While the Australian superannuation administration sector may be contracting at one level, it may be poised to expand at another level as funds take more elements in-house. This is part four of a roundtable.
Mike Taylor, editor, Super Review: On another matter and because we have an administrator at the table and he can absent himself if he wishes; I don’t think there’s any secret Pillar Administration is on the market and Superpartners acquired by AAS. It seems to me, objectively, that the admin market is becoming very, very small and I suspect AAS is being fairly market dominant. Is it sound to have an administration sector, which is high volume and low margin, with so few players? Does it need to be opened up?
Alex Hutchison, CEO, EIS Super: I’m not sure what the answer is now there’s an effects test. So you know the legislation in relation to putting in effects tests, so I’m not sure what the market, how the market’s going to be measured with respect to competition between adiministrators.
MT: What’s the test you refer to?
AH: The effects test in relation to lessening competition.
Peter Brook, CEO, Pillar Administration: Well having said that they want to water it down. Of course this is not going to prevent you from making normal business decisions, so-
AH: Well I don’t know I think that’s one thing. Like anybody, I believe the more competition the better. I think it’s a business which would advise a lot of capital, and a lot of actual expertise. But competition is always good.
Tom Garca, CEO, AIST: It’s an absolute scale game, yet it’s one that is a key plank of how funds engage their members through their admin systems. I mean there are others, there’s a number of other providers out there, they’re just not of the same size. I think it will be a function of what will funds want to do, and how will they want to deliver to their members in the future, and will they want to take control of which bits. Whether funds look to unbundle in the future, – a piece here and a piece there – whether they look to bring it internally, I don’t know. There’s massive cost to bringing it inside. But you know the funds will evolve.
I don’t know what it would be like if there was only one administrator. I don’t think there ever will be only one. And there are different types of coding and this sort of open source stuff that’s easy to plug things in and out. People will come in. I always wondered why a Vanguard or a Fidelity hasn’t come over, because they’re basically gigantic record keepers that have got funds management and those sort of things, but it’s the complication of our system. They don’t want to code that. It’s too hard. So if we simplified the system potentially, maybe more people would want to enter.
Paul Kessell, CEO, Kinetic Super: Yes more competition is better, we hope is better, because of quality of competition. The administrator is the largest external relationship you have as a fund, and it’s imperative that you have a high quality administrator, it’s a connection with your members, they have got the golden record of all members current and past, we’re also with Link.
If there was more competition would it bring fees down in a low margin environment, can the administrators do more for less given that funds are demanding more and more all the time. How do you make it competitive? And it’s a very hard thing to change from one administrator to another. It happens, and it’s happening, obviously at Link, for Superpartners, but it’s a long, long process. I guess it’s something that we would have to deal with.
To Tom’s point, we haven’t seen anyone coming from overseas to try to shake up the market and loss lead as custodians have done to build their business. So prima facie that would indicate that it’s too tough to actually create more competition. So at the moment Link is the player in that market, and with the effects test has the effect of actually creating more competition, or not, we don’t know.
MT: Peter you’re the administrator?
PB: So declared conflict of interest. But you know Link’s been touted as a...and they tout themselves as a potential purchaser of us. If you consider the contestable market, the third party administration, were they to buy us they would be getting up close to 90 per cent of the third party market. I just put that out there as a fact, you can go do your analysis, you will come up pretty close.
We’ve had a number of discussions with APRA [Australian Prudential Regulation Authority], mainly...and you know we’re not regulated by APRA, the guy that does my tax return is more regulated than we are, so I actually think that given we’re managing close to $106 billion worth of assets under management, you’d think we might be regulated. But we are not. And we’ve had a number of meetings with APRA, more to understand what our clients go through and what are the pictures on them. And very interestingly at one of the meetings we had, they said you know we don’t regulate you, but we talk about you all the time. And they didn’t mean Pillar, they meant third party administrators. They are very concerned.
And the conversation was not about Link buying us, it was about they’re very interested in the space. I think about two years ago, I can’t remember the guy’s name, but there was a University of New South Wales professor of something, did a paper on systems risk in custodians. He went through and looked at all the custodians and thought there was a real systems risk. There are a lot more custodians than there are third party administrators. And in the Link space, if you’re on the Link, you know they have their own bespoke system, they built it themselves. The trouble with that of course is that if it fails, who knows anything about it. And there are no other players in the market with that system. So I can understand why APRA might be concerned.
PK: I think though one of the comments that you made is that it just costs so much to move the administrators, and that’s right. But I think what you are going to find, I’m pretty certain what you are going to find is that friction cost is going to go. It’s been legislated out and we found the way to do it with members’ accounts, you know, so instead of taking four weeks or six weeks and all of that effort, three days. And people have built that in. I think you will find, and certainly this is what we are doing a lot of work on, about removing that friction cost for you moving your fund. We’ve quoted for a few small funds over the last couple of years, and I’m vetoing this down to small funds.
You know if you’re a big fund you can probably afford it. But you can’t go to a 50,000 member fund and say it’s going to cost you $5 million to transfer. You can’t do that. Not that we did, but you can’t do that.
So you need to be able to remove that friction cost, and I think the technology is moving to a place where that’s going to be possible. So yes I think about it a lot, I talk to my clients a lot about it, I think they have got concern. So I don’t think it’s healthy for my clients particularly, and I don’t think...and frankly I don’t think it’s healthy for the industry to have, it’s a kind of self-serving statement I know, but I don’t think it’s good for the industry to have such a dominant player.
TG: So therefore how do you create that competition, given that the set up costs for the administrator to come into the market is, I guess quite material.
PK: Well I think the first thing is you don’t remove the ones that are already there. There are new players coming in, there’s some smaller ones, but it’s difficult to get a foothold. Because you need to say I’ve got this brand new platform, you’re going to love it, and they say great what clients have you got on there, I haven’t got any. And what trustee is going to say we’ll give you a run. That’s hard.
TG: I think there’s an element there, a propensity for the regulator to allow trustees to take more risk. That’s all you do is manage risk, funds all they do is manage risk, but particularly in the digital space for instance, and arguably admin is in the digital space. The notion that failing fast and these sorts of clichès, but allowing funds the ability to say we are going to try this and we are going to pilot this. It mightn’t work, but I don’t need a regulator lying on top of me saying, we’ve made this huge mistake and now we’ve got a breach notice and all that sort of stuff. Because the funds will just go, we’re not doing it.
My sense is that if the funds don’t try things, the train will come along and they won’t have been able to keep going. I just get the sense the regulator needs to make a statement about allowing funds to try new ways to connect with members. And some of these aren’t going to work. And it’s not that they are trying to waste money and you know, you tell them not for profit, we don’t have the capital, but they are going to have to try and do these pilots.
AH: Well I think our move to Northern Trust is a good example on that. So we were the first APRA-regulated fund to move to Northern Trust.
There’s a lot of due diligence done in relation to that. I hear what you’re saying Tom, but really a lot of it has to come back to the trustee going through the proper process to make that decision.
TG: I guess though the idea of changing custodian and/or administrator, that’s a big deal. But if you’re wanting to go out and say we want to spend $20,000, I don’t know what the number is, on building this extra platform that sits with our administrator to let us send to SMSFs [self-managed super funds], I don’t know, whatever it might be, and people watching going ‘gees your fees are going up, gees your...’ but unless you’re actually out there trying on these other things, then how are you going to sort of keep up with this world that’s flying along. And that’s why I just get the sense that we’re not getting the right signals from the regulators that we’re allowed to try.
NC: I think our perspective on the administration is that funds are changing in that they’re actually chasing the data of their administrators, and if you go back not so far, anything that involved data, the fund mindset was, well we don’t own that, the administrator owns that. And they were beholden to the administrator, and there’s a great tension because funds wanted to do more, but anything they do is constrained on what the administrators can do. And this creates this unworkable thing where the administrator wasn’t quick to do a lot of things they wanted to do, and the funds didn’t own it enough so nothing happened.
Now I think funds are realising, as we all know, there’s a lot of value in that data, it’s harnessing it is the key. And I think with a lot of work we do now with funds is what you might call the value add type stuff, and bigger funds are doing it themselves. Things like retirement income estimates, web based modelling, data analytics, these sorts of things. So to me it’s clarifying what you expect your administrator to do. And I think where it’s heading, I’m certain a lot of funds... the administrator does transactional stuff and the record keeping stuff, and does it really well. Don’t expect them to be the one who does the value add stuff, the analytics – funds have got to build up that capability themselves or outsource it.
But let’s get away from this for a flat and low fee that the administrator is the knowledge base for all your data needs. It’s a much bigger game than that. Go back to the basics, do the transactions that pulls into that thing and do it really well, and the funds have to actually build up their capabilities internally.
PB: Tom and I were having a kind of talk about it just before we started. And I think you’re right, partly right, that I think the administration has got to have a very good core service, no doubt about it, but there are different sized funds with different needs.
So you need to make sure that all of the registry transaction stuff is core and good quality, but you need to be able to have a kind of what I was calling a plug and play arrangement. So if you want to do your own contact centre, no problem, you just plug that in and you get the access to the services.
If you want BI [business intelligence], you just plug in. Or the administrator can provide those services. So if you have got a million-member fund you probably want your own contact centre, you want to hold that member experience totally inside. But if you’re a 70,000-member fund, maybe you don’t, maybe you haven’t got the resources. So the administrator has the capability to dial up those services in a way that suits your fund’s character and requirements.
TG: How close are we to getting to that point?
PB: Very close. Well I don’t want to sound like an advertisement, that’s the trouble. Our largest client, First State, they run their own contact centre, and it’s been built so they have direct access into the registry. We do that contact centre for our other clients, and we do the BI for our clients, so it’s a dial-up event. Sorry, Tom.
TG: That’s fine. There’s sort of a transformation in the funds that many years ago they were seen as an administrator, they administrated the records and provided...they hardly even provided pensions other than DBs [defined benefits], whereas now they are becoming an information business. So there’s heaps of information coming in, but then there’s also a requirement to provide information in the form of advice on the way out. And that’s what they are, they’ve just got so much data and they’re working out how much they’ve got, and then they can match other bits of data in there, they will be able to then start tailoring this movement to the cohort one and those sorts of things and pensions.
AH: Funds are financial advice businesses. It’s just taking a while for people to work that out. It’s that simple. If you don’t turn yourself into a financial advice business and I take your point, not only it’s the traditional way, financial advice hasn’t changed in the last 30 years. That’s what they are. Because if you don’t do that, somebody else will.
TG: Yes. Because they will make the connection.