A single supplier of default superannuation?
Last week QMV opened the doors to its monthly thought leadership session ‘QMV Super Community’. Over 70 delegates gathered at Melbourne’s RACV club and after a light lunch observed a very lively panel discussion, moderated by Michael Quinn, Managing Director at QMV.The theme for discussion was competition in the superannuation system, with the overarching question of:
“Is competition in superannuation a driver of efficiency and innovation
or a costly distraction?”
The panel comprising four industry leaders enlivened the discussion with generous insights which both resonated and challenged attendees:
- Nick Sherry : Former Assistant Treasurer and Minister Superannuation and Corporate Law
- Stephen Reilly: Chief Operating Officer, HESTA
- Dr Rob Nicholls: Visiting Fellow and Lecturer, UNSW Business School
- Amara Haqqani: Senior Manager Retirement Income Policy, Challenger
The role of competition in promoting better outcomes for members in the superannuation system is a nuanced topic where there are no perfect answers. The panel approached the discussion by focusing on default contributions, supply chains, retirement income products before looking at the role that innovations in technology might have on competition.
THE COMPETITIVE LANDSCAPE IN SUPERANNUATION IS HAMSTRUNG BECAUSE THE SYSTEM IS SO OVERWHELMINGLY COMPLEX
There was consensus among panellists that competition should lead to better products, lower fees, and improved retirement outcomes. However, discussion turned towards the competitive environment being hamstrung by the overwhelming complexity of Australia’s superannuation system, making competition conditioned by information asymmetry, behavioural bias and members who are either confused or unengaged.
1. It can be challenging for funds to allocate limited resources into developing robust and competitive advantages such as technology, customer service, product innovation and so on, because so much effort and investment is required to navigate the challenges of simply being a superannuation fund within a highly complex and regulated system.
2. It is also extremely difficult for members to understand their superannuation let alone the differences between one fund and the next. This is particularly so in a mandatory system. It is therefore a huge ask for members to make an informed decision about which fund is best. The result is that members lack engagement and subsequently don’t create the same level of competition within the super supply chain.
It was further discussed that behavioural analysis has indicated that exception to this lack of engagement arises with life changing events (e.g. arrival of dependencies, property investment and/or approaching pension phase).
IT WOULD BE A WHOLE LOT EASIER IF THERE WAS ONE SINGLE DEFAULT SUPERANNUATION FUND
Discussion continued around the mind numbing complexity of Australia’s superannuation system, begging the question as to whether we would all be better off with a single default superannuation supplier? While it was accepted that this is highly unlikely to happen, one centralised default fund would simplify and streamline inefficiencies, make policy easier, maximise returns and generally make it more straight-forward for members and employers to navigate. Competition can continue to exist in this situation with layers of competing suppliers underneath.
One centralised fund will make life easier for the seven out of ten Australians who will not save. Such members should go on autopilot (throughout their super life-cycle) if they are not interested in taking an active involvement in their super and all members would still have the right to DIY. The additional costs and resources associated with DIY should not however come at the expense of default members.
WHY BUNDLE INSURANCE IN SUPERANNUATION?
Panellists challenged the role of death and disability insured benefits in superannuation, contributing to the complexity and challenge of getting the right outcome for members and their unique set of circumstances. The panel discussed the idea of unbundling and simplifying superannuation. It was noted that Australia is the most complicated defined contribution system in the world. No other retirement system in the world offers insurance (with peers such as Canada, Sweden, UK, Greece and USA referenced).
PRODUCT INNOVATION…THE RACE TO CREATE A PRODUCT THAT DELIVERS MONEY ‘TIL YOU DIE
The ultimate competition was said to be product innovation, especially in the race to create a product that delivers money ‘til you die. Industry attention is shifting focus to the underdeveloped post-retirement space and members are increasingly expecting more personalisation and contextualisation around this.
Superannuation products that suit retiree preferences are fuelling serious competition and may give funds the opportunity to curb the growing SMSF market. Many retirees do not want just an annuity or an allocated pension. They also want to take lump sums to pay off the house, go around the world and have enough money to buy presents for the grandkids.
Gen-Xers are the defined contribution generation and have not yet gone full cycle from work to retirement. This group are increasingly looking for advice and seeking input to their superannuation strategy. They harbour fears that they will not be able to retire, that their parents will spend their inheritance and that they will have to take up smoking (joking) so not to live as their long-life expectancy of 117.
Millennials who are engaged with their super present a unique set of requirements with expectations of tailored offerings, savvy digital experiences (with a maximum of 3 clicks) and immediate outcomes…oh and now they also want to buy a house with their super.
An interesting point was raised in that as competition increases in the market for retirement income products, there may be opportunities for advice and product design to place a greater focus on the economic reality of the family or couple remaining the dominant economic unit at retirement. While the superannuation system is focused on individuals as autonomous economic units, relationships of mutual dependence in families play a persistently important role which shouldn’t be ignored.
ENHANCED CUSTOMER SERVICE AND MEMBER EDUCATION IS FUELLING COMPETITION
Members want access to advice and flexible offerings that can be easily adapted throughout their life-cycle to reflect changes, such as their capacity to save, risk appetite, investment needs and communication preferences. Retirees want prior indications of how much age pension they are eligible to against their superannuation. They also need education on how it is all going to pan out regarding longevity and sequencing risk, and they want affirmation from a face real person, not a computer.
DISRUPTERS COULD BLOW EVERYTHING OUT OF THE WATER
The rising popularity of ETF’s are posing a significant threat to which superannuation will find it difficult to compete. Unregulated global pension and insurance products are emerging via technological advances that could render Australia’s highly regulated system redundant. The rapid growth in global technology is giving rise to highly sophisticated technology systems which are cost efficient, more flexible and now more capable of dealing with the complexity ofAustralia’s regulatory specifications than they have been in the past.
In 10 to 20 years, local administration, funds management, technology and customer service suppliers will not be able provide the cost efficacies of global scale and much of Australia’s superannuation operations will be offshore.
So what is your take? Is competition in superannuation hamstrung by the complexities of the system and are we better off streamlining with a single supplier default fund for apathetic members?
As you will note, this month’s QMV Super Community Session was extremely engaging and QMV would like to take this opportunity to sincerely thank our exceptional panellists and delegates for their involvement. We look forward to seeing you at our next QMV Super Community event!
Michael Quinn – Managing Director