Superannuation funds are increasingly looking to take greater control of their relationships with members and, as Mike Taylor reports, this has driven some fundamental changes in what they want and expect from their administrators.
Technological advancement, the use of big data and the competitive challenges confronting superannuation funds have all served to change the face of the superannuation administration sector.
Half a decade ago, there were four major superannuation administrators – Australian Administration Services, SuperPartners, Pillar Administration, and Mercer. Today there are just two – Mercer/Pillar and Australian Administration Services (AAS).
SuperPartners, owned by a collective of industry funds, was acquired by the now publicly-listed Link Market Services, while Mercer acquired the NSW Government-owned Pillar Administration when the State Government finally decided it no longer wanted to be in the superannuation administration business.
The consolidation of the industry is owed one central fact – administration is a high cost, low margin business requiring high levels of ongoing technological investment.
Another central fact is that not all owners are willing to make that investment and, in the case of SuperPartners, it was proof that the bottom line can deteriorate rapidly when the wrong technology investment decisions are made and the shareholders are unwilling to underwrite substantial new investment.
Reflecting all of this, in the nearly 12 months since Mercer acquired Pillar, the dynamics of the industry have changed. Link’s AAS remains the dominant player in the market, but the combined Mercer/Pillar entity has begun to make inroads on the dominance.
In 2017, the industry has been witness to the EISS, Kinetic Super, Tasplan and TWU Super each changing administrators with three of those funds switching from AAS to Mercer/Pillar. Still more administration mandates are in play and being strongly contested.
But it would be wrong to assume that superannuation funds are moving administrators based simply on the traditional member register model, with Deloitte superannuation partner, Russell Mason, stating that funds are being much more strategic in looking at their needs.
“Consultants are looking to give their superannuation fund clients options,” he said. “Those options include the holistic, traditional administration offer or a combination of in-source/outsource.”
Mason pointed to an increasing number of superannuation funds looking to keep member interactions in-house, therefore not wanting the full suite of offerings that administrators traditionally sought to provide.
“Consultants talk to administrators about quoting on the component parts,” he said. “Some parts they want to consider doing in-house, other parts they want to be done by a specialist administrator.”
Mercer Financial Services leader, Andrew Godfrey confirmed Mason’s view saying that superannuation fund needs were redefining administration.
“Historically, it’s been transactionally based and it’s important that we continue to do that but, more and more, it’s about creating a more member-centric administration business indicated by investments in digital, data analytics and implementation of Salesforce and sales and marketing, new operating models, workforce management and models around customer service,” he said.
So funds that might have once dealt with just an administrator and a custodian, they’re now dealing with a lot of different suppliers.
– Suzanne Holden
AAS chief executive, Suzanne Holden acknowledged the manner in which the industry was changing to deal with the changing requirements of superannuation funds – something which she said had also influenced the investment decisions being made by administrators.
This meant that while there was little likelihood of a major new player entering the administration market, there had been the entry of many smaller players.
“Is there capacity for others [new] players,” Holden said. “If they can achieve scale, certainly, but a start-up with small numbers would not necessarily be viable.”
“What we’re seeing is that an administrator used to be all things to all people and you would outsource almost entirely to one provider. Now you’ve got more start-ups and different providers, fintech providers or analytics companies they’re all making a play on the administration space.”
“So funds that might have once dealt with just an administrator and a custodian, they’re now dealing with a lot of different suppliers,” Holden said.
She said this in turn had altered the AAS model with the result that while it maintained its core platform, it also had the ability to plug in other providers.
“You’re not seeing new administrators with new registry systems, you’re seeing a lot more players coming in and doing parts of what might typically have been seen as admin,” Holden said.
Mercer’s Godfrey confirmed that the changes in the administration market meant it was a case of identifying what superannuation fund clients needed and what could be delivered to them.
He said the investments being made by administrators was all about what could be delivered to the end member.
“How we support the funds we are providing those service to. How do we help them leverage our scale? A fund wants to provide a far greater personalised experience to their member base,” Godfrey said. “It then becomes a case of can they partner with an organisation such as ourselves.”
Holden and Godfrey are on the same page when it comes to recognising that much of the growth which can be achieved by their firms resides in the degree to which they can tailor their offerings to meet the particular needs of superannuation funds.
From the Mercer/Pillar perspective, Godfrey looks at it as a case of superannuation funds wanting to access the company’s scale and benefit from the technology investments it has made.
In that sense, he said it was important to recognise that much of that investment had been driven by the reality that while administration remained a transaction business, Mercer’s focus had been on helping funds become more member-centric.
“We see growth in terms of funds in the industry that will be attracted to partnering with us,” Gordfrey said “Elements of those that can be self-administered but see the need to provide member-centric services. We think that is where the growth is going to come.”
The technology difference
If one factor alone strongly differentiates Mercer/Pillar from AAS it is their approach to technology, with one business more than willing to build their capability while the other makes clear that it is not in the technology manufacturing business and would rather buy best of breed off the shelf.
Speaking for Link/AAS, Holden indicated the company’s willingness to partner with technology providers in some circumstances but with the caveat that if it can do something in house, it likely will.
“I can think of examples of where we’ve adopted one of several models,” she said. “Can we build it ourselves and create the capability cost-effectively.”
Holden cited as an example of this approach Link’s move into analytics via its investment in specialist firm Empirics but noted that in circumstances where the company could not make such an investment or do something in-house it would simply “plug and play”.
However, she said that there was a need for caution in entering into agreements around plug and play in circumstances where technological development represented a highly dynamic area; what looked like the best offering in the market today, might not be the best offering in three years’ time.
Holden said such an approach helped AAS keep its platform contemporary and fresh.
Godfrey said the Mercer approach was very different in the sense that it had a very deliberate philosophy of buying, not building.
“The need to continuously invest in technology is critical and never more so than today,” he said.
“Our philosophy is very deliberate in that we buy and not build. And as much as possible we want software that is out of the box.”
“We’re the integrators. We’re not a technology shop and we do not hold ourselves out to be that. We want best of breed. Best of salesforce, Adobe,” Godfrey said. “Leveraging the best capability is how we think about it going forward.”
“I reflect on the investments we’ve made and are making around digital, data analytics and how you bring all those together to create an experience for the end-member and once you commence that investment it continuously evolves at a very rapid rate,” he said. “Look at what is happening in robotics and artificial intelligence (AI) – it’s about working with partners and working with funds to make sure we’ve got the most optimised processes in place.”
On the question of marketshare, AAS’ Holden acknowledges that administration mandates have been changing but argues that it has been a two-way street.
“We’ve obviously got some work moving between Mercer and Link and vice versa,” she said. “Funds are moving in both directions.”
However Holden suggests that the growth in the market will not be amongst those funds which are already outsourcing their administration requirements, but amongst the 55 per cent of the market which have been identified by Rice Warner research as being in-house administered.
“So there is still a significant part of the market [which is in-house administered] and it cannot be sustainable for many of the funds which are pumping money into their technology and the reform agenda,” she said.
“So there might be some flex between Link and Mercer, but given the significant change to the reform and regulatory agendas and the [consequent] investment in technology will see in-house administered moving to outsourced administration,” Holden said.
Godfrey is less clear-cut in his assessment of how the increasing regulatory burden and technology burdens will impact superannuation fund decisions about administration mandates, but he acknowledged that the regulatory demands carried with them their own challenges.
“We’re ready and prepared for regulatory change, it’s a core part of what we do,” he said. “But what about the costs that that introduces to the industry? What are the opportunity costs? Does that prevent us investing in the areas that matter to servicing the member?”.