The Australian superannuation industry may have accepted the inevitability of MySuper but, as Damon Taylor writes, many trustees and executives are looking for more detail.
Coming out of the 2011 Federal Budget, it has become very clear that the industry will be facing an entirely new superannuation environment in a little over two years.
Yet while 1 July 2013 (and the MySuper legislation set to launch on that date) is just around the corner, the industry’s primary concern is the details of the changes.
Trustee of industry fund NGS Super John Quessy said that he had a number of concerns about MySuper and for a range of different reasons, but that his greatest concerns revolved around a lack of clarity.
“As with so many of these things, the devil is still in the detail and we haven’t seen anywhere near enough of it,” he said.
“I’m obviously talking about nitty gritty detail but in this day and age, if you want to do something in 18 months to two years’ time, the lead in to the systems and a range of other things to cope with that is about that same length of time.
“Even this far out, we really ought to have had a lot more detail from the Federal Government about what is and what is not going to be okay in MySuper.”
Providing a counter view, Mercer Worldwide partner and head of defined contribution consulting for Australia, Russell Mason, said that like it or not, MySuper was coming and that it was time for Australia’s super industry to accept it.
“At this point, I think we’ve got to accept it,” he said. “Like all change, there is some the industry likes and some it doesn’t like.
“But the Government has stated its intention very clearly. It wants MySuper in place and it believes it’s a consumer protection that allows members to make fair comparisons,” Mason continued. “So, subject to it being in a form that’s fair to the industry, then I think my view is that we accept it and let’s move on with it.”
Getting down to work
Fortunately, ‘getting on with it’ seems to be something that funds are already on top of. According to Pillar chief executive Peter Beck, most funds are specifically thinking about their value propositions in the market.
“In my view, funds all need to be thinking about where they want to position their products in terms of fees, in terms of investment options, investment approaches, and in terms of advice,” he said.
“We think they should be thinking about insourcing versus outsourcing, and not just in their accumulation product, but in their pension product as well.”
“MySuper seems to be going in the direction of people being asked to demonstrate that they’ve got scale and efficiency and that they can create value for money,” Beck added.
“So it seems to me that a lot of them need to be thinking about how they can demonstrate that they have sufficient scale to do that.”
According to Mason, there is no doubt that funds wanting to succeed in the new MySuper environment have to be preparing now.
“In fact, I’ve already seen one fund that’s resolved to get the ball rolling by putting in place a very low-cost option that will work on about five basis points, a balanced-type option with everything indexed and using extremely low cost products,” he said.
“And their view, subject to it getting some traction with members, is that that will become their MySuper option.
“So I think funds have got to start looking at their balanced option, or whatever is their current default option, and asking themselves whether that’s going to be their MySuper option or not,” Mason continued.
“If it is, they need to ask themselves where they need to tweak it and what they need to do to make sure it meets with the requirements of MySuper.”
Of course, one of the key premises of MySuper is that most super funds — and industry funds in particular — will need to do little to alter their current default funds in order to satisfy the new requirements. Yet Mason said that minor tweaking, at the very least, would still be necessary.
“A lot depends on the current structure of their default offering and its suitability,” he said.
“I’m aware of one fund that is actually looking at creating their new MySuper option right now because they either can’t change the current default or it becomes too messy and too costly in terms of redemptions and lost returns to do so.
“So I think this is where funds are still in the early days, in starting to think what they’re going to have to do to satisfy MySuper, what changes are going to have to be made,” continued Mason.
“But while the vast majority of corporate and industry funds won’t have to make a lot of wholesale changes, there is clearly an impact on the master trusts in terms of pricing models.
“We’re yet to see the final outcome of that but, again, that needs to be fair to everybody.”
Similarly looking towards MySuper’s impact on the wider superannuation marketplace, Beck agreed that any change by industry funds would be minimal — although change on the retail side would be interesting to watch.
“The retail funds clearly have to do something,” he said.
“So they’ll separate their product from the advice and they’re already introducing cheaper versions of their products and, as far as we can tell, AMP, BT and Colonial have all got products now with the advice unbundled that are essentially MySuper-lookalikes.
“So I would suggest that most of them would be ready to launch a strong campaign into that MySuper space, but that’s where this interesting dynamic comes in,” Beck continued.
“Industry funds have always been positioned as the low-cost product, but MySuper will mean that they’ll be competing against the retail funds in a way they haven’t done before.
“Add to that the fact that the retail funds do have scale — manufacturing scale — that means they can produce product very cheaply and I think you’ve got an interesting tussle on your hands.”
However, for Quessy, the fact that industry funds need only make small changes or that retail funds are likely to require larger changes is not the point.
“I’m taking that as a given from comments made my members of the committee at the ASFA [Association for Superannuation Funds of Australia] conference last year,” he said.
“And if members of the committee are publicly making that statement, then I’m assuming that to satisfy the requirements of offering a MySuper product, our fund’s and most other funds’ default products will tick the boxes.
“But ticking the boxes isn’t going to be enough if, in fact, what you’re then going to have is some website that has a comparison of MySuper funds based on costs,” Quessy continued.
“And that’s simply because most trustees have not developed default products on the basis of what they cost.”
Using NGS Super as an example, Quessy said that the executive had developed a default product on the basis of the best possible returns to members given the variety of risk appetites that existed among clients that who in the default fund.
“That can be everyone from people starting to work in their very first full-time job right through to those who are weeks away from retirement,” he said.
“It’s still a pretty ‘one-size-fits-all’ product that’s aimed at getting good returns and it has achieved that.
“It is, however, actively managed,” Quessy pointed out.
“Now, if that’s going to be compared on the basis of its returns, then I’ve got no problem with that. If, however, it’s going to be compared on the basis of costs, which are already absorbed anyway, then I have serious concerns about that because (a), it’s saying to people, superannuation is all about costs and that’s the only thing you’ve got to give consideration to, and (b), it’s an unfair comparison.
“If something costs 20 basis points and gives you a CPI [consumer price index] return and then something else costs 60 or 80 basis points and gives you 3 per cent above CPI, which one do you want to be in? We all know the answer to that but we’ve got an unengaged group of people who don’t and therein lies the problem.”
The value proposition
The importance of value and, furthermore, communicating that importance to members, is the key here. But with regard to investment options, the reality is that the concept of value is open to interpretation.
According to Mason, funds are conscious that cost is a focus but there is no set formula when it comes to implementation.
“If cost does become a driver, I suspect that while a lot of funds may not move entirely to passive investments for their default MySuper option, they will certainly look at removing their high-cost products,” he said.
“So some of the infrastructure and private equity products are quite expensive and they will perhaps move out of performance-based fee products where their MER [management expense ratio] can be pushed up quite significantly by good performance, though I realise that it’s almost a contradiction that those investments are the ones that will be penalised.”
However, Mason said that one interesting point was that in all the documentation thus far released for MySuper, there had been no explicit statement that a MySuper fund had to be a low-cost product.
“Certainly, it must be sustainable, but I think the industry has taken it, and some in Government have said this, that it needs to be pretty low cost,” he said.
“So most people are assuming that the option they offer for MySuper won’t necessarily be the one where they have performance-based fees or high cost investments like private equity or infrastructure.
“But if that did eventuate, it would be a little bit of a shame because it means that this will be a product that may or may not produce the sort of returns that trustees are trying to achieve,” Mason continued.
“My concern is that we don’t make it so simple or so low-cost that it underperforms what the typical balanced option does today.
“If that’s the case, that will quite obviously be a step backwards.”
Illustrating his fund’s own preparation, Quessy said that NGS Super’s executive was thinking through the potential implications of whatever scenario eventuated.
“We’re not going to start making serious changes to our current default investment portfolio on the basis of what we don’t know,” he said.
“However, it may well be that one of the things that we do is we start building a portfolio in another option, either a new or currently existing option, that is very mindful of costs, fees and MER.
“We will try to have something that will be based on an index, so that’s in place and we can therefore market that immediately if that’s what happens,” Quessy continued.
“But I would also point out that there’s a fundamental problem with concentrating on fee-free or cheap investments for people who are disengaged and in this for the long haul.”
Quessy said that if someone wasn’t engaged in their superannuation and yet were nonetheless going to be in it for a long time, they were a classic example of someone who was never going to make any switches or liquidity demands on their superannuation provider.
“So that person is just never going to ring them up and say, ‘get me out of equities, move me into cash’ and then ring them up a couple of weeks later and say, ‘okay, the market’s down, now’s a good time to buy,’” he said.
“They’re just not going to do that. So here is a group of people who you can really afford to take some illiquidity risk premium with because they’re not going to say that they want their money in something liquid. They’re going to say, ‘I don’t care what you do with it, I don’t know what you do with it, just give me a good return and don’t charge me too much’.
“You’ve got an opportunity to get a great return for the illiquidity investment, but often that illiquidity investment is one that does have fees attached to it,” continued Quessy.
“So if fees are all you’re worried about, I think you’re going to miss out on some great potential returns.”
Bringing another perspective on value to the table, Beck suggested that there was also a question around which services funds would incorporate into their MySuper products.
“I think if we go back to what the objective of MySuper is, it’s to have default funds that suit most Australians,” he said.
“Therefore, it’s important to have a product that’s not just the cheapest but that offers value for money for most Australians. The classic example is that you can either offer single-issue advice in the product or you can actually make that a choice on top of the product.
“Now, if everyone goes down the cheap and nasty option, then there’s going to be no single-issue advice included in MySuper products and I don’t think that suits most Australians,” Beck continued.
“So there’s this debate taking place between whether you have a ‘cheap and nasty’ and then you let everyone dial up under choice or whether you go for something that’s got more value for money in it as your MySuper product and dial up from there.
“You could envisage a very low-cost product which has got indexed investment options, no advice, limited services, minimum insurance and minimum options but the danger is that if that becomes the MySuper product or the default option, that’s probably not going to suit most Australians.”
Member engagement
Naturally, the last piece of the MySuper puzzle is member engagement. Over a number of months, any number of industry pundits have expressed the view that MySuper will entrench member disengagement and undo much of the hard work done by the super industry to this point.
Yet while he admitted that engagement needed to remain a trustee priority, Beck said that he did not foresee a negative impact from MySuper.
“My view is simply that there’s a certain amount of people who are disengaged and will end up in a default option,” he said. “And I don’t think that the introduction of MySuper is going to change that.
“What’s happening is that over time, as SG [superannuation guarantee] contributions mature and as members’ account balances start getting higher, people are showing more interest in super,” Beck continued.
“And that’s a secular trend towards a little bit more engagement.
“MySuper or no MySuper, there will be more engagement over time, but it’s a long-term proposition.”
Alternatively, Quessy said that he had grave fears that MySuper would take the industry backwards in terms of member engagement.
“My concern is that MySuper will end up being something that essentially ‘dumbs down’ superannuation and potentially undoes all of the work that the industry has tried to do to engage members,” he said.
“I think this is an opportunity for complete and total disengagement because, if we’re not careful, what it will mean for some people is that they’ll be over there in some MySuper option they know nothing about, it’s not going to give them great returns but the message will be, ‘look, you don’t have to worry about it’.
“I think one of the things that people have underestimated in regard to member engagement and basic financial literacy is that this is an evolutionary process,” added Quessy.
“It’s not a revolution. You’re not going to change peoples’ knowledge and attitudes to anything financial overnight.
“This has got to be a process that the community and the funds and the lawmakers undertakes for the long haul, knowing that it’s going to take a generation.”
Providing an example, Quessy said that when he was growing up, the television news consisted of what was happening in the state, what was happening in the nation, what was happening overseas, the weather and the sport.
“There was no finance report and I don’t think newsreaders ever mentioned the word ‘sharemarket’,” he said. “But sometime in the last 15 years, or thereabouts, the Australian people have started to have a bit of an interest in that.
“Now, it didn’t happen suddenly one day. The fact of the matter is that people are gradually taking an interest in these things and I think we’ve got to take the same attitude to making people aware of their superannuation,” continued Quessy.
“I don’t think we’re ever going to have a situation where an 18-year-old is excited about his superannuation and really wants to talk about it over lunch.
“That’s not going to happen, but that doesn’t mean we just give it up and don’t engage in those conversations. They still have to happen and my concern is that under MySuper they may not.”
Playing the waiting game
Yet when all is said and done, the reality is that the super industry will have to wait until the final MySuper legislation is released for firm answers to all of its questions.
And for Beck, what does seem clear is that the industry is heading towards an even more competitive superannuation environment in which products are more easily understood and compared.
“The first point here is that the intent is to create a more competitive environment and I think that will happen,” he said. “Retail funds are already positioning to compete against industry funds at a product level, and I think the industry funds have got to now start thinking about how to compete at an advice level.
“Traditionally, the retail funds have offered their products with advice and there’s been no competition for it and the industry funds have offered their product without advice and they haven’t really been competing against retail,” Beck continued.
“But now I think both retail and the industry funds are going to compete both at a product level and at an advice level, and there’s no doubt that that makes for an entirely new super industry dynamic.”
For Quessy, however, the fact that so many of the industry’s questions remain unanswered is a concern.
“We will get answers to these questions but I just cannot believe that the Government have had the Cooper Review’s findings for as long as they’ve had it and we still don’t have detailed answers as to what they want MySuper to look like,” he said.
“Clearly we’re going to have it; whatever the industry thinks about whether it’s going to happen or not, it is going to happen. We just want to know what it is that’s going to happen.
“And there are some positive aspects to it. We might, in fact, get a whole series of really no-frills superannuation products and there are a whole lot of people who might be attracted to a simple, low-cost product,” Quessy continued.
“These might be the people who chase bargains around supermarkets for whatever reasons, some because they just love getting a bargain even if it costs them an awful lot to go and chase it and others because the household budget just requires them to shop at the cheapest place even if it’s not convenient.”
But according to Quessy, there would also be others who not only wanted but valued convenience, choice and a whole range of services that inevitably came at a cost.
“And my concern is that everywhere I go, I go to the politicians, I go to the members of the committee, I hear fees, fees, fees as though that was the only thing,” he said.
“But if it’s all about fees, I think we’re coming at things from the wrong angle.”
