Irrespective of the current political landscape, further change to the superannuation industry is inevitable and, as Damon Taylor writes, administrators are evolving their offerings to deal with this change.
Though Australian eyes are yet to focus on the result of the recent federal election, it seems certain the superannuation industry will continue on its current path of evolution.
The industry’s various reviews have given all participants a great deal to think about with respect to positioning in the superannuation marketplace and, according to Steve Schubert, managing director of Superannuation for Russell Investments, fund trustees are well aware administration will have an important role to play.
Pointing to a recent uptick in tender activity as evidence many funds were actively examining their existing administration offerings, Schubert said funds’ interest have been about more than simply due diligence.
"Generally, I think there’s been a view in recent times that funds ought to look at their providers and clearly the Australian Prudential Regulation Authority (APRA) likes them to do that," he said.
"But I think our sense is that this is more than just kicking the tyres."
"I think there’s a genuine interest in exploring new service models and, just as a bit of background, that’s been one of the reasons that we have really revisited our entire service delivery model," Schubert added.
"We’re in the process of making some pretty significant changes in our model, so where we have previously outsourced a lot of activity to IBM, we’re in the process of bringing a lot of those activities back in-house, particularly around member services."
"In our view, super funds are wanting to increase the ways in which they can engage with their members and so the key issue for us, is making sure our model allows us to control those activities and, more importantly, invest and innovate in them."
Alternatively, Peter Beck, chief executive officer of Pillar, identified other motivations for those funds going out to tender.
"It’s probably driven more by all the Cooper Review activity that’s trying to encourage funds to look at themselves and drive efficiencies," he said.
"Part of it is driven by the need to drive efficiencies into those businesses and I believe that the potential for consolidation within the industry is a factor as well."
"There are a lot of discussions going on about potential consolidations, courting I guess you would say, and there’s definitely going to be some first mover advantage for those in terms of securing administration resources."
Yet, while tender activity may be a constant for service providers to the super industry, government reviews and the prospect of legislative change is ever present.12 months ago, administrators signalled that the approach to be taken was one of ‘wait and see’ and in the wake of an election, Greg Camm, chief executive officer of SuperPartners, said the status quo hadn’t changed.
"Unfortunately, with the election result still undecided, the reality is that the story could still change," he said.
"The Coalition has been luke warm, to the point of being offhand actually, about a lot of the stuff that’s been recommended and announced, but what we’re saying is that 95 per cent of what’s been announced, we like, and if it turns into reality we’ll be jumping into it."
"However, any preparations we make depend on the actual legislation," Camm added.
"You can’t build a system around a press release, you’ve got to build a system around legislation."
"All of these announcements require laws to go through parliament and it isn’t until you see that content that you can actually start cutting code and making changes."
Also focused on the election, Beck said the easiest prediction was that nothing would happen until that result was clear.
"For certain parts of these reviews, people will wait for a signal from the government as to what its intentions are," he said.
"But for other things, such as the use of tax file numbers (TFNs), there seems to be universal agreement to it, so we’re starting to think about what that means for our business."
"There are definitely some things we believe are going to get up irrespective of what government is in place, like TFNs, which are such a sensible thing that we find it hard to believe it’s taken so long for us to get to this point," Beck said.
"So stuff like that, we’re preparing and planning for how it’s going to impact us. For limited advice, again we have confidence the market is starting to understand what’s required so, without really waiting for regulation, we’re getting on with it and developing our solutions."
"There’s certainly not as much ‘wait and see’ as there was a year ago. It’s more a case of the writing’s on the wall and we’re starting to plan for it."
Schubert said while the changes recommended by the Cooper Review in particular had not yet been implemented into legislation, it was in the best interest of both funds, and service providers to be putting plans in place.
"I think if the industry sits on its hands and is waiting for legislators and the dust to settle on the MySuper recommendations and so on, then we’ll be left behind," he said.
"So, in terms of finding ways to engage with members, some people are misinterpreting Cooper as being all about dumbing down the service you provide and basically assuming your members don’t want to engage.
"But we just have a fundamentally different view. We believe you can engage with members and get them to make good decisions about the level of contributions they make and how prepared they are for retirement," Schubert said.
"So funds can and should be investing in those areas and services regardless of how quickly or slowly the legislation from Cooper comes through."
Schubert said when it came to current legislative change; there was a comparison to be drawn with Choice of Fund.
"When Choice of Fund was first flagged back in the mid-90s, the industry started to think about what it meant even though it was near enough to 10 years before the legislation actually came through," he said.
"But by that time, the industry had really fundamentally changed and adapted on the basis this was coming at some stage."
"All funds realised they had to modernise and update their products and engage better with their members so by the time Choice of Fund came in, it was almost academic because they had already adapted and evolved."
Of course, the one element of prospective legislative change that administrators seem united in bringing to super funds immediately is the provision of financial advice.
With the announcement of the Financial Advice Reforms already having been a game changer for the industry, Gary Cox, director, administration services for Russell Investments, said it was an area in which all administrators were keen to get on the front foot.
"It’s been a huge game changer. Even the contact centres these days are minimum Regulatory Guide 146 (RG146) qualified and then it steps up from there," he said.
"So in terms of intra-fund advice, we’re an advocate. You certainly need to provide that kind of service to fund members to explain things like allocations, top-up contributions and so on and it’s really important for us to provide those sorts of services to members to help them with that.
"If it isn’t already, this is going to be a fundamental superannuation offering and something all funds will be looking to provide."
For his part, Schubert said one of the key issues was that peoples’ need for advice followed a broad spectrum.
"Its not just about needing to get information off the Internet or getting a financial plan or going to an adviser and then getting tangled up in issues about how the adviser gets remunerated," he said.
"In practise, there will always be some members who need to pay for a full-blown financial plan (and obviously the fact that the new reforms make sure that there’s a proper relationship between the member and their adviser, rather than the adviser being paid from institutions is a good thing) but what needs to be put in context is that the vast majority of super fund members aren’t going to be sitting down and getting a full financial plan."
"They have information needs and advice needs from time to time and sometimes those needs are relatively modest and can be efficiently dealt with through things like intra-fund advice."
Holding a slightly different perspective, Camm said one of the main drivers behind an increased focus on the provision of financial advice was the impending retirement of the baby-boomer generation.
"From an industry super perspective, you’ve got a big cohort of members who are now into their 50’s with reasonable balances," he said.
"They’ve now been in compulsory super for nearly 20 years so their balances are getting up and they’re thinking about retirement.
"And when you get into that headspace, we all know that you need a bit of advice because it just isn’t simple."
However, when asked whether the scope of what could be done under the proposed financial advice legislation was well defined, Camm indicated it was a tricky question to answer.
"I think that the lawyers have been in charge of that space for a long time and I think it’s incumbent on the industry to say to the lawyers ‘hey, members can probably get a bit more advice than what you’re telling us’," he said.
"The regulators would be encouraging funds to give more advice rather than less but the law is always read down to its smallest parts.
"Typically, our advice is either single issue or only to do with superannuation," added Camm. "So the stuff that we do, which is all phone based, never strays outside of superannuation.
"We don’t provide a full financial planning service, that’s done by Industry Funds Financial Planning on a face-to-face basis."
Adopting a similar perspective, Beck suggested one approach to be taken was that of self-limitation in regards to advice.
"We’re going down the track of single-issue advice so we’re going to be licensed to do full financial planning but we’re going to limit what we do to a range of issues," he said.
"So to the extent that limited advice has been regulated and limited, we’re not actually going to rely on that limitation.
"We’re going to self-impose limitations on what we do because limited advice has got to be simple and quick and it’s got to follow a process," Beck added.
"So to some extent, it’s self-limiting in terms of what you’re able to efficiently and effectively do through the web and contact centres."
"But that’s also the opportunity. It’s got to be efficient and it’s got to go to the major issues that people have concerns about or want advice on and we need to give people quick solutions — it’s kind of like a financial planning quickie."
According to Schubert, the sooner the industry has a clear definition on intra-fund advice, the better administrators’ financial advice offerings would be.
"It’s still a work in progress and there are lots of things that have been spoken about without obviously being legislated," he said.
"Following the election’s outcome, what we are hoping for is a bit more direction about what we can do and about what is being offered.
"I think at the moment, everyone is struggling to define what intra-fund advice is and what do we deliver," added Schubert. "Everyone understands there’s a need for it but I think it’s fair to say that there’s a problem in terms of the definition around it at this point in time."
But while financial advice delivery is now an integral part of the administration service being sought by super funds, administrators’ primary focus remains on efficiency, data integrity and risk management.
Looking at efficiency in isolation, the proposed use of tax file numbers and the National Clearinghouse scheme steps in the right direction however, Beck said there was still a great deal of ground to be covered, particularly with respect to the industry’s wider adoption of electronic commerce.
"The Cooper Review is all about efficiencies and we think that’s a good thing," he said.
"Efficiencies and automation are something we support 100 per cent because though there’s always been the opportunity to have efficiencies, it does require investment."
"With a lot of the things that have been suggested in Cooper, we could have got on with them ourselves without regulation but it did require investment," Beck added.
"And I think what Cooper’s made really clear is the government’s asking for that investment to be made in efficiencies and the industry will respond to that."
But when it comes to efficiency investment, Beck said the most important thing is the need for a return on that investment.
"The efficiencies will come through but it needs to be remembered that most business cases are based on three to five year paybacks," he said.
"So the real efficiencies which get passed on to members will take some time to feed through the system and that’s a reality that the entire industry has to face."
"Historically, because there’s been no bi-partisan agreement on the basics of super, super’s always been a bit like a political football," Beck added.
"Every time there’s a change in government, there’s a change in the basics of super and, as an administrator, we’ve had to spend a lot of money on just keeping compliant."
"In some respects, that’s quite wasteful when it comes to what members are looking for. What we’ve got to try to do is move the spend from compliance to operational efficiency and service and if governments can help us by actually getting bi-partisan agreement to the basics of super and not kicking that football around every time a government changes, then that will be the precursor for investment in operational efficiency and service."
Illustrating the benefits of efficiency investment and the industry-wide adoption of electronic commerce, Camm said the key benefits would be in accuracy and cost.
"We handle up to 10,000 cheques a day and even the world’s best operator is going to misplace one of those cheques every so often," he said.
"So getting us into an electronic world will reduce those error rates, money will get into peoples’ accounts faster and, in the end, that means lower costs for members, which is always a good thing."
However, the showstopper, according to Camm is inertia. "The biggest one is inertia but it’s also resistance at the small employer end of the marketplace," he said.
"We all carry a mental model in our head that employers are all the size of Coles, Myer or Bunnings and they’ve got 20,000 employees and they send big payroll files on electronic tapes."
"But of course, the reality is the vast majority of employers in Australia have less than five employees. Every corner shop, or not even a corner shop, which has three part-timers and one full-timer, every tradesman that’s got an apprentice, every doctor who has a nurse and a receptionist – they’re all employers," Camm added.
"And a lot of those people are terribly engaged with superannuation and getting to them somehow and getting them incentivised and encouraged to use electronic means is a challenge because there are a lot of them."
Despite this, Cox said the move to electronic commerce and electronic transactions was one that simply had to be made.
"These days everyone is online to do their banking and everything else so to me, there’s no excuse," he said.
"It’s inertia or laziness that has lead to this paper-based administration for a large part of our industry."
"There’s never really been any incentive for the employer to drive things online but when it happens, its going to make life that much easier," Cox added.
"There is obviously inefficiency in the system, so I think that by moving things online, the big result will be, being able to transfer the costs of administering paper, collecting paper, filing paper, losing paper, chasing that up.
"You can take the savings from that and put that into your front-end and put that into your services, spend more on the administration, on the engagement with customers, spend longer time on the phone with them, intra-fund advice, all of those things.
"The shape of the dollar spend on administration will change and give the trustee the flexibility to do so much more."
So while a lot within Australia’s super industry seems set for change, in line not only with legislation but also with increased competition, it seems clear the onus is on administrators to support funds through this.
"In terms of administration, this is a low margin business, which requires heavy investment and scale," he said.
"Our belief is that to be effective, you’ve got to make the investment in the business, you have to have operational efficiencies, you have to do administration well and you’ve got to focus on it but more than that, you can’t have gaps in your services."
"You have to have a comprehensive range of services and that range of service is expanding in terms of single-issue advice, clearing houses, rollover hubs and so on," Beck added.
"Those are all services and operational efficiency measures that need to be in place."
Looking to the future of super administration, Schubert predicted it would primarily be about member engagement.
"All the stuff that happens in the back office, from a member’s point of view, that will be back office," he said.
"So the industry needs to get more efficient, and that’s all well and good, but by and large, that won’t be very visible.
"It’s like our banking system – people don’t change banks very often, so while we might grumble here and there, when we put our piece of plastic into the wall or we write a cheque or whatever, the banking system works for us," Schubert said.
"And that’s the way it has to be with super funds as well, everything just has to work and work well.
"Whenever we need something, it has to be there at our fingertips and if we can find ways to engage with our members, then they will be loyal because no one wants to change super funds if they don’t have to."
