Reinventing Super

A high-calibre panel explored the many and varied strategic issues facing the superannuation industry over the medium and long term at recent roundtable in Sydney. Andrew Starke reports.

Andrew Stabback: I suspect we probably couldn’t have picked a better time to have this discussion because there is so much on the table with regards to what’s going on in superannuation at the moment. Superannuation is now 22 years old and it’s evolving, growing and becoming an adult. Meanwhile, Australians are reaching retirement age with super funds that are getting larger, more sophisticated and increasingly competing to satisfy their customer requirements. Pauline, what do you  think are the key issues the superannuation industry is facing at this critical time and do you believe the Financial System Inquiry (FSI) has really touched on some of those key issues as you would have expected?

Pauline Vamos: There are a number of issues for the industry. Firstly, its key stakeholders, including the government and treasury, have very low confidence in the industry and a poor view of its credibility. When the treasurer of the country stands up and says the superannuation system is not doing its job, then we have a real image problem. Then one of the most visible findings of the FSI is that the industry is much more expensive compared to its competitors on a global scale. From an industry point of view, we still have masses of challenges with the implementation of Stronger Super. However, there were two big things that have come out of the FSI, both of which I think are very positive. One is the fact that finally the focus is on post-retirement. We might actually see some movement there and I think we’ll see regulation change to open up the market in post-retirement. At the moment, there’s absolutely no flexibility in the system and in developing products. That needs to change. So now it’s time to set those rules and the industry can use this as an opportunity to make a significant contribution. The second part is the fee issue. The reason I raise this as a positive is because it gives us an opportunity to share in a public forum where the costs actually go. There is a perception that
funds earn millions of dollars and that the margins in super are huge. They are not.

Andrew Stabback: Beyond what Pauline has mentioned, what other key issues is the industry facing at the moment?

Andrew Proebstl:
I think the essence of the superannuation industry is about the community trusting the industry. That should include government, regulators, fund managers and everyone else that participates in the broader industry. Trust is such a huge part of that dynamic and criticism of the industry, its costs, the focus on governance, the suggestion that sometimes compared to other funds we don’t have as good governance, all of this is eroding the trust of the general community and this isn’t really in the interests of anyone. Any industry in the economy can be run better than it currently is. There’s no industry that’s completely efficient out there. Many may debate that they’re more efficient than others, but there’s no doubt that there’s scope for our industry to improve and get better at what it does. However, while they have a different market to ours, those in the UK superannuation industry look at what we’re doing here in terms of member engagement and communications and they are amazed. I know they face very different dynamics to us, but they are really interested in what we’re doing. In many ways they’re only starting the journey of getting to where we have already got to.

Andrew Stabback: Damian, you come from the investment management side rather than the superannuation side. Tell us a little bit more about what QSuper is facing right now?

Damian Lillicrap: In terms of the investing environment at the moment, there are obviously some real challenges with low cash rates around the world. We’re really positive about the fact that there’s so much focus on longevity in terms of the FSI. I started life as an engineer and some engineers build bridges. It seems to me we’ve got this situation where you sit down in front of a financial calculator, if you’re an ordinary person, and it asks you how long you want your money to last. So do you say 85? Is that the average age? So they build this product that goes out to 85 and then what? You could be driving along until you hit 85, but you’re in trouble if you keep going. So for me it’s a really important part of finishing off that bridge and building the bridges to help members get to their final destinations.

Andrew Stabback: Let’s talk about the trust issue raised earlier because I think that’s one of the fundamental issues. We’ve had the Future of Financial Advice (FOFA) reforms and proposed amendments met with a mixture of responses. David Murray came out and specifically mentioned a vertical integration issue in the interim FSI report. What do we think is going to regain that trust that has been lost? How can the individual members feel confident that they’re getting advice that really is in their own best interests?

Pauline Vamos: I think there’s a significant change happening. We’ve talked about the definition of advice for many years and, rightly or wrongly, financial product advice is where we ended up. In reality, much of the advice that is delivered is not financial product advice. The professionalism that’s come in means we can start to recalibrate the definition so that customers can say “when I go here, I know I’m going to get sound information”, but they are there to make a product fit. Selling products is very different to strategic planning. It requires very different skills and different customers have different needs. That’s what the FSI has opened up and that is an enormous can of worms. It’s a great opportunity, but it could change the game for some people in this room.

Bill Watson: The one thing that was drummed into my head as a lawyer was that I should always act in the best interests of my clients. The way I look at it is that we really should have two types of advisers in the future. We should have people whose interests are aligned with the members’ interests and that’s an inversion of where we are at the moment. They’re not selling products. They are providing advice. Then there’s another group of people who are not aligned and should have a big sign on their heads which says: “I’m just flogging product for whoever I’m working for.” Murray talks about asymmetry of information and a whole lot of stuff like that, but unfortunately I see far too many of my members going into products that are just not right for them and are too expensive. They’ve been sold a product. It doesn’t matter how you dress up what’s occurred in the past couple of weeks, but we have lots of working class people who aren’t particularly financially literate or numerate and they’re being put into products which are totally wrong. For us, we really see this as perhaps one step in a much longer battle that has to be fought about financial planning, advice and the role of product providers. We’ll continue to campaign with a message that financial planners should always have their interests aligned with members, full stop! Banks can go and flog their products, but really let’s not mince words, because that’s what they’re doing.

Andrew Howard: I think there is an opportunity and yet there’s some way to go. The opportunity that scalable advice is possible by defining clearly what types of advice there are is quite good for the consumer. The idea that we can start to speak to financial institutions and say what we want advice for, and be clear about what that is, and then, potentially open up the ability for technology to be used for members to get light or simple advice is a good thing. Yet, on the other hand, there’s a way to go because, as Bill rightly points out, the terms and the manner in which that’s executed needs to be very clear.

Ron Saxena: I work for BT Financial Group and specifically in the private wealth business where we are dealing with the general versus personal advice aspect on a day-to-day basis. The Murray inquiry pointed out that general advice should be classed as “sales”, with customers being self-directed and seeking a solution as opposed to providing a solution to them in their best interests. So going forward, if advice as a term is defined better, as in “for your interests” and personal advice only, that will go a long way to helping the industry. We do see that wealthier clients tend to be more self-directed. They often do not want a longer, personal advice conversation. They may directly ask you for a certain solution or product. We do feel compelled as the banks to provide them with this factual information they’re asking for in which case it is general
advice for us.

Andrew Stabback: So does that mean there’s going to be this two tiered or several tiered level of service or advice depending on whether you’re wealthy or not? How’s that going to play out going forward?

Damian Lillicrap: I would like to think that the landscape will change a fair bit over the next few years. There is some scepticism about people going to see financial planners and even a lack of appreciation of the costs involved in that – that a small cost there is really worthwhile. That I think could well lead to more and more people looking for online solutions. We could have simple solutions that deliver what people actually need and can filter the types of suppliers that Bill talks about to those that are aligned or not, and we can ensure there are cost efficiencies there. I would like to think that that’s going to assist people who don’t have as much money in getting appropriate aligned financial advice as well. A lot of people have situations that aren’t that complicated. There probably is relatively simple advice that ticks most of their boxes and can get them a long way down the path without some of the hurdles they are struggling with at the moment.

Bill Watson: As Australians, we do not like the idea of paying for financial advice. I think the financial planning industry has dug itself a hole that it can’t get out of which is costs packed inside product. You’ve got to pay for advice. You wouldn’t expect to see a heart surgeon give you some advice for free or at the BBQ. There’s another group of people who believe it’s quite legitimate to be able to have this conflict between advice and best interests. For us as a superannuation fund, we have a dilemma. We believe in the former, but our members benefit from the latter. We’ve got a significant weighting to domestic banks and that’s been terrific for our members over the past 12 months.

Andrew Proebstl: It doesn’t seem that unreasonable to expect financial planners to offer advice that is in the best interest of their members or is of a certain level of quality. As a concept, we shouldn’t even be debating it really. It’s a no brainer. I know the detail and complexity are what create the problem. Some of our members are wealthy individuals and they don’t like paying for advice either. If you extrapolate the lack of financial literacy across the industry, you have an individual who is supposed to have a high level of professional capability to provide advice and an individual who is seeking advice who is at a disadvantage and who will, in most cases, probably accept what they’re being told. He or she doesn’t have a high level of knowledge to critique what is being said and this places a level of trust on advisers that is working with them.

Damian Lillicrap: Think back to pre-iTunes days. It was possible to download music off the internet and to put it on  devices and play it. But people didn’t do it. It was a very technical thing and there was a general apathy. That’s what we see around at the moment. People aren’t engaged and maybe they shouldn’t be. Perhaps the right thing for us to do is to deliver something that will get them home. Again, we need that longevity piece to finish it off and give them something as a starting point so that if they jump on that road they’ll be alright. They may choose to be self-directed and complicate things, but in the first instance we should give them something simple that gets them home.

Andrew Stabback: Has the Australian superannuation sector been effective in creating and designing products that best serve the customer in the past or would you still say there is a lot of work to do to improve on that?

Pauline Vamos: It is difficult to innovate at this time in post-retirement products. You cannot put any innovation in a post-retirement product whatsoever. Then you’ve got the tax treatment of annuities, particularly if they’re deferred. That’s just a brick wall; you can’t do anything. You’re not going to get innovation until you start to look at this. To develop a product, you’ve got to go through four regulators and each one has a different view, so the cost is enormous. There’s absolutely no advice framework around it. Financial planners don’t know about tax and they certainly don’t know about post-retirement. It’s never really been a big part of their curriculum. So that needs to be changed. How do we measure post-retirement? If I retire with $200,000, which one of the people around the table is going to give me the best deal to turn that $200,000 into an  income stream for the rest of my life. Unless providers are measured on that, we will never really start to get that conversation and innovation going.

Paul Franks: We’ve talked about how all products interconnect and interrelate. We need to consider a holistic index that looks at dimensions other than just pure financial performance. Does it satisfy other retirement outcomes – for example, your health because the health dimension is real and has a big impact on overall care in retirement? I’m hoping there’s some opportunity around health insurance as that product could probably do with some rethinking in terms of how it could support retirement outcomes. Part of it relates to health incentives rather than “I got sick, I got fixed, I can do it all again”. There’s also a consequential behavioural dimension to it. But how do each of those elements inter-operate – the insurance and superannuation – as a holistic vehicle for retirement? I’m not sure we’ve really kept pace with society.

Bill Watson: The constant change in that environment makes it really difficult to design products. How do you design a product that has a perfect landing?

Andrew Stabback: How prepared and organised are some of the larger industry funds to cope with these extraordinary complex issues that are coming at them quite rapidly?

Damian Lillicrap: We don’t pretend that we’ve got the answers, but we’re starting to ask ourselves the questions. We’re trying to take steps in the directions that we think are appropriate. We know that some of the steps we take 10 years down the track will be far more sophisticated, but we also feel that if we don’t start moving, we probably never will. We’ve made a range of changes over the past few years. One was moving away from ratings. We thought it wasn’t in the best interests of our members to be in a race against other funds, given that different members are of different ages and average balances and so on. We thought the best thing we could do was to be out of that race. Part of that led to more robust asset allocation changes that have seen us hold a lot less equities and a lot more bonds. The other thing we’ve started doing is moving our default members and adjusting their investment risk based on growth, their age and their account balances.

Michael Mulholland: In the past month or so, the Commonwealth Bank has been on the front page and, I dare say, if the public cannot trust the Commonwealth Bank, then who can it trust? I’m not sure all the inquiries and legislation is actually getting to the heart of solving that problem. The latest FoFA amendments have watered down the best interest rule which I don’t think is in the best interest of consumers at all. And we have a ticking time bomb with self-managed super funds. I’d also say we’ve got a ticking time bomb with the way that the four banks are set up for internal financial advice. What happened with the Commonwealth Bank? All four of the banks have set up the same way under their new model, a vertically aligned platform. When it comes to post-retirement, I’d say industry funds have missed the boat. They just seem to concentrate on their existing members and only on their account balances within the fund. They’ve missed the whole complexity of people coming up to the age group of, say, 50 plus and what they’d acquire. That’s a shame because when you look at it, industry funds will give the public value for money and trust that’s probably lacking in the industry at the moment. So at Sun Super we’re going to look at that. I think there’s a definite fracture in the market. Thirty-three percent in self-managed super funds tells a story. Thirty-three percent of the market just doesn’t trust us.

Pauline Vamos: You’ve got to be careful with these stats. You’re absolutely right that 33 per cent of funds under management is selfdirected, but it’s less than four per cent of the Australian population. When we talk about the system or duty of care or about how we deal with trust, we have to really think about it and the question of where the money is. So when you look at self-managed funds, yes, there are some issues. Look at the divorce rate and the unravelling of self-managed funds when divorce occurs. It takes years. There’s also an insurance gap there. These issues are not systemic yet, but we need to be very careful. Thirty per cent of people moving out of your fund are going to a self-managed fund. Because all the higher account balances have gone, it’s the smaller accounts that are now trickling into self-managed funds and that is a growing issue. When you’ve got one high account, one low account and same investment strategy, that’s when you start to see those fundamental advice issues. It wasn’t there so much before, but now it is.

Andrew Proebstl: I wonder sometimes if we, the industry, and probably the government and regulators to some extent, need to internalise the debate and sort ourselves out first and reduce some of the bickering that goes on between the different segments of the market. We do have very high-balance members and we do lose a lot of high-balance members to self-managed super funds, but we also have people who are unwinding their self-managed super funds and coming in to use our direct investment platforms because they were burdened by the compliance. We also have people who are getting older and don’t want to leave the complexity of the selfmanaged super fund with their spouse should they die. It’s a competitive marketplace as we all know and increasingly, it should be a more mature industry and people should be able to do things in different ways with different vehicles and different products. I don’t think we should be automatically negative about a particular element.

Andrew Howard: I think there’s a second dimension to the rise of self-managed super. Of course there’s a trust dimension with financial institutions, but the other issue is that people, in general, are saying: “Why can’t I look online for this or that?” And yes, they may end up going to a full financial advice situation, but they may not. People in general are moving to a Web 2.0 environment where information is free and its easy. They choose what information they trust and they vote with their feet.

Andrew Stabback: Is the super industry well prepared for the technology revolution that is confronting the financial services sector right now? Are we seeing the foundations being built in terms of investment in the services that should be there in the future?

Pauline Vamos: It’s very lumpy. When you look at a lot of the retail sector, there are some real game changers out there in terms of investment in new technology and efficiently  linking access to one’s super account. But, on the back-end, many providers with legacy products and systems can not go shooting ahead with new products. They’ve still got an anchor behind them. There’s no doubt that some of the innovation in the frontend engagement with clients in the industry fund movement has been spectacular. What we forget as an industry is that our biggest stakeholders today may not be our employers in the future. So we’ve got 800,000 of them coming into contributions, some players are ready, some players are not, some players are saying they are ready but they’re not. Sure they can accept electronic contributions, they accept electronic data, but they have to print it off. If we don’t get that back-end sorted or successfully implement Super Stream and don’t have data and money aligning over the next 12 months, we will have a significant trust issue. This could be our biggest trust issue.

Bill Watson:
I think some people in this industry are deluding themselves that a whole lot of things are free goods. It’s  pretty unhealthy for the Murray inquiry and the Grattan Institute to talk about costs in that sense, because if we actually really want an efficient and functioning industry, there’s money that’s got to be spent on technology. It is about us having a sufficiently high administration fee to be able to pay for technology and to have it out there. For us as a fund, we’re not necessarily acting in the best interests of our members by starving our administrator. But I don’t think scale is necessarily the issue. Some funds may become too big to administer; they’ll have their own set of problems.

Andrew Proebstl: I would say that scale is a topic that the big funds put out there in the marketplace because they want to get bigger in the easiest possible way, which is by swallowing up smaller funds. You can be a very specialist, niche, boutique player and run a very efficient business and develop really good engagement with your members that no other big fund can even hope to achieve. The scale thing fires me up every time because I just think it’s nothing more than PR spin.

Paul Franks: I appreciate the dynamics on the service charges, but the early settler problem mentioned usually results from too much ambition in a technology investment – that is, too much catch up as opposed to a graduated investment program over time to get a higher level of capability. It’s less about super and more about organisational strategy. The good or bad news, depending on how you look at it, has less to do with technology and more to do with strategy and operational design. here’s a real message in that because too many times in the past 12 months I’ve had to sit in front of folk and have some pretty unpleasant conversations. I’ve had to tell people that I think they’re biting off more than they can chew. Way too much. My advice is to work on a program where, say over the next three or four years, you’re going to have a deliberate and sustained program to get to a better level of capability, as opposed to a lot of big words and lovely statements of intent that don’t have execution and pathways behind them.

Pauline Vamos: There are a number of things in any industry that are all about competition and point of difference. There is no problem with that, but some things need to be for the good of the industry. I use the banks as an example – what they do in terms of their ATM system so that they can all use each other’s ATMs. You could make it a competitive issue, but they’re mature enough to recognise that it’s better to work together. This is the difference between teenagers and adults. You’ve got the Australian Taxation Office which governs our gateway system, because the industry would not agree even to do that. We’ve got 18 months left to agree to actually put that body in place. I’ve been working on this for four years and it’s still a sector issue. Until we decide these are the issues where we all contribute, without putting sectors and competitiveness into it, then we’re still children. Banks have got APRA and they have agreed, even if they agreed to disagree, that they will agree on some points.  This industry will not.

Andrew Stabback: I want to ask about asset allocation and longevity risk. How are we going to tackle longevity risk and what is needed for Australians to balance their penchant for equity and property across other asset classes?

Pauline Vamos: When you look back five years, the allocation to Australian equities was nudging 60 per cent. It’s now about 50 per cent, so it’s already starting to change. Yes, we all know that there’s no deep and liquid bond market and we know there are impediments to infrastructure. In more mature markets like the US, UK and Japan, their superannuation-equivalent systems are a lot more deterministic in terms of what types of products are coming onto the market, whether they are coming out of investment banks or from corporations and so on.

Trent Doughty:
BT has spent a significant amount of time to delivering more fixed income products to self-managed super funds and self-funded retirees. There’s no doubt the market needs to become deeper and wider in the fixed income space. Legislation aimed at making it more attractive for listed companies to issue simple corporate bonds to retail and sophisticated investors has now passed through both houses of parliament. This is expected to be a positive supply-side initiative for senior unsecured investment opportunities. If we’re going to develop the listed bond and hybrid market, we need to be able to attract more offshore issuers and local corporates. One of the biggest impediments to that is obviously the current tax structure relating to withholding tax. I think the government needs to rethink its whole approach to withholding tax to attract more foreign bond issuance to the listed market.

Pauline Vamos: When you look at the original role of the system, it was to provide a supplement to the aged pension. We certainly drive economic growth and even when you look at the recent speeches at B20, there was a lot of talk about the super pool being the ballast when it came to the GFC. The question that is always asked of the system, rightly or wrongly, is whether the tax concessions that are funded by the taxpayer are better off in the system or in consolidated revenue. Part of the answer to that is how much we drive economic growth, how much we fund innovation and how much we deliver on infrastructure. Those questions will not go away. I think the industry sees we will not be able to deliver long-term sustainable returns to our members unless we contribute to economic growth, because they do go handin- hand.


THE AUSTRALIAN SUPERANNUATION industry has reached adulthood. As an adult, it enjoys generous living arrangements, is expensive and not always acting in the best interest of members. The time for change is here and must be made. Australia has an ageing population and reliance on compulsory superannuation contributions to provide sufficient retirement incomes will prove challenging and sustain dependence on government pensions. Governments of either political persuasion need to take a bi-partisan approach to legislation and taxation arrangements for superannuation. Any arrangements need to be progressive and equally support fair share and income adequacy principles. There are still significant opportunities to reduce operational costs and give greater preference and focus to effective support and advice to customers across each phase of their income and retirement lifecycle. The FSI has now put the issue of post-retirement firmly on the agenda and together with deeper consideration of taxation, I hold expectations that retirees in future years will be able to enjoy greater certainty and confidence that incomes will be sufficient for periods of extended retirement. What role can analytics play? Better data and insight means capacity for better long-term decisions and improved opportunity for right outcomes. Isn’t this really what fund members are seeking?
Capital Markets,
SAS, Super, Paul Franks, Pauline Vamos, Association of Supperannuation Funds of Australia
Andrew Starke
Article Posted:
September 01, 2014

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