While superannuation returns rebounded in 2010, Damon Taylor writes that most of the focus during the year was directed towards the future of the super system itself.
For Australia's superannuation industry, yearly reviews are usually characterised by performance. Yet while investment returns rallied this year and much healthier account balances have reassured members, it was the super system itself which took centre stage in 2010.
For Anthony Rodwell-Ball, chief executive officer of NGS Super, the Government's various reviews and the discussions around them have clearly defined the last 12 months and are likely to dictate the industry's focus for the next 12 months as well.
"Without doubt, this year's highlights have been the bringing down of the Henry Tax Review and, of course, the Cooper Review," he said.
"And then I suppose a change to the Minister for Financial Services and Superannuation as a result of the election was also an interesting development.
"It probably wasn't surprising to see Chris Bowen move on, but to have a minister appointed literally from the boardroom, firstly as an STA [Superannuation Trust of Australia] director and then as an Australian Super director, to have Minister [Bill] Shorten appointed from that background implies a far more immediate understanding of superannuation," Rodwell-Ball continued.
"That is not to say that Bowen had a shallow understanding of superannuation issues, but this is a far more immediate understanding of the sorts of issues that he will face in a very dynamic and diverse industry.
"So I expect those three – Henry, Cooper and the appointment of a new Minister – will bring a very different focus to the industry in the next 12 months."
Damian Hill, chief executive officer of the Retail Employees' Superannuation Trust (REST), said that it was also significant that the 9 per cent to 12 per cent superannuation guarantee (SG) debate was now front of mind.
"That's been a long-standing aspect of the super environment where you look at Australia's system versus others around the world, and adequacy is one of our deficiencies," he said. "So to have that front and centre as part of the debate now is very important.
"And while it hasn't garnered as much attention, the other highlight is just getting into reasonably positive returns again," Hill continued. "We shouldn't underestimate the impact that has on the average member out there.
"In many cases, it's served to rebuild some of the trust that was, at the very least, shaken in recent years."
According to Warren Chant, principal of research house Chant West, the other issue of significance for 2010 had been the Ripoll Inquiry and its various recommendations.
"It's basically saying that product fees and adviser commissions need to be separated and, by and large, the financial planning industry has accepted that," he said. "In fact, they've come out and said they're going to do it by 1 July, 2012, and you've seen AMP and MLC move on it already.
"So you've got the Ripoll Inquiry on the one hand and then you've got [Jeremy] Cooper coming out with his recommendations on the other," Chant continued.
"But the biggest highlight has to be the Government wanting to increase the superannuation guarantee from 9 per cent to 12 per cent.
"We've had Bill Shorten come out and say, 'look, given the situation in Parliament, it's not a lay down misère that we're going to get these reforms up'."
But the very clear message, according to Chant, is that the Government intends a package of reforms to the superannuation industry, and while it will include an increase to the superannuation guarantee, it will also include MySuper.
"You have a situation now where we've had the inquiries – some good things have come out of the inquiries and some not so good things have come out of the inquiries. But at the end of the day, the Government's made its position clear," Chant said.
"It wants to increase the SG and it wants, by and large, to implement Cooper's recommendations.
"It will certainly be interesting to see how the next 12 months unfold."
So while 2010 has seen a number of super-related Government reviews deliver their findings, it's clear that Cooper's Super System Review has drawn most of the industry's focus.
Of late, the MySuper legislation has garnered particular discussion, but according to Rodwell-Ball, that is not without reason.
"I'm not entirely convinced that MySuper was or is required," he said. "Sooner or later, the market responds to market pressures and beyond that, you have to remember that consumers aren't silly.
"When you see the very large retail funds like AMP and BT coming out with products positioned as low cost and no frills that are in competition with a very successful industry fund advertising campaign, I'm not so sure that MySuper, as a product, is necessary," Rodwell-Ball continued.
"I think the market itself will play out in terms of competition and in terms of bringing different offers."
Nanny state
Rodwell-Ball said that while Australians by and large might be disengaged with their super, they certainly weren't stupid.
"They're able to determine themselves what offers suit them best without a sort of Nanny-state coming in and saying 'we're going to have this product; it's going to have this design and you will be defaulted into it if you opt out'. I don't philosophically agree with that."
Similarly, Chant said that for the vast majority of super funds, investment governance was strong. Their decisions were backed by good asset consultants and their default options, particularly those of not-for-profit funds, have done very well.
"I actually asked this of Sandy Grant (director of CareSuper) at the ASFA [Association of Superannuation Funds of Australia] conference," Chant said.
"At the conference he said: 'Look, basically what will happen is that pretty much every fund's current default option – they just need to call it MySuper with very little if any change.'
"So the question I asked him was that if that's the case, why do we need MySuper?" continued Chant.
"His answer, and what seems to be the universal answer, was that this is about putting in place some rules and regulations around how default options should look.
"Now when you're in a crowd and you ask a question there, you can't hog the floor, but my next question would have been: 'Well, why do you need rules and regulations when it's already working really well?'"
Chant explained that his main concern was that MySuper was unnecessary in what he considered to already be a good superannuation system.
"If you're really concerned about scale and you want funds to merge, which certainly is what Cooper wants, then you don't have to create a new product just to do that," he said.
"That's why we say that this is much of the same. But the big problem is that by March next year virtually every retail fund will have a simple, low-cost product, which is effectively just an index product.
"The issue we have is that they'll look competitive, but really they won't be."
MySuper
Providing a counter point to the views of Rodwell-Ball and Chant, Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), said that MySuper was about having much greater flexibility in superannuation's regulatory framework and Choice architecture.
"We want to be able to cater for those who don't want to make an investment decision as well as those who want to take much greater control of their investments in a tooled vehicle," she said.
"The job over the next 12 months is designing MySuper so that we get the right policy outcomes, so we get proper comparisons, so we get no dumbing down of investments and so that we really can deliver on those principles.
"Creating a vehicle for MySuper is also about creating a vehicle where we can get real comparisons and we can start moving toward standard measures on performance and risk."
Asked whether the comparisons and measures she referred to were in fact the key improvements of MySuper over the currently available default investment and superannuation options, Vamos said "absolutely".
"Mandatory after-tax/after-fee measures and a way to label portfolios where the level of risk can be compared against the same level of risk in other portfolios, for example," she said. "We don't have that at the moment.
"The bottom line is that this review was never saying that the industry was wrong; it was never saying that it was bad; it's merely saying that the system is maturing."
Vamos said that with Australia's super industry going from what was a $1.1 trillion industry to what would be a $6 trillion industry in the next 20 years, the regulatory framework needed to be modernised.
"MySuper will make the structure and the industry stronger and more accountable," she said.
"Will there be some pain along the way? Yes. Will there be more pain on some funds than others? Yes. Is this uncertainty causing grief? Yes. Is the fear of cost of implementation a real issue for a lot of funds? Yes.
"There's no doubt about those things but, at the end of the day, this is about modernising the framework so that it reflects the modern needs of society – nothing more, nothing less."
Irrespective of MySuper's apparent inevitability, it is interesting to note that one of its stated objectives is reducing costs by allowing funds to benefit 'from the economies of scale derived from its increasing size'.
Again, this does not seem to be a view shared by the entire industry and, according to Rodwell-Ball, those cost savings are far more likely to be delivered by SuperStream.
"With some of the other initiatives that Cooper's recommended, particularly SuperStream, I think cost savings are very likely," he said. "But I don't believe the same can be said of MySuper.
Superstream
"There's been a lot of denial and a lot of reassurance that MySuper won't lead to lower performance by virtue of driving fees down and taking us to more indexed outcomes," Rodwell-Ball continued.
"The assurances have been made but the difficulty with it will be when trustees start to look at and then concentrate only on fees.
"If MySuper forces concentration purely on the NER [new entrant rate], then I think it will be counterproductive. It may be more efficient but I doubt it will be more beneficial for members."
SuperStream, on the other hand, would be an altogether different story.
"The back-office efficiencies that can be gained, the greater reliance and building of back-office e-commerce solutions will have all sorts of incremental benefits. [It will] reduce fraud and the potential for fraud and clearly allow transacting to be more immediate," Rodwell-Ball said.
"I know that our members are always amazed that they transact today but don't see it tonight in their accounts or tomorrow morning at the latest.
"They don't understand that we don't have the electronic backbone and back-office that the banks have," he added. "That, I believe, will be a significant value-add in the industry.
"It will have all sorts of benefits."
For Hill, it is telling that SuperStream has been met with broad approval within the super industry while MySuper has encountered significant opposition.
"What it says to me is that a lot of SuperStream is the best bits of industry ideas from the last 10 years that the industry itself hasn't been able to implement," he said.
"Unfortunately, we have ultimately needed this sort of review to get this kind of momentum.
"There are still significant challenges in SuperStream, in getting it all there, and while I think that the principles and policies behind it are well regarded, when you do get into the nitty gritty and details of this, that's where the difficulty lies," Hill continued.
"Having said that, starting from the point of view where there is a very broad consensus means that it has a much higher likelihood of getting engagement throughout the industry, and that is a definite plus."
Alternatively, Vamos attributed differing views on SuperStream and MySuper to differing levels of complexity.
"I actually think SuperStream is easier to understand because it's about efficiency," she said.
"With MySuper, the concepts are a lot more subtle and more regulatory in nature, and because of that and the way a lot of the recommendations are worded, there are many, many different ways in which you can interpret the findings.
"That's what has caused a lot of the issues. People have read into the recommendations so many outcomes that I don't think were ever intended."
According to Vamos, the outcomes of both MySuper and SuperStream are now in the hands of the industry.
"People say that the devil is in the detail," she said. "Well boys and girls, we create the detail here.
"It's our job to move forward now; our job is not to sit here and wait but rather to move forward together as an industry."
Of course, the sideline to both legislative discussion and the normal business of superannuation has been an increase in industry merger activity. Some surprising alliances have already meant a certain amount of consolidation and, according to Chant, it is a trend set to continue.
"I don't think there's any doubt that we'll see a lot more over the next three years," he said. "Mergers like the recent one between First State Super and Health Super are fantastic, and it will give other funds encouragement by setting an example.
"But the reality here is that it's hard to get funds to agree to merge," qualified Chant.
"The self-interest of the representative groups on boards is considerable.
"It was never going to be something that we saw a huge amount of in a short period, but I think over the next three years the consolidation that we've seen so far will certainly increase."
For Rodwell-Ball, consolidation within Australia's superannuation industry has been inevitable for some time.
"Superannuation existed before the mid-80s and Keating and the Labor Government that set it up, but it's only really got legs in a significant way in the last 20 or 25 years," he said.
"Hitherto it's effectively been an immature industry with many, many players, and the feature of any immature industry is the number of players."
Consolidation
Rodwell-Ball said that as industries matured, there would always be shakedowns and consolidations.
"But once that's occurred, you get some efficiency coming into it in so far as you get scale," he said.
"So in my view, this sort of consolidation was inevitable, and whether its driven by legislation, Cooper, increasing compliance, competition or whatever, I think that in the next 20 or 30 years we'll see a very different superannuation landscape in Australia.
"As the market matures, people are going to realise that while they may inhabit a niche and be able to satisfy and relate more closely with a small member group, that member group will ultimately be disadvantaged," Rodwell-Ball continued.
"The cost base will inevitably increase for you to continue to operate and, as a consequence, things are going to change."
Vamos said that while she certainly expected merger activity to continue, change would and had already gone beyond that.
"It won't only be merger activity that we'll see – we'll also see funds do business differently," she said.
"We're already seeing a change in the way funds outsource, but what will also cause mergers will be the industry's moving towards the requirements of operational risk reserves and the need to deliver post-retirement services to members who are in retirement.
"The whole nature of our membership is changing and we will continue to see the impact of award modernisation," Vamos added.
"We've got all of these external influences really changing the way funds operate, and that will continue to drive changes in the funds themselves.
"Mergers are just a part of it."
Yet while mergers may indeed be something that the super industry and members themselves have to get used to, it remains to be seen what impact they will have on member engagement. Undoubtedly, the industry has made significant strides in recent years and, according to Vamos, those strides are set to continue in 2011.
"When it comes to member engagement, there are four areas of focus," she said. "One, we need a regulated body that looks after data and payment standards.
"Number two is that we need an industry standard on risk symbols for portfolios so that you can identify the level of risk in a portfolio," Vamos continued. "We also need an industry-wide standard to measure investment performance, particularly after-tax investment performance.
"Finally, for prudential purposes, we really need to look at the way we assess and measure the costs and efficiency of the system."
And Vamos said that the timeline for these initiatives was exceedingly short.
"I want all of these nailed down in the next 12 months," she said. "These are our big four [key performance indicators] for next year, and these are the areas that the industry can come together on and act in one voice.
"We're going to have very different views as we go through Future of Financial Advice and some of the detail around SuperStream, governance, self-managed funds [and] MySuper. But, with these four, we've got to nail it and speak with one voice."
But the problem, according to Rodwell-Ball, is that member engagement is a constant battle and one made more difficult by the prospect of legislative reform.
"The problem here is that if this kind of legislative change continues, there is every chance that members will become more disengaged," he said.
"This has to be about bringing about all the change that is necessary, doing it once and then leaving it alone.
"Do the reform that's necessary but then let us get on with doing our jobs," Rodwell-Ball continued. "One of the reasons that members are disengaged and one of the reasons they don't understand their super is that the rules keep changing."
Rodwell-Ball said that as fund executives, he and his industry peers had to communicate any change in rules to their members, and that combined with recent market volatility had created significant and understandable unease.
Member engagement
"They look at what's happened and say: 'We thought our money was safe but it isn't.' And secondly: 'The rules keep changing on us so how do we plan?'" he said. "And, quite understandably, they say 'oh stuff it, we'll just leave it alone'.
"Now we can't control the markets; no one can control the markets," Rodwell-Ball added. "But we can control what happens in the legislative environment.
"So after this round of reform, I would both hope and appeal for no significant changes within the foreseeable future."
Offering a similar perspective, Hill said that the super industry and Australia as a nation had to commit to the broad principles of the superannuation system.
"If we can commit to the broad principles of this system, to adequate levels of the SG, to issues around post-retirement, to all of the things that we haven't addressed at this stage, then hopefully we will have a more solid base and changes can be reduced," he said.
"But whilst I would love to say that I believe both sides will leave it be for a while, I'm not necessarily sure that that is a realistic belief.
"I've been in the industry a lot of years now, and while I've always thought that there was lots of change in the industry, the last year has proved that the pace of change is accelerating," Hill added.
"A few years ago, I wouldn't have thought that was possible, but it obviously is and that just means that when managing superannuation funds, the leadership and management need to set the course as best they can.
"They need to focus on the imperatives rather than the niceties but, most of all, they need to retain the ability to be flexible."
And as 2010 comes to a close, flexibility does indeed seem to be the name of the game for the super industry. Investment performance, the shape of legislative change, even the names and shapes of funds all remain unclear and, according to Hill, industry participants have little choice but to roll with it.
"As a fund, we'll be focusing on those things that are part of our strategy and almost regulatory and legislatively agnostic," he said.
"We would and will do them regardless … So continuing to enhance the service offering to our members, trying to take more costs out of the system and making it simpler for employers as well," Hill said.
"Yes, some of that is related to SuperStream, but we would need to do them anyway."
Hill said that REST would also continue to focus on its core investment beliefs and strategy, making sure that it was in a position to both protect on the downside and take advantage of opportunities as they arose.
"In many aspects of the business, the only certainty is continued uncertainty," he said.
"So we've got to remain attuned and connected with what's happening in the various fields – be it regulatory, be it investment markets, it really doesn't matter.
"We simply have to make sure that we retain the flexibility to change direction as the market, as the industry, as the legislation changes."
