The superannuation clearing house represents a key part of the Government’s policy but, as Damon Taylor reports, the industry's response to the initiative has been muted.
After a 2009 that was full of government reviews both touching and specifically involving superannuation, 2010 seems set to be a year of change.
Naturally, the results of a number of these inquiries remain pending but mere months into the New Year, one of the first outputs and perhaps the first signal of the change to come has arrived already in the Superannuation Clearing House.
Having already prompted multiple industry submissions, the clearing house draft legislation, and its provider in Medicare, has been the topic of numerous discussions, but according to Damian Hill, chief executive officer of industry super fund REST, while the clearing house will have significance over the longer term, its initial impact is unlikely to be substantial.
"For super funds, this will be another clearing house and another payroll system to interface with," he said. "But at REST we already interact with 50 to 60 such systems, so realistically we’re just adding one more to the list.
"The employers of all funds already have clearing house facilities and the ability to make electronic transactions available to them, but it’s the take-up rate that’s been low," Hill continued.
"So while this clearing house is a step forward, I can’t see it meaning an explosion in their use."
Reflecting on what a national superannuation clearing house would mean for super funds, employers and existing fund members, Glenn Palmer, general manager of operations for Australian Super, said while it would be a slow process, he was in favour of anything that made super administration easier for employers.
"Australian Super is committed to making super administration easier for employers and we applaud the Government’s clearing house initiative," he said.
"It is a slow process, but we have been actively encouraging Australian Super employers to migrate to more user-friendly online payment systems and hope the Government’s initiative will encourage this further.
"For Australian Super, our largest growth in employers has been in the ‘under 20’ employee category as a result of [Choice of Fund]," Palmer continued.
"These employers are generally choosing not to register with the fund for electronic payment and pay via paper instead.
"If the [national superannuation clearing house] was able to deliver a simple solution for employers to accurately and quickly meet their superannuation obligations and it facilitated the quick and accurate movement of superannuation monies and data to the fund, it would potentially be a great benefit."
Looking more specifically at fund members, Palmer suggested that any change would be small but positive.
"For members who are employed by a small employer, so in that ‘under 20’ category, potentially it could mean their superannuation contributions are in their accounts faster and therefore invested sooner."
Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), said she viewed the Medicare clearing house initiative as representative of an opportunity for the future rather than groundbreaking change right now.
"The good thing about the Medicare clearing house is that it gives the super industry the opportunity to get some data standards in place for electronic transactions," she said.
"As an industry body, ASFA has been trying to get the industry together on this for quite some time, and we’ve been saying that if the industry itself doesn’t do it then the Government will.
"Now the Government has and I think it’s going to be a wake-up call for a lot of people."
As to whether a national clearing house would create an overall gain for efficiency and whether it was, in fact, filling a gap that existed within the current system, Hill argued that there were enough existing clearing house facilities and said that the Government’s Medicare clearing house would not be adding to efficiency, at least not from a fund point of view.
"Certainly for small employers, a national clearing house is likely to have a significant impact and it delivers on the Government’s election promise," he said.
"But for super funds, I think there will be much greater efficiency gains coming out of the Cooper Review."
According to Palmer, it is too early to say what sort of efficiency gains a national clearing house will bring until a working model is in place.
"However, initial indications are that it will be an efficient solution if it is only available electronically and has minimum data standards," he said.
"Choice of Fund has now created a situation in which small businesses are having to deal with multiple funds that each have different contribution models.
"Most employers in this situation will generally choose to contribute via paper so they have a consistent approach to paying super, but paper is the most inefficient method," continued Palmer.
"Changing these employers from paper to electronic via the national clearing house will obviously lead to an increase in efficiency."
Palmer added that while he could see the Medicare clearing house offering efficiency gains, he felt its greatest potential would be to show employers that electronic commerce is not only possible but efficient as well.
"There have always been clearing house providers," he said. "But the Government solution of a free and independent service is the key, at least for smaller employers."
Take-up challenges
Yet the key question mark on any sort of national clearing house is something that has been highlighted by super fund administrators for a number of years now.
Many argued that, as things stand, 90 to 95 per cent of employers have the ability to perform their transactions electronically, compared to around 50 per cent which actually do so.
And on that basis, the basic challenge for the super industry — take-up — hasn’t changed at all.
Palmer said the Australian Super prediction was that the take-up of a national clearing house service would replicate the take-up of superannuation choice.
"We think it will be similar to Choice of Fund take-up, which wasn’t a big bang but rather a gradual increase," he said.
"Over time that gradual increase becomes a more significant number but it will depend on a few factors — the level of government marketing, the level of third party promotion (small business association, chamber of commerce, etc), whether super funds proactively guide eligible employers to the national clearing house and, naturally, the employer experience when using the service."
By contrast, Hill’s assessment of take up was somewhat less optimistic.
"I think it’s a bit of a ‘field of dreams’ type scenario," he said.
"To some extent, the Government is taking an ‘if we build it, they will come’ approach, and the question is whether there’s a compelling reason for them to come.
"The Medicare clearing house will have to be sold to employers because I don’t think it’s necessarily something they’re crying out for."
Taking a similar line to Hill, Vamos said because the Medicare clearing house would be voluntary, the Government could find attracting users difficult.
"ASFA’s members have been pushing for their employers to be making electronic transactions for a number of years now," she said.
"The problem is that the Medicare clearing house isn’t going to target the real issues here, and first and foremost that has to be [rectified].
"The industry needs to be able to verify the identities of members within a specific fund, it needs minimum data standards, it needs the transmission of data electronically across the board and it needs to be able to use individual members’ tax file numbers as an identifier," Vamos continued.
"If the Government gave us those things then we wouldn’t need a Medicare clearing house."
Vamos said the focus for both the Government and the super industry had to be on giving employers a single portal.
"What is important here is that employers have one portal through which they can pay all the super funds their employees are members of," she said. "And it’s a portal that in turn links in with all funds.
"That’s where the focus needs to be."
Criticisms and concerns
Understandably less than enthusiastic about the Medicare clearing house, Peter Philip, chief executive officer of clearing house provider SuperChoice, said the jury was still out on whether it was a solution that would meet the needs of fund members individually.
"But we certainly feel that what the Government is proposing will create distortions in the market," he said.
"How could it not when they’re funding with public money a clearing house that will be a significantly advantaged competitor to existing clearing houses?
"Our submission to Treasury is that the Government shouldn’t be creating an uneven playing field with public funds," Philip continued.
"This is a market already well served by existing solutions, solutions that can come at no cost to the employer, and it’s disappointing that the Government isn’t supporting these.
"With a three-year mandate, this is a solution with an uncertain future and, thus far, they’re simply reinventing the wheel."
As to whether a national clearing house would automatically mean greater employer use of electronic transactions, Philip was also doubtful.
"Can Medicare change the clearing house landscape significantly?" he asked. "Probably not.
"So the question is, what will be the trigger to change employer behaviour and make them go online?
"I do believe there will be some sort of universal clearing house that could do that but it will be a long, slow road and it won’t happen with a solution that has a three-year timeframe."
Of course, SuperChoice’s criticism of the Medicare clearing house is hardly surprising. This is, after all, a solution that is being set up in direct competition to the services it already provides.
Yet SuperChoice’s submission upon the draft legislation is not the only one to have been put forward. ASFA has also deemed it necessary to comment on a number of key points, and if Palmer and Hill’s reactions are any indication, those views have gained strong industry support.
Palmer said it would be interesting to see the Government’s reaction to ASFA’s recommendations.
"ASFA has raised some good points regarding the proposed standards and it will be interesting to see if the Government takes these into consideration," he said.
"We (Australian Super) support ASFA’s views around minimum data standards, use of electronic submission and support this being further rolled out in the industry."
Commenting on the chief issues raised in both the ASFA and SuperChoice submissions, Philip said there were a couple of points SuperChoice was taking issue with.
"The first point is that the technology to do all clearing house activities exists today as a result of significant investment from the private sector clearing houses," he said.
"That’s probably 10 years and $30 million worth of investment, so I don’t think that the $16 million budgeted for the Medicare clearing house really scratches the surface of what’s needed when you’re talking about building a system from scratch.
"Bottom line, we don’t think it’s a good use of tax payer’s money."
Philip said that SuperChoice’s second point was to question why the Medicare clearing house was being set up in direct competition with existing clearing houses.
"Is it right to create a clearing house that is not only a competitor for existing clearing houses but one that also holds a significant advantage in allowing employers to shed their superannuation guarantee (SG) advantages so immediately?" he asked.
"Because that’s something clearing houses without the ‘Approved Clearing House’ label simply won’t be able to do."
Competency and standards
Referencing what ASFA perceived to be another issue with the Government’s draft clearing house legislation, that of operating standards and minimum competency, Vamos said that to operate a clearing house there had to be a clear level of competency.
"That competency has to be there — being able to verify a member and the transaction data being sent, being able to cope with the volume of transactions," she said. "Dealing at the front-end is one thing but when you’re dealing with the back-end and interacting with funds as well, that’s when it gets tougher."
Asked whether the concern was transaction speed, privacy or something else entirely, Vamos said it was definitely transaction speed.
"It is transaction speed," she said. "If a contribution is paid electronically, there is some uncertainty around Medicare’s data standards in paying that amount forward.
"When an employer pays their contributions to the Medicare clearing house then their SG obligations have been met," Vamos continued. "But if that contribution isn’t cleared in a timely fashion, who bears that transaction risk?"
In terms of privacy, Hill’s indication was that the majority of the super industry remained unconcerned.
"Medicare should already have privacy as one of its core competencies given the other information it handles for Australia," he said.
"The key will be how quickly that information is passed on to funds as well as the quality of the data being transferred, but I can’t see that either of those will be any better than what existing clearing houses offer.
"I think the whole industry will be monitoring Medicare and the clearing house closely," added Hill.
"Because with a July 1 deadline, they only have a short period of time to build and roll it out.
"It’s something the super industry will need to keep a watching brief on."
Philip said that while he was sure Medicare was a very capable organisation with respect to privacy concerns, the time factor mentioned by Hill had to be a concern.
"[Medicare] has ample resources to throw at this, but with respect to privacy, I would say that it has taken us (SuperChoice) 12 years to get to where we are today.
"That’s a lot of time investment and a lot of financial investment, so I’m doubtful that they can reach a similar place in only four months."
Cost and efficiency
Quite apart from the obvious cost to existing clearing houses, there is also the question of what other costs any centralised clearing house may mean for super funds and their administrators. But according to Vamos, that cost was likely to be something funds had not yet contemplated.
"I don’t think a lot of funds have costed the changes they may need to make to their existing processes," she said. "But setting up a link with another provider does come at a price.
"What people have got to keep in mind is that in the Medicare clearing house the Government has kept one of its election promises," she continued. "They’ve delivered for employers, just not necessarily for the industry.
"Not at this time anyway."
Looking not just at the cost to super funds and administrators but also at whether the efficiency gain would be worth the price, Philip said that the cost savings delivered by a clearing house were highly dependent on the volume of transactions.
"For instance, the first transaction through an e-commerce channel isn’t sufficient to justify the investment made in creating that channel," he said.
"You need a significant volume of transactions, perhaps 10 per cent, before that happens.
"Doing some quick calculations, that could mean that Medicare will need 1 million members to get those sort of volumes," continued Philip. "So that’s in the order of 300,000 small businesses.
"To do that in their first year of operation means almost 6,000 businesses a week or 150 businesses an hour."
Philip said SuperChoice had spent years dealing with funds and trying to minimise the amount of re-engineering they’ve had to do to receive electronic transactions, but it had also been involved with a number of ongoing projects to get employers online.
"Those projects have included a number of elements from e-mail to mail outs to web presentations and, in some cases, even monetary incentives," he said.
"In some cases employers have been offered not only free clearing house services but also a reduction in fees for their members.
"Take up is by no means a given and I’d say that it’s all too easy to underestimate the enormity of this task."
For Hill, while the cost of building another clearing house interface is not insignificant, the Medicare clearing house’s value lay in what it could mean for the industry in the long term.
"As time moves on the extent to which this clearing house will contribute to electronic standards will be interesting to watch," he said. "And that’s the point at which the industry may see decent returns.
"We have to be patient though because it won’t be an immediate return on investment."
Outlook
So where to from here? The Government has presented draft legislation for the new national clearing house and, in turn, the wider super industry has put forward a number of submissions. The question, according to Palmer, is what will be the end result.
"It’s still early days but I think there a few questions that remain outstanding," he said.
"For instance, who will promote the service and how much promotion will occur? What support will the service offer (e.g, helpdesk for employers and funds) and will it be viable for employers with fluctuating numbers of employees to use the service?
"The announcement of Medicare as the national clearing house service provider did take some in the industry by surprise," Palmer continued.
"However, Medicare has been very proactive in working with the industry to understand the current issues and to build a model that should succeed."
The question for Philip is what happens if the Government doesn’t get the Medicare clearing house right.
"What will be the long-term impact?" he asked.
"For the employers who try it and find it doesn’t work, will they be turned off? Will they be reluctant to use electronic transactions for their contributions in the future?
"And that’s aside from the lost investment made by super funds and their administrators," continued Philip. "This clearing house is something that the Government needs to get right and it can’t be a short-term project.
"It needs to be done right and it needs to be done in conjunction with the industry, not by competing against it."
Vamos said in terms of the detailed clearing house legislation, both Medicare and Treasury were both being very open.
"But in terms of winding back the decision, I’m afraid the horse has bolted," she said.
"What’s important now is that we use this as a driving force across the industry for improving efficiencies in existing clearing houses.
"I’d also like to see minimum data standards for employers and the ability to use tax file numbers," Vamos continued.
"A lot of funds want to move to fully electronic communications and transactions with employers, but they’re seeing real reluctance.
"Ultimately, we need to see the Government’s thinking on the Medicare clearing house extended to the rest of the super industry."
