The last year has been a particularly stormy one for superannuation and it has left many people a little disoriented. Now that the deluge has passed we paradoxically have a clear and uncluttered view of what our strengths and weaknesses are and where we are heading, the looming federal election notwithstanding.
So, where do we stand in the aftermath of the Productivity and Royal Commissions and the varying success of the Government’s legislative measures?
The first thing that strikes me in surveying the aftermath, and I am conscious that many observers would find what I’m about to say surprising given the nature of the public debate in recent times, is that Australia is tantalisingly close to having one of the best retirement systems in the world. Many studies have reached this conclusion and the recent OECD Pensions Outlook publication is another reminder of the virtues and benefits of our system. The report finds that the Australian system is equitable, affordable or fiscally sustainable and well designed. The area where Australia does not do so well is adequacy of retirement incomes which is directly correlated to our relatively low level of contributions, another reason to move to an SG rate of 12 per cent.
On the other hand, we must acknowledge the existence of underperformance, however that is defined, and I think that the attention that the Commissions drew to this subject will continue. There appears to be broad support for reform and the need for improvements in this area and enormous pressure will be placed on funds perceived to be underperforming to lift their game or leave the game if they can’t. In practice this could be a disorderly process and we need to establish the tramlines for remediation or resolution or define them much more clearly than they are at present. Everyone has been focused on the ‘what’ up to this point, but they now need to focus on the ‘how’.
For the funds that are performing well there will also be changes as they are pushed to demonstrate their value proposition to members. The existing bias to scale will become more accentuated because of the growing need for capability, investment capability in areas such as alternative assets and the international deployment of capital, and operational capability, in particular the capacity to deal with the ever-growing regulatory and reporting burden.
At the same time funds, especially small to medium sized funds, will have to differentiate and show that their product offering is uniquely tailored to the needs of their membership. A big part of targeting value to members will be group insurance which Commissioner Hayne appears to support, even though he scarcely turned his attention to it during the hearings. Along with the recent amendments made to the Protecting your Super package the future of group insurance appears to be secure, at least in the medium term, and funds now have an opportunity to use it to cement their value proposition to members.
Another area which funds can use to establish their niche value offering is financial advice. I believe that the provision of financial advice will bifurcate between a low cost, digital service; and the more traditional personal offering but which is also more expensive. However, I am not convinced that most members won’t pay for financial advice. You just have to look at our use of the internet where people are moving quickly from casual piracy to happily paying for their films, music, sport and news. The important thing is establishing value and at the right price point and the evolution of advice will have to better match services to members’ willingness to pay for those services.
The impact on the regulators will, in my view, be more complicated. The current regulatory architecture will survive but the style, the cadence of regulatory oversight will change substantially. The demands for timely data from funds will increase and it will be an enormous challenge for the regulators to filter that information, to locate the music in the noise. The idea that more data is intrinsically beneficial is based on a flawed epistemology but that won’t stop the regulators asking for it. We must hope that they can use it sensibly, but I think it more likely that they will simply be overwhelmed.
The regulators’ tolerance for error is also likely to diminish. We are moving from a world where elegant strategy was admired and sometimes used as the basis to explain mistakes to one of flawless execution where errors, even small ones, will not be countenanced. To achieve this, funds could look to other industries where for health or safety reasons errors are simply not permissible and where evidentiary assurance is commonplace. Industries such as pharmaceuticals where for good reason faults in measurements are not permitted, mining where large operations will be brought to a standstill for the most minor health and safety breach or the aeronautics industry where safety is happily paramount.
Our current approach of accepting or at least tolerating amateurish processes and systems has got to change. For example, we will no longer be able to accept elderly, creaky and multi-layered administration systems with the occasional spreadsheet to fill in the gaps, on the basis that if anything goes wrong the affected members will be compensated in due course.
While a person’s life may not be at stake because of an incorrect unit price or a faulty tax calculation we can no longer afford such an easy-going, she’ll be right style. The regulators won’t stand for it, increasingly members won’t tolerate it, and—in a world where personal attestations will increasingly be required—super fund staff won’t accept it either.
In this safety-first environment, the regulators will also need to work out how to deal with innovation and disruption or we will miss out on the benefits they can bring. This is already a difficult area for the regulators, and they will have to ensure that in the process of enforcing seamless and faultless processes they don’t suppress new entrants and digital enterprises which are inherently riskier than the tried, if occasionally a little tired, and true.
There is unfortunately no time for complacency. We are living in a petulant, hyper-sensitive political environment and the risk of rash or excessive policy ideas is high and the threat to the basic tenets of superannuation, universality and compulsion, is real. We all need to lift our game, but we also need to deal with potentially unreasonable expectations about those identified as underperformers so that an orderly resolution can be achieved for funds and members. There also needs to be a new understanding and relationship built between the regulated and the regulators, and the potential for misunderstanding, inefficiency and bad blood needs to be avoided.
So what is the state of super in Australia? There is much to do. There’s much we in the industry can do to make improvements, and we must also acknowledge our reliance on others, the government and the regulators, to bring about the necessary changes. However, as I said at the beginning, we are tantalisingly close to being one of the best retirement systems in the world and while we work to improve it, we also need to recognise its fundamental strength – that it is delivering for its members.