This article has been syndicated by Financial Standard and is available in the Expert Feed section of FS Super’s Journal of Superannuation Management.
The super system is big. Much bigger than you realise. It’s so big that most numbers describing super are incomprehensible:
- $2.3 trillion of assets invested in 2017
- $10 trillion of assets estimated by 2040
- wellbeing of 15 million working Australians
- the 4th largest pension system in the world.
For a system so big, it’s no surprise that shifting it in a new direction takes time. Right now it’s being pushed and prodded by external forces harder than ever.
In this article, I delve into how these forces are creating four big shockwaves that are rippling through superannuation and reshaping it for future generations.
1. Big isn’t better (but it helps)
APRA has had enough. For years it has taken an influencing rather than instructing approach to the perceived problem of too many underperforming funds. The prevailing wisdom has been that consolidation or outsourcing within the sector was inevitable:
It’s clear now that APRA sees the scale=success equation as more nuanced. To prove it, they have gotten very specific on their criteria for success and will be naming and shaming funds that don’t measure up or have a long-term plan for sustainably improving member outcomes:
Why is APRA becoming so interventionist? In my view, it’s a product of many superannuation funds losing focus on core values (more on this later). The first and foremost responsibility of a fund is to ensure members receive an adequate return for the fees they pay. For some struggling funds, their only way forward will be to merge with others or outsource core activities.
I am hopeful though, that many funds can refocus on their core purpose and provide a more compelling, cost-effective and tailored proposition to their members. One big barrier for smaller funds to do this is the complexity associated with legacy product rationalisation. A myriad of regulations still operate to make it complex for trustees and providers to consolidate or transfer members to more contemporary products. The successor fund transfer regime is good but more can be done by regulators to assist funds in this regard.
Choice and competition is always good for consumers, particularly when funds differentiate their proposition by focusing on areas where they can truly add value to their specific member base. What use is retirement advice when the bulk of members are under 50? What benefit is there for life insurance if the member is under 25 with no mortgage or dependents? Funds need to know what their members are paying for but more importantly what they value. The best way to find this out? Ask them.
2. How to live safely in a net outflow world
“Do not fear death so much, but rather the inadequate life.” Bertolt Brecht
Like many members, I fear death less than I fear not making the most of the years that I have left. Superannuation theoretically plays an extraordinary role in protecting and preserving the lifestyle of hardworking Australians in their retirement years. The problem is, the system was built to make it easy for workers to get money into super (while taxing them on the way in) with little thought as to how they would get money out 40 years later (hence no tax on the way out).
A big shift is coming. Australia’s population is ageing rapidly. The number of people above retirement age grew from 1 million to 3.5 million in about half a century. Within our lifetimes, 1/4 of Australians will be aged over 65 and 1 in 14 will be aged over 85. Source: Ageing in Australia
What’s worse? People don’t even realise that they’re living longer and continue to underestimate their future life expectancy. A National Seniors Australia (NSA) surveyof 2,000 of its members found that, on average, seniors over the age of 50 underestimated their life expectancy by seven years. This generational change will result in many, if not most, funds moving into a net outflow position and the Federal Government’s fiscal deficit position growing rapidly:
Few funds are well equipped to service members in such an environment, let alone help them to make the transition to a comfortable retirement. The funds that proactively focus members’ attention on a retirement outcome rather than an account balance or annual return will be the ones best placed to win. In this future, funds will only succeed by boldly partnering with specialist providers to:
- individually tailor retirement solutions for members
- provide calculators and tools to demistify projected retirement income
- cost-effectively protect against longevity and sequencing risk
- offer savings and retirement alternatives to superannuation
- equip members to overcome their behavioural biases that lead them to be overly conservative and apathetic about their future self.
Regulation may force their hand anyway but funds can’t rely on a Comprehensive Income Product for Retirement (CIPR) or an Alternative Default Model regime alone to deliver quality retirement outcomes. Regulators may even go further in fulfilling their promise that superannuation policy setting will be reoriented around a retirement income focused purpose. The unspoken threat on the regulatory horizon is future governments dipping into the superannuation honeypot by taxing retirees on pension withdrawals. Then we would really see a new retirement paradigm emerge, one that may no longer be so dependent on superannuation.
3. If you build it, Millennials will come
“If I have seen this far, it is by standing on the shoulders of giants.” – Sir Isaac Newton
In many ways, this could be the mantra of the super “disrupters” gaining a lot of press attention. There are new ones popping up every day, super designed for:
- the lads (Grow Super)
- techies (Spaceship)
- women (Human Super)
- mobile addicts (MobiSuper)
- first grade spellers (Zuperannuation) – kidding!
I’m an inherent skeptic about whether these new entrants are in it for the long haul. But really, that doesn’t matter. What matters is that they represent an important customer acquisition trend. You can make prospective members care about the fund they select by tailoring the experience down to the lowest possible level (or the lowest common denominator in the case of Grow Super’s hilarious ad below):
But what’s behind their sudden rise? A mix of technological and market trends:
- the rise of outsourced administration / trustees for hire
- a rapid improvement in out-of-the-box superannuation software solutions
- the advent of seamless electronic contributions/rollovers (aka Superstream)
- savvy entrepreneurs and VC investors seeing big captive margins in the super industry and sniffing a quick juicy pump and dump.
Incumbuents can learn from this. Millennials will gravitate towards those companies and people who share their values or have similar core characteristics. You shouldn’t have to start a whole new super fund to provide a great experience to female members. In fact, Spaceship’s entire proposition could be encompassed by making available a single tech-focused investment option within an existing fund and marketing the hell out of it.
So why aren’t more funds doing this? Corporate inertia and high barriers to entry surely play a part. The bright side is, if there’s an easy answer, there’s an easy solution…
4. Forget FinTech, focus on the fundamentals
Blockchain, bitcoin, artificial intelligence, insurtech, supertech. They’re all just spokes on a wheel. This one’s on top, then that ones on top, on and on it spins – crushing the innovation ambitions of super fund board after super fund board.
Unlike Daenerys Targaryen though, I’m not advocating that funds break or reinvent the innovation wheel. Rather, funds need to return to their core principles and reflect upon how they add value to members. At a recent presentation by Bravura’s Darren Stevens, I got profound insight into the areas where Australia’s largest superannuation fund (Australian Super) believes it can add value to members long term:
- net returns (gross returns less fees)
- education / advice
- retirement planning.
If most funds reflect deeply enough on their strategic ambitions, they would all boil down to a version of these four things. If a super fund’s value proposition is so ubiquitous, what is the purpose of having so many different funds? I think it comes back to my earlier point that choice and competition are good for consumers only if funds are adding value to the specific member base they serve.
For funds to have a differentiated purpose which reflect the members they service, they must understand the member preferences and characteristics that demand a unique and tailored service model. For example, one sector of the economy grossly under served by the superannuation system are contractors including those working in the “gig economy”. Where is Share Super – a fund designed for members in the sharing economy? *cue series A funding round* As ASFA points out, “It is crucial that superannuation settings are adjusted to ensure the superannuation system remains fit-for-purpose, and can best meet the needs of all Australians.” –Superannuation and the Changing Nature of Work
I’d argue that to better service members, most funds don’t need more or different regulation, but they do need to adjust their service proposition and provide more tailored solutions to members. Innovate but do it with purpose. This may sound odd coming from a “Fintech Freak” but innovation to me has never been about experimenting with the coolest new technology or chasing the latest upswing on the Gartner Hype Cycle.
Innovation must always be purpose-driven and customer-centric. Superannuation funds should look to the experience of sports drink giant Gatorade for inspiration. Gatorade invented new products by reinventing old ones in a “Third Way” approach to innovation. When Sarah Robb-O’Hagan took over Gatorade she eschewed the typical approaches to innovation (incremental improvement or a radical rethink) to focus on a Third Way of innovating around the current product to make it more valuable. Superannuation funds fighting for relevance amidst powerful regulatory, technological and demographic forces would do well to learn from this experience.
What other #shockwaves would you suggest are shaking up the #superannuation system? Please comment below with your thoughts to start a conversation.
The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.