Whilst there are undoubtedly challenges with some parts of the Protecting Your Super (PYS) legislation (such as the removal of insurance cover for a large portion of members and how this can be communicated appropriately), the consolidation of small, inactive accounts is one that is hard to argue with when considered through a member best interest lens.
Whilst most will agree that retaining an account with the Australian Taxation Office (ATO) is unlikely to be in a member’s long term best interest, if we can assume that accounts will be re-united by the ATO in an efficient, expedient manner, the fee savings for the industry as a whole will be significant.
All things being equal, these savings should then be passed on to members in the form of fee reductions. This does not, however, necessarily seem to have been the case in recent months. What is of concern is that many funds have been required to, or are likely to, increase their administration fees as their costs of operation have not reduced in line with the expected reduction in membership.
Recalling numerous discussions with the general manager of research during my time at SuperRatings in relation to the fact that funds are, at the end of the day, businesses, which need to match their revenue with their operating costs in order to continue to remain viable, PYS poses some difficulties.
The challenge for many funds is that the PYS legislation does little to reduce their costs but for some, results in a significant reduction in the membership base across which these can be spread. Unless a fund can find material administration savings or reductions in cost through other avenues, there remains little alternative but to increase fees (or use reserves, which cannot be a long-term solution). At the same time, many funds have been hit with a significant ‘PYS implementation charge’ by their providers to enable them to comply with the legislative changes, which only serves to exacerbate the cost burden.
The operational ecosystems that exist today are heavily influenced by the notion of legacy. The dependency on legacy technology, operations and processes from current superannuation administrators creates significant friction and inefficiencies that ultimately deplete the ability for funds to add maximum value to the most important component of the ecosystem: the member. In 2019, with the quality of technology globally available, the inability of funds to respond to policy changes in a timely and cost-effective manner is wearing thin and falling below consumer expectations.
Technology’s helping hand
The focus for funds needs to be on technology platforms that are fit for purpose and fully compliant with all governing legislation, regardless of the regularity of change. Further to this, it would only seem reasonable that the cost of an update should never be passed onto clients, notwithstanding the scale of the changes. We don’t see Apple charging for updates to their software every six months, so why should super funds be required to pay for similar changes!
Whilst the PYS legislation presents many challenges for funds and may drive many trustees to begin to consider mergers given they may no longer be able to effectively compete, the positive outcome of the legislation in relation to account consolidation is that it puts funds on a more level playing field. For those funds that have relied on ongoing fee revenue from large swathes of small balance, inactive members, the ability is no longer there to do this, meaning funds must become more efficient to stay alive.
In addition to this, with the potential for some form of ‘account stapling’ expected to be implemented in the short to medium term, as well as potential changes to the default fund mechanism, this will create even more pressure for funds to find greater efficiencies in their operations to survive and potentially thrive in the new competitive superannuation landscape.
Adam Gee is the head of strategy for GROW Super.