Profit-to-members superannuation funds emerged relatively unscathed in the final report of the Financial Services Royal Commission. Justice Hayne’s withering report had far bigger fish to fry.
But rather than saying “there’s nothing to see here”, it’s worth remembering what AustralianSuper CEO Ian Silk said shortly after the Commission’s final report to stress that there was no basis for complacency or hubris whatsoever: “Rather than pointing the finger over there and saying we’re better than this or that group, the only focus of the profit-for-member sector should be to be exemplary in performance and behaviour and being the very best we can be for members.”
I couldn’t agree more.
This is our opportunity to meet the challenge to ‘do super well’ and define this challenge in terms of our highest, best thinking, not simply ‘better than other industry sectors’.
And while there are pressing issues confronting all APRA-regulated funds, many have shown a lack of urgency in addressing them. Industry critics would argue that having legislatively underwritten inflows in the form of the 9.5 per cent Super Guarantee—a privilege indeed—underpins this apparent complacency.
In a recent address to fund trustees, I laid out my perspective and identified some issues the super industry needs to address – urgently. Some of these include:
1. Improving investment decisions through better use of data
Funds’ investment decisions are caught between competing, imperfect worlds: either member-directed, where members have good information about their own finances, goals and preferences but often lack financial literacy or fund-directed, where funds are financially literate but lack detailed member information. Given this latter world is the norm, how can we bridge the fund literacy/lack of member guidance challenge? Through better collection, analysis and use of member data, embracing ‘nudging’ to deliver intelligent defaults such as lifecycle investing and comprehensive income products in retirement (CIPR) and embracing high fiduciary standards. The increasing scale and sophistication of funds can surreptitiously imperil their stated commitments to fiduciary practice and member-centricity, if not managed well.
2. Looking beyond accumulation for retirement solution
On retirement solutions, critics could argue that the industry has failed its members. In a world where Nostradamus would have trouble predicting the future, the fact the population is ageing is a lay-down misère. But instead of the industry leading the charge with retirement income solutions, we find the Government at the front of the pack with its Retirement Income Covenant and CIPR legislation. We need to recognise that more than 65 per cent of gross inflows into super are being paid back out as benefits – the accumulation mindset that has brought us so far is yesterday’s story. Retirement product design must overcome the powerful anchoring bias that accumulation represents. If we could design from a ‘clean slate’, we would (and should) be willing to redefine basic investment principles such as what risk means to a retired member—not “the ASX 200 delivered 8 per cent and I only got 7 per cent”—and how we deliver stable income, not a total return, from our pension assets.
3. Questioning existing models
When it comes to investing, we need courage to embrace a brave, new world of portfolio thinking. Probably no one in a super fund is specifically charged with challenging the ‘status quo’ tools we have used for decades; nor do fund advisers have any incentive to question our familiar thinking paradigms. For example, instead of feeding these tools with ever more data, what if we started with a humble premise that we don’t have confidence that market gyrations can be predicted anymore; we don’t know whether central bank/monetary policy still works; we don’t know the impact of a US-China trade war? If “there is very little I can control or predict” is the starting premise, I strongly suspect our approach to investing would be quite different.
Funds also need to resist the race to the bottom—the lowest cost investment strategies—and concentrate on value to members (net fees, costs and taxes).
4. Rebuilding trust initiatives
With privilege—and the 9.5 per cent Super Guarantee is a rare privilege—comes public scrutiny. It’s not only because of this privilege – our huge presence in Australia’s economic, political and cultural landscape demands media and public scrutiny and we shouldn’t complain. At the same time, we should acknowledge that external scrutiny can be dangerous when there is a broader societal crisis of truth (‘post-truth world’) and distrust of experts. [Think 97 per cent of climate scientists agreeing on climate change but only 45 per cent of the public believing them.] In response, we need fund-level and industry-wide ‘trust deficit’ rebuilding initiatives – and I mean more than just brand-building and member engagement. I applaud Rice Warner’s recent courageous public take-down of poor Grattan research on superannuation. Imagine the power of a flourishing environment of trust combined with good data and research rigour to win over the hearts and minds of our members in the cultural debate about superannuation.
I know it’s aspirational, but there are a handful of things that the political parties could agree are above politics and super should be one of them.
5. Embracing innovation
Another thing the 9.5 per cent Super Guarantee might explain is the sense that the super industry is immune from disruption (I mean beyond the technical, in the broader business sense). Why should it be? Corporate literature tells us how hard innovation is in existing businesses, and these principles apply to funds as well – perhaps more so if layers of governance reduce agility, embed many who can say ‘no’ and few who can say ‘yes’ and engender a risk-aversion mindset. Add a regulator compelling funds to explain and defend what they have, rather than fostering the innovative mindset that will take funds forward. The literature tells us disruptors succeed not because they are better but because they are more convenient, meet demand where it is (not where it should be) and at a more appropriate price point. [Uber isn’t better than a cab, but a lot more convenient and usually cheaper.] Despite popular thinking, scale is actually an inhibitor to innovation and fresh thinking. Smaller funds have a comparative advantage re innovation; larger funds should look to what these funds are doing and not just see them as their next takeover target.
My advice to super funds is to define their future, and therefore the future of their members, not by the details (RG 97 on fee and cost disclosure, SPS 515 on strategic planning and member outcomes)—although these are important—but by the big ideas about what ‘doing super well’ really means. Our collective ESG endeavours show the power our big ideas have – we can actually change the world. ‘Doing super well’ comes down to: being mission- and member-centric, upholding high fiduciary standards, showing leadership and courage and securing super as one of Australia’s most trusted professions, for today’s retirees and generations of retirees to come.