Medium and small superannuation funds must amplify their distinctive traits
Brisbane based superannuation administrator Independent Fund Administrators & Advisors (IFAA) recently hosted their annual Trustee Director education conference. The theme for this year’s conference was ‘bigger is not always better’, and featured speakers focusing on the challenges, virtues and opportunities faced by smaller superannuation funds within a very challenging and highly regulated marketplace.
Regulatory expectations on consolidation and the resulting efficiency of scale in the superannuation system has many smaller and mid-sized funds working hard towards delivering member outcomes that rival those of the more dominant funds. The ‘size doesn’t matter’ adage is contingent on the smaller entity’s ability to be intimate, efficient, agile and distinctive.
One of the big challenges for smaller funds is operating costs. Achieving economies of scale with fewer members and lower account balances is challenging, but not impossible. The adoption of an outsourcing based operating model which strikes the right balance of expertise and capability is a critical success factor. The sharing of fixed costs which constitutes the basis for economy of scale can be accessible to smaller funds through outsourcing material business functions to providers who can achieve economy of scale.
The challenge then follows in ensuring that the commercial terms of the outsourced function result in the efficiencies being passed on to Trustees, and in turn to members. Trustees have regulatory obligations to go through a tender or other formal decision making process when renewing existing, or entering into new material outsourcing arrangements. An independent, thorough and comprehensive process can be very effective in bridging the competitive challenges faced by Trustees of smaller superannuation funds.
Smaller funds may also have distinctive traits and competencies which can be used to advantage. One of the greatest strengths of smaller funds is the intimacy between the professional team and members or employers. Small funds must amplify this sense of ‘proximity’ to the fund as one their major draw cards. In smaller funds decisions and advances are made more quickly, they respond to change more easily, communication flows more readily and the ‘fund experience’ engenders a greater sense of belonging, reassurance and trust.
Below I have noted a few of the key takeaways from the conference and will take this opportunity to thank each presenter for their valuable contributions:
INSURANCE DATA QUALITY
Robert Nunez, Head of Industry Funds Segment, CommInsure
Smaller funds must ensure the quality of their data so the trustee can enable the insurer to assess risk with confidence and therefore place the trustee in a strong position to negotiate insurance premiums. Insurers rely on data provided by Trustees to assess risk, and therefore price premiums. Where data quality is poor, the uncertainty makes it more difficult for the insurer to commit to better premium rates.
LEGAL AND REGULATORY CHANGE
Michael Chaaya, Partner, Corrs Chambers Westgarth
Challenges arising from the regulatory environment are likely. With issues related to poor regulatory design, politicisation of reform and uncertainty as to the role of regulators presenting trustees with challenges. Employing a combination of trusted advisors and management systems, smaller funds can ensure that they stay abreast with regulatory change, and manage the associated risks within their appetite in a cost effective manner.
COMPETITION & EFFICIENCY IN ADMINISTRATION
Jonathan Steffanoni, Lawyer and Lead Consultant, QMV
Smaller funds must achieve economies of scale with a considered outsourcing strategy. Without thorough tender or similar competitive process to appoint, or reappoint a service provider there is a risk that the benefits of scale will not flow through to lower fees for members. The due diligence process, strategy development and negotiations with third party suppliers is highly complicated and may in itself require outsourcing to specialists.
Robyn Weatherly, General Manager, Governance, Cbus
The expectations of trustee competence, commitment and confidence will continue to grow. All trustees but especially those of smaller funds are under close watch and must demonstrate sound investment strategy, investment governance, risk management and so on.
Tom Garcia, CEO, AIST
The issue of independent directors, equal representation and governance is likely to be influenced by the 2 June election. A strong sentiment remains among some segments that while there is opportunity to promote greater independence on boards, the proposed reforms (based on ASX rules intended for publically listed companies) are not suitable for the diverse segments of superannuation fund trustees. Smaller funds will need to prepare for the possibility of the proposed governance reforms coming into law, or alternatively engaging with representative associations to propose alternate models directed at balancing flexibility with the need to diversity, renewal and independence of thought on boards.
Loryn Jenkins, Head of Innovation and Strategy, Websilk
Superannuation is a low engagement product but intimacy of smaller funds and digital innovation presents an opportunity for trustees to differentiate brand and make communications more relevant. Digital strategy must be centred around ‘what matters’ to members and to the fund’s business goals. Small funds need to be present in member lives more meaningfully and more often e.g. SMS notification that employer has deposited x funds into their superannuation account.
The overarching responsibility of trustees to manage superannuation assets in the best interests of beneficiaries includes the efficient administration. In a competitive marketplace, this can become increasingly challenging for small and medium sized funds. However, there are ways in which these funds can prove efficient, intimate and competitive.
QMV consults to large institutions and to smaller operators. While the operational improvement themes are the same, and the reliance on quality data the same, greater creativity is required to assist smaller operators achieve effective operational and cost outcomes without diminishing the intimacy of their service relationships.