Declining returns as a result of the global financial crisis and the need for superannuation funds to communicate more clearly with their members have created some serious challenges for superannuation administrators, reports Damon Taylor.
The last few years have seen any number of shifts in superannuation, the players involved, the industry’s legislation and the role of financial advice.
The global financial crisis has underlined those shifts, but it seems clear that the pace of super change is increasing and, according to Greg Camm, chief executive officer of SuperPartners, administrators must be well armed in order to keep up.
Giving a feel for the administration business in the midst of financial crisis, Camm said that he characterised administrators’ current position as being in the third phase of an exciting period for super.
“The first phase started about a year ago when the market started to soften,” he said. “And I’d term that the disappointment phase.
“We saw a surge of activity from members worrying about their investment performance, asking whether they were in the right investment options and about the overall security of their super,” Camm continued.
“That drifted for nine months until September 2008 when markets saw a sharp correction.”
Camm said that from September through to the end of the year, the super industry, and administrators in particular, had seen a lot of panic.
“Then the New Year opened and the market looked as though it had bottomed,” Camm added. “And this is the third phase that we’re in — coming to grips with reality.
“The phones are quiet, any switching that was going to happen probably already has and people have been realising the facts,” he continued. “The fourth quarter of this game will be when markets improve.
“Until then, our focus is on offering our clients a good service and investing in new systems and new capabilities, but above all it’s business as usual.”
Beyond the financial crisis, it seems change within the superannuation industry has given rise to suggestions that the business of super administration may have changed.
Certainly the need for transparency, reduced risks and reduced costs seems to have new importance, yet Peter Beck, chief executive officer of Pillar, believes trustees continue to rely on their administrators to get the basics right.
“The administration business is pretty well about getting the basics right,” he said. “For us, the best performance possible is when trustees don’t know we exist.
“We just get on with it and do our job.”
Commenting following SunSuper’s recent acquisition of Precision Administration Services (previously known as CitiStreet), chief executive officer Tony Lally said if any aspect of superannuation administration had changed in recent years, it was trustees’ focus on risk management.
“Risk management and the integrity of data management has become a key challenge for the whole industry,” he said. “With that in mind, SunSuper has recently appointed a chief risk officer to handle the risk management of our members’ information and transactions and ensure we are operating in a highly secure environment.”
Referring to the industry’s recently bedded down Anti Money Laundering and Counter-Terrorism Financing Legislation (AML/CTF) and the role it had to play in data integrity, Beck said that legislative change was a constant in superannuation.
“AML/CTF was a focus to the extent that it had to be implemented by a certain date,” he said. “That process is pretty fundamental to administration.
“But with so much of the data Pillar has taken on needing data cleansing and indicating how easily data can be corrupted over time, we can see trustees starting to look at data integrity more closely.”
According to Camm, transparency, reducing risk and reducing cost have always been threshold requirements for super administration.
“But the focus on the cost of administration is greater than ever,” he said. “No one cared too much when investment returns were hovering around 15 per cent, but with low or negative returns administration costs can start to stand out.”
Camm added that from his perspective, the AML/CTF legislation hadn’t necessarily represented significant change.
“But it has certainly been a factor,” he said. “The bigger issue is that in recent years, superannuation’s demographics have been such that there has been hardly anyone taking money out.
“Now though, the baby boomers are starting to retire and do just that,” Camm continued.
“And it’s opened a window for a lot of cash to leave super, a window that perhaps provides good opportunity for the fraud and money laundering that that legislation is trying to prevent.”
In a market that has already seen significant consolidation and the size of administrators increasing in the face of ever-significant competition, Camm’s focus on administration cost is appropriate.
But is administration wholly and solely about scale and being able to provide members with the lowest possible cost?
Lally believes the issue comes back to the gap between large and small administration providers.
“The small administration providers will claim that they offer a more personal approach,” he said. “But the technology and systems behind good administration require scale.”
For Beck, scale is an essential ingredient to superannuation administration.
“I believe it’s a scale game, but it’s about quality as well,” he said. “You’ve got to be good at what you do, and the reality is that you need scale to be economically viable.”
Beck said the success of smaller boutique administration providers was dependent on how well they performed within their administration niche.
“A lot of boutique administrators and funds with self-administration would say they have closer relationships with their members through their call centres and other touch points,” he said.
“But we see our role as being surrogates to that call centre.
“There will be people out there who will argue that as third party administrators our client’s members don’t get personal attention,” Beck added. “But we believe it’s the opposite.
“Scale provides the technology to get to members and help them and it gives that relationship a much better chance of being successful.”
For the administration industry, scale and growth and development towards it seem to be key. And according to Camm, there are as many different growth strategies as there are administrators.
“SuperPartners’ sole focus is industry funds,” he said. “So from that perspective, we wouldn’t look at a non-industry fund, even if one came along.
“For us, growth comes from being well positioned, with five of the top 10 industry funds as clients,” Camm continued. “So if further consolidation occurs, not within administration but within super, we feel we are well placed to pick up additional business based on our existing client base.”
Regarding administration consolidation rather than superannuation consolidation, Camm said he did not see fewer players leading to less competition and being detrimental to superannuants.
“The way I think about this is that within Australia, there aren’t too many industries with more than a handful of players,” he said.
“Think of the car industry, biscuit manufacturers, even breweries.
“In any business that needs scale there tends to be fewer competitors, and that fact doesn’t impact upon cost.”
Interestingly, growth and development within the administration industry has not been restricted to the administrators. SunSuper’s recent acquisition of Precision Administration Services was the latest in a string of administration shifts and seems to be clear proof that there remains potential for further change.
Lally said that the major driver behind the acquisition had been the potential for SunSuper to take control of its future.
“SunSuper has more than 1 million members,” Lally continued. “And with those sorts of numbers we felt we were past the point of gaining an advantage from outsourcing.
“In having our administration closer to home, we can drive the agenda of development for our business infrastructure into the future.”
Lally pointed out that SunSuper had previously been contributing a significant profit margin to what was then known as CitiStreet and covering the losses the administrator had been taking from other clients.
“As a large client, we weren’t getting the benefit of our own scale,” he said. “But with control of the administration business, we can now prioritise initiatives and develop them in an integrated way.”
Looking particularly at SunSuper’s acquisition of Precision, Camm said every acquisition transaction had unique characteristics.
“In that case, we’re talking about a business significantly affected by the US financial crisis,” he said. “And CitiStreet’s owners were on ground zero.
“It was put up for sale as a non-core asset by a company with bigger issues on its plate.”
But in terms of why CitiStreet was bought, Camm’s thoughts echoed Lally’s reasoning.
“SunSuper was CitiStreet’s largest customer with 80 to 90 per cent of its business,” he said. “It was a logical move, but I don’t think it’s a pointer to a bigger industry trend.”
Providing a sideline to the business of superannuation administration is the Federal Government’s proposed superannuation clearinghouse. Administrators were among the many parties asked for comment, yet many remain divided on the initiative’s benefits.
Beck said efforts towards automating the business of superannuation as much as possible were a great idea.
“Automation does two things,” he said. “It brings down the cost of services and it improves services.
“But it also puts pressure on the administration industry,” Beck continued. “Less activity means less people and more technology means less people.
“I wouldn’t say the Government’s clearinghouse will have a violent impact, but it is definitely something we’ll need to manage our way through.”
According to Lally, the clearinghouse’s impact will depend entirely on the solution that emerges at the end of the day.
“At the moment, 90 to 95 per cent of employers have the ability to perform their transactions electronically, but less than 50 per cent actually do so,” he said. “So the basic challenge hasn’t changed.
“How do you convince employers to use electronic transactions?” Lally asked. “Because this solution only shifts the problem from the administrators to the clearinghouse.
“The clearinghouse may provide part of a solution, but I think there’s a few more questions to be answered regarding its effectiveness.”
For Camm, there’s an argument that the Government’s superannuation clearinghouse is a solution looking for a problem.
“There are two things that the industry needs to solve,” he said. “The first is making choice of fund easy for employers, the second is solving issues around lost super and multiple accounts.
“Regrettably, I think that the clearinghouse solution has been put up before the root causes and other potential issues have been properly examined,” Camm added.
“My view is that we need to investigate employers’ needs and circumstances more closely in order to understand how we can best deal with their SG [superannuation guarantee] obligations.”
Camm said the solution to lost super was more obvious.
“The obvious solution is the use of peoples’ tax file number as an identifier,” he said. “But the question there is whether privacy concerns can be covered off as well as the role of the ATO [Australian Taxation Office].”
Beyond the changes occurring in superannuation, the financial crisis will ensure competition continues and the challenge for administrators remains differentiation.
Looking ahead, Lally said Precision’s initial focus is on utilising the benefits of scale.
“But also tailoring our offering to funds’ needs,” he said. “The constant challenge is to keep our technology up-to-date, to harness the best technologies available and to tailor our services to what both our members and clients want.
“However, this is a complex business and there remains a great deal of inefficiency,” Lally continued.
“So I think the bigger challenge may come from funds getting bigger, biting the bullet and saying that they can do their administration better themselves.
“Banks and insurance providers are already doing it, so why not super funds?”
For his part, Camm said that differentiation was definitely key.
“The main focus has to be providing our clients with a quality and low cost service through scale,” he said. “But the next part is improving the customer experience.
“In a world where a low engagement product like superannuation is suddenly seeing a lot more member interaction, the need for a better member experience is greater than ever.”
