Coping with regulatory change

While the superannuation administration industry has been the subject of consolidated, Damon Taylor writes that the pace of regulatory change means the challenges continue.

As an industry that has dealt with regulatory change constantly in recent years, fund executives and superannuation service providers could be forgiven for wishing for simpler times.  

Yet as dominant as that change has become with regard to both resources and focus, Andrew Godfrey, Financial Services Business Leader, Pacific for Mercer, believes it is something super funds, and administrators in particular, have become used to.

"Look I've been in this industry for coming on 25 years now and regulatory change is the one thing that's been constant over that journey," he said. "And like it or not, I think the expectation is that the next few years will bring more of the same."  

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"So as an administrator, we need to manage and implement this change on behalf of our clients but more importantly, we have to be able to innovate at the same time," Godfrey continued.

"From our clients' perspective, we need to innovate, we need to onboard new clients, we need to manage changes for our clients as they're wanting to acquire members, retain members, grow members and to continue to be competitive." 

"So my position would be that you need to be flexible with your focus, to manage regulatory change smoothly for clients but also to continually improve your existing service offering - and you need to do that not just now but going forward into the future."

According to Suzanne Holden, Chief Executive Officer of Australian Administration Services (AAS), there will probably never be a time when the Australian Government doesn't feel the need to dabble in superannuation.

"But with almost $2 trillion in assets and counting, that's probably understandable," she said. "However in saying that, I think it's important that the industry doesn't become driven by regulatory reforms to the exclusion of all else."

"I do wonder, for instance, whether the changes required by SuperStream have dominated peoples' minds too much," added Holden. "And I say that because as an organisation, we were very focused on operational efficiency and innovation and the delivery of exceptional products and services long before SuperStream came into effect."

"But insomuch as the intent of the reforms is honourable, we're very supportive. Our only criticism would be that their implementation has been very complex and very costly and I think that's hindered funds from focusing on their own strategies of innovation as well."

Alternatively, Peter Brook, Managing Director and Chief Executive Officer of Pillar Administration, said that the regulatory reform had forced organisations to address their legacy issues and improve the flow of both data and money between employers, super funds and service providers.

"And quite frankly, I think that's been very very necessary," he said. "The old days of having someone actually have to fight to get their money out of one super fund and into another or seeing funds hang on to money so that their stats look good should be well and truly over."

"So doing away with all of that and getting a better regime in place has been fantastic," Brook continued. "But while this regulatory change has certainly been significant, the need to consider our clients' requirements in parallel hasn't decreased."

"It doesn't change the marketing or member initiatives that our clients have, or even the need to rationalise, remove costs and increase efficiency, so we've had to run all of those sorts of programs in parallel."

Yet in the wake of so much regulatory reform, the opportunity for administrators, according to Godfrey, has been using the reform program as a catalyst for change beyond regulation.

Our clients need to continue to evolve, to continue to innovate and they need for us, as their administrator, to be aligned with their needs for them to be successful – Andrew Godfrey

"So in the midst of Stronger Super, SuperStream and all of the activities that occurred through that, we've constantly looked to utilise regulatory reform as an opportunity that we can leverage," he said.

"Its been a very important means by which we've ensured that we're constantly innovating, whether that be through the implementation of a direct investments capability for our product, the Mercer Super Trust, or for our clients' implementation of lifecycle investment options, Mercer SmartPath."

"Our clients need to continue to evolve, to continue to innovate and they need for us, as their administrator, to be aligned with their needs for them to be successful," continued Godfrey. "So it hasn't been possible to focus on this regulatory change and leave innovation or drives for efficiency by the wayside."

"This industry is about continuous change and how you implement that change across your client base, still taking into consideration the individual needs of each client that we provide those services to."

Of course while regulatory change has been front and centre in recent years, that same period has also seen quite significant changes to the structure and composition of the superannuation industry itself.  

Super funds and administrators alike have become bigger on the back of consolidation and the need for scale however for Holden, such a trend was linked firmly to the need to remove excess cost.

"So the Grattan Institute's recent report was very interesting in this regard," she said. "Because they were saying that an individual's member account had an average administration fee of $570 and you'd have to wonder what kind of funds are bringing that average up so high."

"But what that kind of result does reinforce is the need for scale," Holden pointed out. "You need it as a fund but you also need it as an administrator because the overheads of running this business and the investment in technology that's required are significant."

"And the bottom line is that you can't compete if you're either a small fund or a small administrator."

Offering a slightly different perspective on the scale argument, Brook said that having such large institutions almost exclusively responsible for peoples' retirement savings could itself be a risk.

"Whether its super-sized super funds or simply large institutions, the trouble is that if any of them experience operational issues, these are economy-affecting businesses," he said. "So while I do think there will be further consolidation in the superannuation space, I'm not a subscriber to the view that we should or will end up with a small clutch of very large super funds."

"There has to be a balance, a framework in which individual super funds can continue the Government's imperative to make sure that members' best interests are considered," Brook continued. "And it has to put pressure on those funds to consider the cost of delivering those services."

"But if parties like Pillar can assist them in  doing that, then I see no reason to merge just for the sake of merging."

Reiterating Holden's view that further consolidation was inevitable, Godfrey pointed out that from an administration perspective, there probably wasn't much more consolidation that could actually occur.

"In a sense, when you look at the administration marketplace right now and consider Link/AAS' recent transaction with Superpartners, we're probably already there," he said. "But the other aspect to consider is the fact that the industry has historically underinvested in administration and I think for service providers in this space to continue to be profitable, that investment needs to continue."

"And that's across all the spectrum of people, process and technology because the funds that we provide these services to are wanting to continue to be competitive," Godfrey added. "So we need to continue to innovate and, at the same time, continue to reduce our cost to serve."

"We need to continuously enhance the services that are provided and its only by being a scaled provider that you're able to leverage that investment and leverage that innovation across your entire client base."

Yet the one other consolidation-related change set to impact administrators just as greatly is increasing activity in rollovers and the auto-consolidation of member accounts.

Naturally, the consensus is that such moves are entirely positive and yet for Holden, they also bring into question the longevity of many administrators' existing remuneration models.

"So there was a quote the other day in the Financial Review that said that the number of accounts in the system is still around 30 million when it should actually be closer to 15 million," she said. "But if we really do see that type of reduction in the industry, its a concern because most of the costs associated with administration are fixed costs."

"So yes, you can take the low balance accounts out and you can take the inactive accounts out but those inactive accounts aren't actually driving any cost in the business," Holden continued. "Ultimately, an increase in the fees associated with administering accounts is inevitable and therefore we have to look at how we charge members for administration."

"And the question is what you're driven by - are you driven by the number of accounts, the number of transactions per member or by something else entirely?"

Interestingly, Brook said that before remuneration models could properly be contemplated, common ground needed to be found on what administration fees were comprised of.

"So the first thing I'd like to clarify, and it comes on the back of a lot of the debate and commentary  on superannuation-related costs, is this all too common statement that administration fees are high," he said. "Because for me, 'administration fee' is a rather amorphous term."

"Administration fees, when they're talked about like that, cover a lot of areas," Brook explained. "Yes, they cover the work that Pillar does for example, but it also covers the cost of the trustees office and the marketing costs and all manner of other things that are a quite substantial burden on funds."

"The point though is that we need to be clear about what the actual administration expense is in a fund versus what is colloquially talked about as administration costs."

But irrespective of administration fees versus administration costs, Brooks said that Pillar had for some time made a quite deliberate decision to be flexible when it came to remuneration models.

"And that's really because we recognised that different funds had different issues and different preferences," he said. "So we have clients who have closed funds, who don't have a lot of activity, but we also have funds who are growing and have a membership that is very active and who, as a consequence, constantly look to maximise their asset allocation based on the economic efficiencies of the day."

"So with so many different scenarios in play, we simply don't feel a single remuneration model is necessarily the best approach," Brook continued. "And we're flexible enough that we're able to structure our remuneration based on what works for the super fund - whether that be a fee per member per week, activity-based fees or even fees based on assets under management."

"So I can't say that we do one thing only; we actually take a number of approaches to fees and we're certainly open to new arrangements. to negotiations and even to sculpting fees over the period of the contract so that the fund itself can develop and grow according to the profile of its membership."

Illustrating the challenge further, Godfrey said that for many administrators, account consolidation was yet another driver for increased operational efficiency.  

"Clearly, the challenge is that as the number of members you have reduces, if your remuneration model is based on per member, per annum fees, your revenue can decline without a corresponding reduction in cost base," he said. "And so at Mercer, that's why we're working so hard from a transformation perspective around reducing our cost to serve and utilising more customer-centric technology that is going to enable us to operate in that existing environment."

But we're continuing to see more of our contributions processing coming through automated channels and making sure that works as all of the clearing houses and gateways come online successfully – Suzanne Holden

"We like to think about it as being more than just an administrator," Godfrey continued. "The challenge isn't just finding the most appropriate remuneration models, its about how we partner with our clients to help them acquire, grow and retain their members, whether that be through the capability that Mercer can bring in the areas of investments or providing actuarial support and advice or providing data and data analytics."

"Its about being more than just an administrator - its about being a partner for our client funds and helping them to succeed."

Of course while regulatory reform, account consolidation and remuneration models are not insignificant issues to contend with, the one thing that has become abundantly clear in recent years is how adept at multitasking administrators have become.  

Indeed for Holden, irrespective of such change, the need to look at new products and new services for existing clients was a constant.

"We're obviously going through the integration of the Superpartners business as well and migrating those funds onto our 'aaspire' platform," she said. "But we're continuing to see more of our contributions processing coming through automated channels and making sure that works as all of the clearing houses and gateways come online successfully."

"So for us, moving forward is about improving operational efficiency and processing but continuing to roll out new products and services as well."
Godfrey said that for Mercer, the key was ensuring their ongoing transformation program continued to span across people, process and technology in equal measure.

"We've invested more than $25 million over the next 5 years which is really about implementing more customer-centric process design and technology," he said. "For example, through the implementation of Salesforce, putting in place new administration operating models and enhancing the investments we've been making in the area of workforce management."

"We're also implementing new digital user experiences to enhance the way that members interact with their fund and with our funds," Godfrey continued. "And we're really looking to - through this investment - to enhance member and client satisfaction, reduce our cost to serve, and ensure that we're aligned with the needs of both our clients and our members."

"So even in the midst of regulatory reform, the key for us is making sure that there's continuing investment in the services that we provide our clients and members to meet their needs but also to ensure that we're successful going forward in the future."