Another year of superannuation challenges

2013 represented a year of challenges for the Australian superannuation industry but, as Damon Taylor writes, the new year will see funds working hard to not only ensure the smooth implementation of Stronger Super but handle the demands associated with a new Government and a new policy approach.

In a year in which Australian politics has seen a changing of the guard, it seems Australia’s super industry may be starting a new chapter as well.  

With MySuper commencing on 1 January 2014, the bulk of fund members will find themselves in an entirely new superannuation environment and yet for Tom Garcia, CEO of the Australian Institute of Superannuation Trustees (AIST), that shift is just the tip of the iceberg. 

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For Garcia, no matter how you look at it, the super industry has accomplished a great deal in 2013 and the hope is that it provides a platform for further progress in the year ahead. 

“To be honest, this year has showcased this industry’s capacity to cope with huge levels of change and huge amounts of work,” he said.

“So next year, right across the board, people will either know that they’re in a MySuper product or, if they’re disengaged, they’ll be able to safely rely on the fact that they’re getting the best outcome that their respective trustees can deliver. 

“So that’s been a huge highlight, but I think SuperStream has been enormous as well,” Garcia continued.

“In fact, I think many people out there underestimate the magnitude of the jump we’re making and what it will mean. 

“SuperStream is where all the money is going to be saved in the future; this is the new McLaren engine for super, it’s efficient and it’s quick and in a few years time, I think the payback will be amazing.” 

Alternatively, Anthony Rodwell-Ball, CEO of industry fund , said that 2013 had been filled with both highlights and lowlights in equal measure.  

Indeed for Rodwell-Ball, perspective is everything. 

“Look, I think the industry at large has been excessively preoccupied with Stronger Super, MySuper, SuperStream, APRA reporting, all of these things,” he said.

“It’s almost as though it comes as a surprise to the industry that a $1.6 to $1.7 trillion asset pool should actually have far more rigorous governance over it. 

“I’m gobsmacked by it,” Rodwell-Ball continued. “If you think about the level of compliance, the reporting and control that’s in place for ‘the big four’ banks and just the banking sector generally, the market capitalisation there is less than $400 billion. 

“Now, if any one of those banks fails, it would be a massive economic and social event - but again, the market capitalisation is less than $400 billion in aggregate.” 

The reality, according to Rodwell-Ball, is that $400 billion is but a fraction of the $1.7 trillion superannuation industry. 

“We, corporately and excluding the self-managed super fund (SMSF) sector, manage $1.2 trillion in rough terms,” he said.

“Now that’s three times the market capitalisation of the big four banks, so why are we all sitting around saying ‘oh God, we’re suffering under such an enormous compliance burden?’ 

“But I guess what we’re trying to grapple with is the cost of all of this because the difference with ‘the big four’ is that they are very, very profitable and they resource appropriately,” Rodwell-Ball continued.

“We, and I suppose I’m speaking now on behalf of industry funds in particular, haven’t yet come to terms with the fact that we’ve got to get real about resourcing as much as the compliance. 

“So I think when I look back on 2013, this reform agenda has held both highlights and lowlights because there’s been some real tussles going on to shoulder such a significantly increased compliance burden and still manage cost in what is a far more competitive market.” 

Of course, it is that newly competitive market that any number industry pundits see as the chief outcome arising from MySuper.

And for Pauline Vamos, CEO of the Association of Superannuation Funds of Australia (ASFA), members cannot help but be better served as a consequence. 

“What will MySuper mean? In a nutshell, enormous competition,” she said. “So we’ve got enormous competition now and a real focus on members and retaining members. 

“Member retention is all that people are talking about because the competition is so severe - whether it’s through a competitor in the pool space or the self-managed fund space - that element of competition is as pronounced as it has ever been,” Vamos continued.

“And yes, its going to drive down costs and fees as well but the big one is that you’re going to get a lot more innovation. 

“We’re seeing it already in investment approach but you’re going to get a lot more tailoring to the individual as well and that’s ultimately where competition’s going - the tailoring of all superannuation offerings to the specific individual.” 

In fact for Vicki Doyle, head of retail and corporate superannuation for BT Financial Group, the structure of MySuper products is such that competition will be further fuelled by ease of comparison. 

“I think MySuper does allow for a more comparable product set across all the different players,” she said.

“So I think from a member perspective, and as we start to see the reporting and performance, people will be able to easily compare a MySuper investment option in BT with an investment option in any of the industry funds because the fees and structure will be fundamentally similar. 

“The challenge for funds, of course, is differentiation; communicating that while MySuper products may have a common baseline, they certainly aren’t the same,” Doyle continued.

“And I think that’s yet to bear out.” 

Doyle pointed to investment approach as the example. “Our fund is an actively managed life-stage fund and what that means is that we actively time the markets and look for the right investments at the right time,” she said.

“And that’s as opposed to a passive life-stage investment that some of our competitors have come out with that just follows the index. 

“And then there’s also a number of industry funds that have just got their normal balanced fund rebadged as MySuper,” Doyle continued. “So they haven’t moved away from the risk of having a balanced fund and all the risk that that implies. 

“I think it’s important to realise that MySuper products will be comparable for members at a headline level but that not all MySupers are the same.” 

Not surprisingly, Rodwell-Ball indicated that the challenge of differentiation was being felt in the industry fund sector as well. 

“I think the challenge really for industry funds and the like is to find a basis to compete other than on costs and fees, because that basis is rapidly disappearing,” he said.

“I mean, when you look at the INGs, the BTs, the AMP offers that are coming in at 50 or 60 basis points, they’re being engineered that way and we know what that means in terms of investment - but members simply don’t understand that. 

“So the industry fund proposition of low fees, all profits for members - that value proposition is being significantly challenged by these sorts of players,” Rodwell-Ball continued.

“They’ve basically said ‘if you want to compete on fees, if those are the ground rules, then we’ll play ball with that one, just give us a few years and we’ll re-engineer our products and we’ll pull the carpet from under you.’ 

“And that’s exactly what they’ve done.” 

Indeed for Rodwell-Ball, although an increasing focus on fees rather than outcomes was not one he favoured, the argument ultimately came back to scale.

“If the retail funds can get it, and they’ve obviously got a great deal of it already, but if they can build on that scale with the distribution and multi-faceted relationships that they have, then they’re very well placed,” he said.

“So what does that mean? Does it mean that in five or 10 or 20 years time the very large industry funds like Aussie Super will become multi-faceted financial institutions offering a range of services? 

“I think yes, that they’ll have to to survive,” Rodwell-Ball explained. “But then what does that mean for the smaller players like us? 

“Well, we’re not looking for a merger partner, but I think in 10 or 20 years time, if that’s how the industry looks, any player with under $50 or $100 billion in the market in today’s dollars is going to struggle.” 

Yet the reality for Australia’s superannuation industry and its players is that competition is now about much more than industry and retail funds.

With continued growth and institutional recognition, self-managed super funds have become a force to be reckoned with - and for Garcia, that growth and presence cannot be ignored. 

“Look, there are many reasons why a lot of people are very suited to an SMSF and it makes absolute sense to be in one,” he said. “I guess the concern is that there seems to be a lot of people moving into SMSFs that have really no idea why they’re in it. 

“They don’t have much money in it and you’ve got to wonder whether this is actually the right vehicle for them because for the most part, what you can do in an SMSF you can do in any of the other APRA-regulated funds anyway,” Garcia continued.

“So I guess it then comes down to whether it’s a behavioural thing; is it simply something where people want control and want their own fund that has their own name on it? 

“For better or worse, it does seem to be very attitudinal.” 

And the troubling unknown, according to Garcia, is what happens when things go wrong. 

“So I do believe that people are getting nervous, that regulators are getting nervous about this sector,” he said. “It’s gigantic - there’s one million people in there now and $500 billion, so what’s the systemic risk attached to that? 

“If a huge proportion of them do something at the same time, and that investment goes down or something goes wrong, that’s a whole lot of risk that just falls back on the tax payer,” continued Garcia.

“They’re the trustee, they’re responsible for it, but I don’t think a lot of people actually understand the fact that they are the trustee, that they are ultimately responsible and that all that money is supposed to provide for their retirement. 

“So clearly better education is a must in terms of what you’re doing, why you’re doing it and what are the alternatives that can give you the same outcome for a lot lower price and a lot less responsibility.” 

Interestingly, Doyle said that while SMSFs were definitely a valid option for a certain segment of the market, there had been signals in 2013 that at least some trustees were keen to rejoin pooled arrangements.  

“We’ve had some customers calling us and wanting to get back out of an SMSF and come back to a platform or a managed product,” she said.

“And of course that’s not everyone who’s in an SMSF, but I think it just shows that those people who probably shouldn’t have gone into one in the first place have now come to realise the administration burden that they represent. 

“So to be your own trustee and to fulfil all the regulatory requirements and do all your own reporting and pay an accountant and the like to do your annual reports, people are realising that that’s not quite as cost effective for a smaller balance as they thought it would be,” Doyle continued.

“And so I think what we’re seeing is the sector righting itself.” 

Echoing Doyle, Garcia said that it was eminently possible that such inquiries and movements could increase dramatically in coming years. 

“So in 10 or 15 years time, take for example the situation where a self-managed super fund has a husband and wife as trustees,” he said.

“If we just look at basic longevity, the husband dies first and, without trying to be sexist, it may be that it’s the husband who’s done the majority of the fund’s administration and investment. 

“All of a sudden, the remaining spouse who’s had nothing to do with this fund, even though they’re supposed to as a trustee, says ‘what’s this thing? Who’s going to run it?’” Garcia explained.

“And so I think there’s an opportunity for pooled super funds to provide a service to roll self-managed super in. 

“I’m sure that process won’t be simple, but being able to efficiently and painlessly take over the trustee responsibilities of a self-managed super fund for elderly retirees will be vital.” 

But irrespective of which sector a superannuant may select, the industry’s clear consensus is that they must be looked after in retirement. To date, that consensus has meant a focus on accumulation and yet for Doyle, this year has also seen increasing recognition of the need to tackle retirement income streams and longevity risk. 

“Yes, I think there’s going to be a significant focus on retirement income and that it will represent a whole positional change for this industry,” she said.

“And I say that because typically, we’ve talked more about how we get people more engaged in their accumulation, how we get them more focused on their super and we keep talking about balances and returns. 

“We say ‘now you’ve got $70,000, now you’ve got $100,000, great you’ve got 15 per cent returns!’” Doyle continued. “But people don’t really necessarily understand what that means for them in the future. 

“So our view would be that we have to move away from talking about balances and returns and talk more about what a projected balance actually means.”

For Doyle, the example to use is the representation of two lump sums; $500,000 and $750,000. 

“So if I said you need an additional $500,000 or you need $750,000, you’d just think ‘hmmm, that all sounds a bit farcical, how am I going to get $500,000, how will I ever get to that, does it even mean anything?’” she explained.

“Whereas if we started to talk to people in terms of the income difference, that if they had $500,000 then it would be $37,500 per year versus $62,500 per year, then I think people might start to understand that difference. 

“It’s like Frequent Flyer points and Qantas; they used to talk to you all the time, saying ‘you’ve got 50,000 points, you’ve got 70,000 points,’” Doyle continued. “But now everything they put out is about ‘where could I go, what could I buy, what could I do with those points?’ 

“So if we can get super to take the same sort of analogy, make people understand that it’s their future income, that it’s what they’re going to live on, that it’s going to be there in their bank account for them to draw down on, that it’s what’s going to enable them to live, then hopefully we can make it more real for them as well.”

Offering a similar perspective, Rodwell-Ball said that post-retirement had become a very real focus for all super funds, but for those with older demographics in particular.  

“We had a strategy meeting on Wednesday and we looked at two alternative projects for 2014 that were in both the investment and product space,” he said.

“And while we haven’t yet determined which one we’ll be proceeding with, I can tell you that they’re both in the post-retirement space. 

“So that is very much our focus,” Rodwell-Ball continued. “I think we manage close to $6 billion now and of that we’ve got probably $800 million in pension and post-retirement, or 12.5 to 13 per cent, and we’re growing that part of the fund at a faster rate than the average industry fund. 

“So we’ve deliberately had a focus on that for the last three or four years because for us, with our membership, with those comparatively high value, high balance members, the last thing we want to do is lose them at 55, 60, 65.” 

For Rodwell-Ball, while they didn’t necessarily realise it, members needed their super funds even more in retirement than they did in accumulation. 

“So for us, a focus on that demographic will continue,” he said. “We will continue to invest in building our post-retirement products, service model, engagement, loyalty and so on. 

“Its been a focus in 2013 and it will be a focus in 2014 - there’s absolutely no doubt about that.” 

As members of Australia’s super industry enter the Christmas break, it seems clear that they are deserving of what will undoubtedly be a well-earned break.

However while MySuper and the first stages of SuperStream have been massive achievements, it is just as clear that there is work yet to be done. 

And for Doyle, the remaining reform agenda as well as the Coalition’s upcoming financial systems inquiry represents little if not opportunity. 

“At BT, we welcome the Financial Systems Inquiry because we think it’s an opportunity to take a really long-term view over financial services and to look at all of the economic and financial system for Australia,” she said.

“And that’s versus what we’ve done today, which is a great job of looking at superannuation as a distinct category, looking at the things we can do within that. 

“That’s all well and good, but at the end of the day, somebody’s future financial welfare is so much more than just superannuation,” Doyle continued. “It’s their assets and their home, it’s their health and wellbeing, it’s their savings outside of super and it’s their whole banking piece as well.” 

Doyle compared it to similar efforts made by the Keating Government back in 1993. 

“At that time, they came up with quite a futuristic model around superannuation and I remember being an employer at that time and thinking ‘goodness, it’s going to be burdensome to do this’. And then I remember us as staff thinking ‘oh, we’re giving up our pay,’” she said. “But look at where we are today. 

“So I think if the Financial Services Inquiry has that same 20, 30, 40-year horizon, then it makes those tinkering changes that happen every year part of a much longer-term strategic picture,” Doyle added.

“And getting that longer-term view, longer than governments are necessarily in and out of office, would be a fantastic outcome. 

“It would give Australians more confidence in their whole financial welfare versus just feeling like the Government is there taking things away from them every year.” 

Drawing similar comparisons, Garcia made the point that when the last financial systems inquiry occurred, Australian superannuation had been a great deal smaller. 

“It’s now a very big part of the sector, even if you’re just looking at infrastructure,” he said. “It’s interesting because you have to look at capital, capital allocation, capital requirements, those sorts of things, and we need to be part of that discussion. 

“Superannuation is a standalone industry now, and globally the pensions industry is just going to get bigger and bigger and bigger because it’s inextricably linked to an ageing population,” Garcia continued. “It’s a very important thing globally and so we do need to make sure we’ve got the best system possible. 

“We’ve got an extraordinarily good system now but you can’t rest on your laurels, so the question becomes how do we make it better, how do we improve it?” 

Indeed for Vamos, it is the chance to answer such questions that will make the inquiry so valuable. 

“I think it’s a fantastic opportunity for the industry,” she said. “This gives us a chance to really show and prove the value of superannuation, not only as social policy but as economic policy. 

“We exist side by side with the banking industry and that existence is getting more and more symbiotic; but the bottom line is that we do not take away from the banking industry, we provide real ballast to the Australian economy,” Vamos continued.

“Yes, there are ways we can do it better but there’s no doubt that the strength of our superannuation system is an asset not just to retirement outcomes but to the economy as well. 

“While other countries are struggling to provide for their retirees, this industry is continually improving - and so it’s vital that we take this opportunity to show that fact and educate all our stakeholders about what a good thing our superannuation system is.”

Putting the regulatory pieces in place 

As the industry approaches 100 MySuper approvals, many will consider at least that part of the reform agenda dealt with. Yet while that may be true in terms of product development, it seems clear that APRA’s new reporting requirements continue to develop. 

Indeed for Vamos, while initiatives such as Product Dashboard and the disclosure of funds’ portfolio holdings have already seen significant discussion, it is vital that that discussion and development continues. 

“If we look at the Product Dashboard first, the problem with Product Dashboard is that it hasn’t been consumer tested and the law takes it further than MySuper,” she said.

“You’ve got to test these things and my concern is that if it’s compulsorily applied in its current form - to all products and without any consumer testing - then there’s going to have to be a lot of undoing in future years. 

“And guess what? That means more cost to members,” Vamos added. “When you’re innovating in any sort of disclosure, when you’re developing anything, you’ve got to develop prototypes and test them. 

“And yes, MySuper is a good vehicle to prototype, but the last thing you want is to start with a big bang.” 

Perhaps not surprisingly, Vamos said that she harboured similar concerns around APRA’s portfolio holdings disclosure requirements. 

“Portfolio holdings disclosure is a much bigger issue because of where that information is going to go,” she said. “There’s two issues here - what the consumer needs to give them comfort and information and then, what the regulator may need in order to follow the money. 

“And you’ve got to really think about that and again, as with Product Dashboard, I’m concerned that the information that’s being collected is being collected for other purposes,” Vamos continued. “Time and time again it’s been proven that when you collect data in a certain way, it doesn’t necessarily lend itself to different uses and to different stakeholders.” 

“So I think we need to be careful here because this could all too easily become an enormous issue.” 

Alternatively, BT Financial Group’s Vicki Doyle said that for her, portfolio reporting in MySuper was the fait accompli. 

“We’ve all put in the effort to put these products together and I think members deserve to see how they compare one to the other,” she said.

“So while not all MySuper products will be the same, you still have to show the headline differences - and I think it’s important to continue down that reporting line. 

“But having said that, I’m still not sure trying to force super funds’ choice products into a system that was basically designed for people who aren’t engaged in their super is necessarily the right approach,” Doyle added.

“I think that will be difficult because the choice products are all completely different across products and platforms and the like. 

“For MySuper, however, the test will be when we see the first year’s results and whether that actually does have any real meaning for people.” 

Indeed for NGS Super’s Anthony Rodwell-Ball, the challenge with any new reporting requirements was the gestation period that was necessarily involved. 

“There’s an introduction, a bedding down and then there is refining - and there’s inevitably involved in all of it a cost,” he said. “So if it leads us all to improve, if it enables us to better focus on what’s important in the business and what APRA requires in terms of its reporting, that’s fine. 

“We can work through and hopefully get there at the end of the day.”

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