggregate, it’s easy to see why the Australian public think the financial services sector has a brand problem.

Let’s take a look at superannuation, insurance and advice.

The trust problem for superannuation funds is mostly self-inflicted. For many Australian’s there’s a deep-seated lack of trust in anything long-term. For superannuation, that manifests as a lack of belief that funds will deliver a meaningful return over time.

Just like Bunnings has made every moderately able weekend warrior think they’re a builder, self managed superannuation funds have created an outlet for those with delusions of investment grandeur.

Put plainly, there is a lack of trust that APRA regulated funds of either persuasion will deliver a better return than going DIY.

There is a lack of trust that APRA regulated funds of either persuasion will deliver a better return than going DIY

There is more than enough evidence to refute this, but with local media being obsessed with short term performance, every fluctuation in performance feeds the lack of belief.

Rather than shift the conversation, the industry has focused on promoting annual returns and awards. These only serve to keep the focus short-term and provide the naysayers oxygen.

Some parts of this are easy to address, but shifting our culture away from passionate self-belief is tricky. Just look at Bunnings profits.

More easily addressed is the lack of trust created through industry in-fighting. The constant refrain from both retail and industry funds that the other can’t be trusted, is unhelpful to say the least.

Imagine if Toyota started advertising its cars by saying not to buy a Mazda because the brakes are sketchy. Or Qantas promoted itself by saying that Virgin don’t maintain planes.

Content such as that contained in the recent Joint Parliamentary Committee submission by Bernie Fraser is another example of low-brow self-promotion at the expense of trust in the industry.

Shifting to promote benefits rather than seeking to accentuate perceived weaknesses in others would result in a massive change in public perception. The current conversation echo’s parliament, and let’s face it, no-one trusts any Australian political party at the moment.

It’s fair to say that 2016 was a shocker for the insurance industry. General insurers and life insurers all took huge hits to credibility. Most would agree that CommInsure took the heaviest blow. Getting an explicit mention in APRA’s submission to the Joint Parliamentary Committee on the life insurance industry, certainly stings.

Trust is a fickle friend, it’s hard won and easily lost. Across insurance there are more own goals, missed opportunities and self-inflected wounds at the root of the trust conundrum than actual issues.

An opinion piece by Adele Ferguson, criticising both the approach and findings of the recent Deloitte independent review of CommInsure, highlights the ease with which media can manipulate the trust deficit.

Rather than confront or defend, the industry should be collectively broadcasting the good news stories

Ferguson tugs on an emotional chord with readers, one that shouts ‘you can’t trust these insurance bastards!’ CommInsure is the target of the moment, but this emotional approach is a familiar refrain.

Drawing on emotion is easy, especially when trust is low. Rather than confront or defend, the industry should be collectively broadcasting the good news stories. After all, they far outweigh the genuine errors.

I don’t mean each insurer wheeling out the ‘happy customer’ cliché, I mean a genuine industry-wide communication exercise, from parliament to the classroom, that puts the positive facts on the table.

There’s more than enough positive emotion to drown out those in the media with a vendetta. It’s also important to acknowledge past failings and to make good where appropriate. But that should be part of the discourse, not the only conversation.

Financial Planning
When I think of industries with a branding problem, financial planning is at the top of my list.

Whether you see rogue operators, poor transparency, repeat offenders or the general perception of product flogging as the biggest issue is moot. They all get an airing on a seemingly interminable cycle.

The fabric of the relationship between a financial adviser and a client is almost entirely predicated on trust. The arguments and counter arguments about the integrity of those in this profession that are played out in the media, have eroded that very fabric to tearing point.

Many advisers that I speak to have not managed to bridge the relationship gap beyond financial products

The reality is simple. The vast majority of financial advisers are good, honest people with a genuine desire to help others enjoy the lifestyle of their choosing. So why the lack of trust?

Scandals are only one factor, undoubtedly a crucial one for some clients. But I think the issue runs deeper than that. Many advisers that I speak to have not managed to bridge the relationship gap beyond financial products. All roads still lead to an SoA.

That the industry conversation is only now talking about goals or objectives based advice is double-edged. It’s indisputably the only path forward, but to an informed audience it raises the spectre of ‘what was happening before then?’ That the Best Interests Duty (BID) had to be legislated raises that same doubt.

Increasing doubt results in diminishing trust just as night turns into day.

As with superannuation and insurance, the financial planning industry needs to unite to bring the positive voice to the table.

For each of these sectors, the conversation needs to move from being about the industry to being about its customers.

Australian Superannuation enters a Space Race

One of my favourite scenes in the recent film Hidden Figures features two IBM technicians who, after struggling for weeks to get NASA’s brand new electronic computer to work, walk into the room to find that Dorothy Vaughan, a mathematician leading NASA’s human computing team, has already figured it out: a bright spark working away in the background showed the establishment the way.

This is a powerful theme, and the scene is made even more powerful when you consider the racial and gender stereotypes Ms Vaughan had to fight along the way.

I was reminded of this scene recently, after attending two very different superannuation events, held less than two weeks apart.

The first event was the ASFA Spotlight on Insurance. Held at the Sofitel Wentworth Ballroom, the guest speakers were a who’s who of the life insurance and superannuation industries. There was earnest discussion on the pressing issue of member engagement, and much head-nodding about how funds and insurers need to improve communication.

While the establishment was talking about engaging members through better communication, it seems like Spaceship has been out there actually doing it

The second event I attended, ‘Meet the Spaceship team and like-minded friends’, was quite a contrast.

Spaceship is Australia’s newest superannuation fund. Targeted at young professionals, they’re advertising aggressively on social media, and have been endorsed by several high-profile tech entrepreneurs, including Atlassian co-founder Mike Cannon-Brookes.

The Spaceship event was held at Tyro FinTechHub. Around 200 people shared beer and pizza and listened enthusiastically to CEO Paul Bennett’s talk about long-term investing, transparency of investment holdings, and the fund’s ambitious growth trajectory.

Whilst still only in pre-launch phase and not yet accepting contributions, Spaceship expects to have $100 million in committed funds by the end of this month.

While the establishment was talking about engaging members through better communication, it seems like Spaceship has been out there actually doing it.

Should the establishment be worried? Over drinks after the ASFA event, I asked one highly-respected leader in the super industry why Spaceship – a fund with enormous disruptive potential that currently doesn’t offer insurance to its members – didn’t rate a mention by any of the speakers at the event.

I questioned the actuarial implications of a potential mass exodus of young, healthy professionals from the large industry funds’ insurance arrangements. The response I got was quite dismissive, to the effect of: “I don’t think much will become of it.”

Will this be the superannuation industry’s Hidden Figures moment?

I’m not a rocket scientist, but I know that launching a rocket into space and launching a new business venture have something in common: if you don’t build enough momentum to reach escape velocity, you’ll come crashing down to earth. Accelerate fast enough, and the sky is the limit.

Time will tell whether Spaceship is destined for the stars or not – and there are certainly those in the investment community who have legitimate concerns about their fees and investment strategy – but given their results so far, it would be unwise to dismiss them just yet.

Thoughts on The Fraser Governance Review

Following on from a blog I published a while back on Public Policy in Superannuation, where I suggested the debate around independence of trustees will play out in 2017. I thought I’d provide an update given events are off and running.

Bernie Fraser has finally published his long awaited review of board governance of Not for Profit Super funds (NFPs), entitled The Fraser Governance Review. It’s important to remember that this report was commissioned in December 2015 by Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees (AIST) and is seen by some as a means of swaying enough senators to vote down the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 to require all trustees to have one-third independent directors.

The report is simply written and easy to understand, but it’s not a particularly strong document

The report is simply written and easy to understand, but it’s not a particularly strong document. It falls short in laying out reasons why the Superannuation Legislation Amendment (Trustee Governance) Bill 2015 shouldn’t apply to NFP trustees. Sadly, given the extended gestation, Mr Fraser fails to present any alternatives.

Predictably, he argues that NFPs are not the same as the rest of the market, and that there is no case to require them to adopt the same minimum governance standards as retail funds.

Instead it draws on the well-practiced arguments that retail funds have less incentive to reduce costs than NFPs, that Australian practice should not be influenced by overseas practice, and that the clear long term outperformance of NFPs in investment returns is a direct result of their equal representation model. I’d hoped for something more, or at the very least something new.

It praises APRA, I think rightly too, for it’s success in regulating an industry that has grown at an alarming rate for years, but expresses concern that APRA should be given the power to determine a person’s independence should the bill eventually pass.

In mounting a concluding argument Mr Fraser essentially says; “Given enough time NFP boards will drift towards the structure desired by government naturally, so no compulsion should be adopted in law”.

It praises APRA, I think rightly too, for it’s success in regulating an industry that has grown at an alarming rate for years

At this point it becomes hard to see the document as an independent report, a point made by the Financial Services Council over recent months, which has questioned Mr Fraser’s independence, given he has been a member of the both the AustralianSuper and CBUS boards in the past, and given that he has once was an official spokesman for IFA.

The government, also rather predictably, is having none of it. Minister O’Dwyer responded by charactering the report thus: “its key recommendation is that the status quo must be protected at any cost”, in so doing she has stated it is nothing more than a “delaying tactic to kill off reforms that have been in the pipeline since 2010”.

Given the potential within the industry and the need to build trust with superannuants no matter their choice of provider I’d hoped that we might have seen progress from the factional days of the past. Sadly, it seems I had hoped for too much.

Superannuation Public Policy Update

Outside of what the prudential regulator has been doing in Superannuation, there has been a fair bit of other movement on issues relating to the policy position on Superannuation.

On March 16 last year, the Productivity Commission (PC) opened a consultation process on Superannuation Competitiveness and Efficiency. After seeking submissions and considering them it released its final report on November 25. The report identifies how the Competitiveness and Efficiency of the system will be assessed. The report identifies five system level objectives (set out below), along with 22 assessment criteria, supported by 89 unique indicators.

Objective 1 – The superannuation system contributes to retirement incomes by maximising the long-term net returns on contributions and balances over the member’s lifetime, taking risk into account. This objective has 5 assessment criteria.

Objective 2 – The superannuation system meets member needs in relation to information, products and risk management, over the member’s lifetime. This objective has 3 assessment criteria.

Objective 3 – The efficiency of the superannuation system improves over time. This has 2 assessment criteria.

Objective 4 – The superannuation system provides value-for-money insurance cover without unduly eroding member balances. This has 2 assessment criteria.

Objective 5 – Competition in the superannuation system should drive efficient outcomes for members. The assessment of this objective is in two areas, Market Structure and Conduct and Outcomes, each of which have 5 assessment criteria.

The full report can be found here:

The second important study being conducted by the PC relates to alternate models for allocating default superannuation funds for employees or groups of employees. The current method of listing eligible default in modern awards for some workers and letting the employer choose in other cases is anachronistic and flawed. The PC opened this consultation on 20 September and expects draft and final reports will be issues in March and August of next year.

The other area where I expect to see more attention directed in 2017 is to the area of Trustee Board structure, most especially in the not-for-profit sector. The Financial System Inquiry recommended that all public-offer funds be required to maintain a majority of independent directors and an independent chair in December 2014. In October last year the government issued a response that reiterated its middle ground position of mandating a one-third minimum of independent directors. Late last year a bill was introduced to parliament to give effect to that requirement, but it failed to pass the Senate last December.

Post that failure to pass, the not-for-profit sector has continued to run an energetic campaign to oppose these changes, and launched their own review of governance on industry fund boards, led by Bernie Fraser. He was to have reported by 30 April, but the review was suspended after the calling of the mid-year election, and it seems not to have restarted. Now ISA and the AIST are saying they are anticipating a draft report early this year.

Since the election the government has reaffirmed its commitment to the one-third minimum requirement and announced its intention to reintroduce the Bill. How this plays out will be fascinating.

2016 – An APRA Year in Review

Not the most breath-takingly interesting year in regulation, but after a few really busy ones that’s no bad thing I guess. Here’s what happened…

In early April APRA released their report on the investigation into the TRIO affair, which resulted in 13 individuals being banned from acting as directors for various periods of time. The issues arose around 6 related party transactions totalling $150m, all of which was lost or unrecoverable. The report outlines the causal effects, and notes that since the affair new prudential standards have been issued, the statutory duties of trustees have been reviewed and enhanced, and new guidance has been issued on Fraud Risk Management. Given the time that has passed since the incident, and the public dialogue that has taken place, the report mostly represents official closure of APRA’s work on the investigation.

Later in April, on the eighteenth, APRA and the ATO wrote jointly to Trustees about upgraded responsibilities resulting from changes to the Superstream standard, outlining compliance dates for error-messaging and changes to rollover standards. This was a very technical letter for operations managers and the like and not significant from a prudential or governance perspective.
In June APRA issued proposed changes to the role of the Appointed Actuary (AA) for Insurers, to streamline and sharpen the role of the AA. The main proposals were to:

  • Introduce a purpose statement for the AA,
  • Implement a clear actuarial advice framework,
  • Manage potential conflicts of interest,
  • Improve reporting requirements, and
  • Simplify prudential standards.

This proposal is made to improve the degree of general governance around management of life offices, to clarify the powers and responsibilities of the AA, and make things more transparent to the regulator.

October 12 saw the release of a letter sent by APRA to Life Offices and Superannuation Trustees on their expectations for claims handling improvements. In May 2016 APRA conducted a survey of 25 (mostly larger) funds seeking information on oversight and management of insurance claims. Based on this APRA believe there are 4 areas where improvement is possible:

  • Closer cooperation between Trustee, Life Office and Reinsurer,
  • Clarifying the Fund’s Claim Philosophy,
  • Better information sharing between Trustees and Insurers, and
  • Redesigning insurance benefits so that they are sustainable and meet member needs at appropriate cost.

There has been widespread debate over several years about claims management in particular, and the sustainability of many group life programs in general. It’s probably fair to say no large life office has not had a claims remediation project underway at some point in the last 3 years, so APRA’s interest should not come as a surprise. What is implied by this release is an expectation on the part of the regulator for better information processing and storage technology at life offices, and better system integration with third parties. IN fact, APRA member Geoff Summerhayes told a parliamentary inquiry on the life insurance industry that insurers have not invested enough in “systems and processes capable of fairly and accurately administering their book of legacy business” less than a month ago.

October also saw APRA release a Snapshot of Industry Practice in Risk Management in Banking, Insurance and Super. The key points made were that approaches to understand and manage risk culture are at an early stage of development, and that many institutions are grappling with how best to:

  • Clearly articulate what risk culture they aspire to,
  • Identify specific weaknesses in current risk cultures, and
  • Effectively address those weaknesses.

The multiple failures at some of our larger insurance, advice and banking institutions have demanded that APRA address risk culture. The findings above are hardly surprising. Expect a lot more effort from the regulator on risk culture in 2017 and beyond.
On Oaks Day in November, APRA released Enhanced Governance Requirements for Trustees, in the form of updates to Prudential Standard SPS510 Governance, and Prudential Practice Guide SPG510 Governance.

Changes to SPS510 require trustees to have a governance framework with policies and procedures to support effective governance, and a requirement for these to address nomination, appointment and removal of directors, board renewal, tenure limits and board size. This new standard will be effective 1 July 2017.

Changes to SPG510 clarify APRA’s expectations regarding governance practices, and APRA expects these to be considered by trustees immediately.

For years now there have been many in the industry who have been concerned that sinecure-like positions on superannuation boards, and at the apparent lack of rationalisation of member numbers when funds and boards merge. These changes are directly aimed at these kinds issues and are, in my view, overdue. After all, all approved deposit-taking institutions, life and general insurers have had to have a majority of independent directors and an independent chair for over 10 years now. Why are super funds special?

Finally on 24 November APRA issued Draft Prudential Practice Guide SPG227 Successor Fund Transfers (SFTs) and Wind-ups. This will replace and enhance previous guidance on the subject, the key enhancements being:

  • Guidance on the concept of ”Equivalent Rights” when conducting an SFT,
  • MySuper to MySuper transfers, given the enhanced obligations of MySuper licensees and noting MySuper did not exist at the time of the current guidance’s release, and
  • Considerations for merging Operational Risk Finance Reserves when conducting an SFT.

This guidance is somewhat helpful and provides a lot more definition in the areas above, but whether it will drive mergers of funds is questionable, if that is what it was meant to do. The biggest obstacle to fund mergers is not a lack of understanding of process. It is inertia.
At this stage only MySuper trustees are explicitly required to conduct this annual test, but any trustee that feels it is not meeting the “member outcomes” standard should be asking serious questions, so it can be argued it applies across the board.

In my view, APRA is going to have to get much more prescriptive if it wants serious consideration of the “scale” test to take place, and lead to mergers when trustees are not delivering to the “member outcome” standard. Helen Rowell spoke of this in October 2015 in a speech to the AIST, in which she linked the “scale” test with the requirement that “business and strategic plans are sustainable in the long run”. I’d be surprised if there is no movement on this front in 2017.

Is your fund truly digital ready?

Intense focus on customer centric change over the past few years has meant many funds have formed at least an initial view of what this means to the service proposition for members, and to a lesser extent, employers.

Many hours have been spent on the introduction, or at least planning for, new digital points of engagement. This has triggered far greater realisation of the power accessible through technology.

We’re excited to see increasing numbers of fund executives exploring the quantifiable benefits available from operational efficiency, alongside qualitative benefits in areas such as member retention and attraction. We’re also excited to see funds who have already acted, getting information to members when it counts.

Embracing new technology is indisputably positive but it isn’t a cure-all.

Take the recent events in Europe as an example. Britain’s decision to leave the EU is playing havoc with international markets, but digitally enabled funds are reaching into the pockets of members and engaging them. This is directly improving both qualitative and quantitative outcomes. Operationally, their well timed digital intervention alleviates pressure on the contact centre whilst it also reassures the member that the fund is on top of matters.

Embracing new technology is indisputably positive but it isn’t a cure-all. In many funds there has been a blind-spot on the need to tune the operating model in order to support these new capabilities.

For many funds the dialogue with members is intermediated by their third-party administrator, so internal capability and capacity are often constrained. The move to targeted digital interventions gives rise to the need to reconsider whether a third-party provider is relevant for this channel. The sands are shifting on many points of member engagement and the desire to own or at least control the member relationship is migrating back to the Trustee. So too must the structures and skills to support it.

I’ll write separately on the importance of distinguishing between ownership and control another time, but regardless on the option taken, there is a need for review to ensure the trustee office is well placed to succeed as a customer centric operation.

Being truly digital ready is a major commitment. There is no ‘half-wet’ option.

At a minimum, consideration needs to be given to how digital content will be crafted and reviewed, the business rules governing intervention, response handling, risk assessment, compliance, privacy, marketing potential and data outcomes that becoming customer centric will trigger. Add to this that many funds lack mature CRM technology and it becomes clear that there remains much to do.

As with all aspects of the fund, the new digital elements must be regularly assessed as a part of operational risk reviews and evaluated in line with the funds overall strategy.

Being truly digital ready is a major commitment. There is no ‘half-wet’ option. Once expectations of digital engagement have been created failing to maintain them can have dire consequences.

Default Super in Modern Awards

The final nail is being hammered into default superannuation. The Turnbull Government’s response to the Financial Services Inquiry (FSI) has been to accept the all but a few of the recommendations.

It’s been Coalition policy to decouple super from awards since well before the last election, but they weren’t ever going there quickly. The senate proved problematic with passing law to halt the Fair Work Commission’s (FWC) process. The FWC felt compelled to select defaults for modern awards because of laws passed at the eleventh hour of the Labor Government, despite the obvious anti-competitive and opaque basis of selection.

The process of selecting funds to embed in awards has been flawed from the outset.

The issue became academic when the FWC was found to have improperly constituted the expert panel. The whole process just ground to a halt and little has happened since.

With the government’s position now public, and the Government emboldened by the post-coup surge in popularity, it appears likely that superannuation and industrial awards will be decoupled at last. A long-awaited surge towards common sense.

The process of selecting funds to embed in awards has been flawed from the outset. Arcane and secretive, the default fund model has been an uncompetitive blight in a modern democracy.

It’s ironic that at a time where funds are concerned about member engagement, those favoured by the FWC process are lobbying for the status-quo to blindly bind members to them. The perpetuation of defaults serves only to distance members from the decision.

Why do we need the concept of a default super fund at all? The concept is redundant and should be eliminated from the industry lexicon.

MySuper introduced a regime in which disengaged members were transferred into simple, comparable, no-frills product at fee levels approved by APRA. So surely we can all agree that the disengaged are now protected from the market, or themselves, or the big banks or whatever other evils might be out there?

Why do we need the concept of a default fund at all?

Why not simply legislate that any MySuper product can be used by an employer to discharge their SG obligations and move on? Let people stay in the fund that they are in, exercise choice if they want, and let the coming auto-consolidation sort the rest out.

There will always be a potential issue with the big banks and a handful of other enormous financial institutions going down the path of third line forcing. The way to address that is to make sure anti-competitive behaviour is punished wherever it manifests itself, not build compensating anti-competitive measures into another part of the system.

Mr Morrison, please let’s have the clarity and simplicity we need to sort this out.

Superannuation: It takes two to tango

Superannuation is without doubt one of the most outsource friendly industries in the world. Administration, contact centre, investment management, registry, custody, marketing, insurance, even trusteeship in a mastertrust, the list goes on. Of course not all funds outsource all these components, but many do. Overlay the fact that fund trustees and executives lament the difficulties with engaging members and you begin to see a dichotomy.

Imagine going to dinner with someone but sitting at different tables in the restaurant. You can’t speak directly with the other party, only via the restaurant staff. It’d be tricky to build rapport wouldn’t it?

Across the industry fierce battlelines are being drawn.

The logic for outsourcing makes a lot of sense when viewed through the ‘scale’ argument. Pooling of assets with investment managers allows for lower fees and diversification benefits. Leveraging custodians for investment operations and unit pricing to manage risk, as well as cost, does too. Of course the most common outsourcing partnership is fund administration. Efficient administration requires use of sophisticated and ever more expensive technology – the record keeping, transaction processing and reporting is otherwise massively labour intensive, to the extent that it materially impacts a fund’s competitive position. For all but the largest of funds it has become cost prohibitive to manage internally.

But with all this outsourcing, no matter how well thought through, will the result be the proverbial ‘baby’ being thrown out with the bath water?

Across the industry fierce battlelines are being drawn and with the Turnbull government’s position on the Murray Report now known, the heat is going to intensify. Every superannuation executive believes that their fund is the best for members. Frankly, if they don’t then they’re in the wrong job. The challenge is how to differentiate in what is a compelled, not chosen, relationship for the majority of members. With external parties intermediating the relationship (remember our waiters from earlier) in many cases the fund isn’t even in the conversation with the member. Contact centres are clearly where the next round of the battle will play out.

This isn’t something that will happen in the future – it’s happening now, and it will reshape the future of the outsourced administration business. Under current arrangements most funds have a shared contact centre within their administrator. Teams of people answering calls for three or four funds, in some cases even dozens. Sure, call-scripting and clever IVR routing can help but genuine differentiation is not really possible under this model.

Across the administration providers the option exists for funds to have dedicated contact centre teams, the challenge is cost. Dedicated resources will simply cost more. I’m aware of several funds with outsourced administration arrangements who are now crunching the numbers on bringing the contact centre back in house. Whilst I can see the emotive drivers behind the desire I’m struggling to see the numbers making sense.

Insourcing a contact centre is not as simple as getting some people and a phone system. Just as with administration, the technology to drive a modern contact centre is sophisticated and expensive. Amortising that cost over only a few staff with push the ROI out to a level possibly well beyond the retirement age of the current fund leadership team. Not to mention that you’d also need the administration provider to agree to a two-way data interchange to ensure smooth and efficient operation of the business. The cost equation on a dedicated resource team within the administrator looks to be the stronger option.

Efficiency, strength and longevity of the member relationships are critical success factors for funds.

Rather than insource, fund executives should work with their administration partner around the following key areas:
Staff selection – the contact centre is your front line so make sure you have a strong say in the recruitment of the team. You want the individuals to be invested in your brand. On the flip side – make sure you have the say over who stays and goes. It’s your island so make sure you can vote people off!

Staff development – they might be employed by your administrator but they’re part of your team, so treat them that way. Involve them in training, team days and networking. They should feel like your people, not your administrator’s. With competition for members heating up you need every experience at your front line to be the very best it can be.

Processes / scripting – outsource providers like vanilla, it scales well and costs less but your fund needs its own flavour. If you have a dedicated team make the investment in the member experience by aligning call scripting and processes to your brand personality. The upfront investment in changes at the administrator will still be only a fraction of doing it yourself in house.

Integration – outside of registry and telephony don’t just take the systems that your administrator provides (remember they like vanilla), look to drive rich relationship management software (CRM) within the fund so you can deliver well targeted direct marketing and integrated digital experience management.

With the government looking to adopt the majority of the recommendations from the Murray Review (FSI) it is clear that competition will increase in the default superannuation space. It is also clear that operational efficiency coupled with the strength and longevity of the member relationship are the critical success factors for funds. Efficiency will only get you so far!

Will divesting drive engagement?

Superannuation funds from all segments battle one common enemy, apathy. Australian’s are so disengaged with their superannuation that the majority have little idea where their money is even invested, let alone how many funds they’re invested through. Millions are spent each year on targeted marketing campaigns in pursuit of the ever elusive key to member engagement, and yet the problem persists.

The simple fact is that to the average Australian, superannuation is a tax on their earnings that at some distant life point they will gain access to. Most give little thought to where or how it’s invested until they reach an age where considerations of life beyond the 9-to-5 grind begin to occupy their minds. This behaviour drives product design and in turn product marketing, both of which perpetuate the engagement challenge.
It’s a self-fulfilling prophecy.

Australian’s are so disengaged with their superannuation that the majority have little idea where their money is even invested

Scale is a word applied to superannuation in many contexts. Most commonly, the debate surrounding the merging of funds to grow investment scale, in-turn securing lower fees from investment houses and/or accessing larger investment opportunities in global markets. There are differing opinions on the merits of this type of scale, and they warrant ongoing debate but for now I’m going to leave that to others better informed than me. The scale I’m interested in is the potential of the industry to drive social, commercial or political change.

Of course, this is not new. The UNPRI’s six principles are designed to drive elements of this behaviour, however, it’s limited to signatories. In recent years we have seen funds take divestment steps around product manufacturers of tobacco and coal products. First State Super have taken this several steps further by divesting from companies deriving more than 20% of revenue from coal, oil or gas – exploration, production, sale or distribution are all covered. HESTA and others have recently added another dimension by divesting Transfield, citing the investment risk from social concern around their Australian Government detention centre contracts.

Critics have questioned the investment logic and argued that Trustees are obliged to take all decisions in the best ‘financial’ interest of members. As ever this is a somewhat subjective measure and is influenced by the length of the lens applied. It is reasonable to argue that a business that is attracting sustained negative press has potential for degradation to its investment performance. Equally it’s valid to argue that the press is fickle and with a new social issue the attention will wane and the investment risk may improve. It’s all crystal ball stuff and so Trustee’s need other metrics. Surely one of those metrics should be the voice of the membership.

Funds could, and should, actively engage their membership on social issues.

For me, this is where it starts to get interesting. Take a quick look at the demographic profile of those most likely to express strong, vocal contempt for firms operating outside of what they feel to be acceptable social, environmental and political norms and you’ll see the very group of superannuation members that funds are desperately trying to engage.

So herein lies the opportunity. Rather than waiting for a groundswell of member pressure mobilised by groups like GetUp! And Change.Org to raise concerns, funds could, and should, actively engage their membership on social issues. Understanding the issues their member’s care deeply about provides a basis for Trustees to inform divestment decisions as well as arming the executive with information for future product design.

Information on social conscience also presents the opportunity for funds to engage directly with members on those issues. With superannuation accounting for almost a quarter of financial institution assets, and growing fast. There is an enormous potential power to drive change.