SUPER A NNUATION P OLICY IN V E S TMENT S INSUR A NCE A DMINIS TR ATION
AUSTR ALIA’S LE ADING SUPER ANNUATION M AGA ZINE
Editorial
Why trustees will need to rise to the challenge of 2022
Superannuation mergers
How super funds are managing their mergers
Insurance
Despite a few challenging years, insurance in super is still surviving
Asset servicing
Custodians will need to become more collaborative if they want to stay competitive
VOLUME 35 - ISSUE 2, DECEMBER 2021
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CONTENTS
DECEMBER 2021 WWW.SUPERREVIEW.COM.AU
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F IN D U S O N TWITTER @SUPERREVIEW LINKEDIN SUPER-REVIEW FACEBOOK SUPERREVIEW
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TOP STORIES & FEATURES
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ASIC sues MLC Life for multiple insurance failures
The corporate regulator alleges MLC Life failed to pay life insurance benefits, notify on premium rises or refund premiums, amongst other breaches affecting over 260,000 customers.
6 | Five to 10 mega super funds on the horizon
7 | Vanguard Super delayed until 2022
Mid-tier superannuation funds have begun merger discussions but there will likely be added complications as some are looking to mix two to four entities into one.
Vanguard has delayed the launch of its Vanguard Super superannuation product to work through the various licencing and regulatory requirements.
8 | When two become one
12 | Where is insurance in super at?
14 | The digital future of asset servicing
With the Australian Prudential Regulation Authority warning against sub-optimal mergers, how are super funds amalgamating?
The full impact of regulatory change on insurance in super is a close watch for consumers.
Asset servicers will need to be client centric, digitally enabled and flexible as new technology is on the horizon.
2 | Super Review
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EDITORIAL
Remaining on the front foot While the last two years have been challenging for the superannuation industry, there is more to come in 2022 and super funds will need to rise up to the challenge.
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The superannuation industry did not have a quiet 2020 or 2021 and should not expect a quiet 2022 either. The Australian Prudential Regulation Authority (APRA) is putting pressure on super funds to merge and many mergers are on the horizon for the new year. Not only this, despite APRA executive director, Margaret Cole, claiming the regulator could not “compel a merger” but could have conversations leaning with “moral suasion and put directions on discussions around mergers” it has done just that with EISS Super. The regulator placed new license conditions on EISS Super and one of the conditions was to “implement a strategy to merge with a larger, better-performing fund by 30 June, 2022”. Given this, the industry could expect this heavy-handed approach to continue. The retirement income covenant will take effect from 1 July, 2022, allowing product providers to launch new retirement income solutions. However, industry participants are reluctant to launch new products given the lack of guidance from the regulator which has said it is not looking to issue extensive or detailed guidance in the short-term. It will be interesting to see what solutions will be released in 2022 and how they may evolve. Super funds will also need to consider its strategy around its reserve as there are proposals for ‘Section 56 amendment’ to pass Parliament that would prevent super funds from using
members’ money to pay penalties imposed by regulators from early 2022. This year has also seen the introduction of the Your Future, Your Super regime including the stapling of super funds, the first round of performance test results, and the introduction of best financial interests duty. With stapling, the impact on insurance in super remains to be seen as the median age and account balance of members will likely rise but could see members in funds have a wider range of occupations. This has the potential to lead to more basic levels of default cover and more general underwriting tools. The performance test next year will not only include MySuper products but be extended to other superannuation products and specified investment options. Depending on the results of next year’s performance test it could put more funds under the microscope from APRA and its merger mission. The industry must be on the front foot to handle those challenges next year while also navigating the Federal Election. This is the last print edition of Super Review for 2021 and will return in 2022. The bi-weekly newsletter will continue through until Thursday 16 December. The entire Super Review team wishes our readers a very happy holiday season and a safe and prosperous 2022.
“Depending on 2022’s performance test it could put more funds under the microscope from APRA and its merger mission.”
FE Money Management Pty Ltd ACN 618 558 295 Level 10 4 Martin Place, Sydney, 2000 www.fe-fundinfo.com EDITORIAL Editor: Jassmyn Goh Tel: 0438 957 266 jassmyn.goh@moneymanagement.com.au Associate Editor - Research: Oksana Patron Tel: 0439 137 814 oksana.patron@moneymanagement.com.au Features Editor: Laura Dew Tel: 0438 836 560 laura.dew@moneymanagement.com.au Journalist: Liam Cormican Tel: 0438 789 214 liam.cormican@moneymanagement.com.au
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3 | Super Review
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NEWS
ASFA welcomes passage of RIC BY LAURA DEW
The Association of Superannuation Funds of Australia (ASFA) has welcomed the introduction of the retirement income covenant into Parliament. The Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 would codify an obligation for super trustees to demonstrate how a retirement income strategy plans to assist its members in retirement. It must consider how the trustee would guide and support its members to maximise income in retirement, manage risk and provide flexible access to savings. “The legislating of a retirement income covenant is a significant step in encouraging the further development of the retirement phase of superannuation and should assist members to be able to make informed decisions in retirement,” ASFA deputy chief executive, Glen McCrea, said. “We would encourage the Parliament to pass this legislation so that superannuation funds can begin implementing these important reforms. “We look forward to seeing the Australian Prudential Regulation Authority’s (APRA’s) guidance about trustees’ retirement income strategies soon, so when developing their retirement income strategy for 1 July, 2022, trustees know what APRA expects.” Subject to the passage of the bill, the covenant will take effect from 1 July, 2022.
Trustees raise concerns with AFCA funding The superannuation sector is concerned about issues arising around fairness if the Australian Financial Complaints Authority (AFCA) moves to a user-pays model for superannuation trustees. In an independent review of the organisation, the first since AFCA was formed in 2018, the report discussed incentives for early complaint resolution. “A number of financial firms (both small and large) expressed concerns about the unfairness of situations where firms have to pay substantial complaint-handling fees to go through AFCA’s process, just to be found not at fault,” it said. “The superannuation sector was also concerned about this becoming an issue for it if AFCA moves to a user-pays model for superannuation trustees, especially because fees are ultimately borne by the members of the superannuation fund and superannuation trustees are required to consider the best financial interests of members.” Currently, super trustees paid a single super levy each financial year based on projected number of super complaints annually and associated complaint costs, and a proportional contribution to AFCA’s indirect costs not covered by complaint fees. This was divided by trustees based on their size. Complaints about super fund trustees or advisers made up over 11,000 complaints between November 2018 and October 2020, the fourth most-frequent sector to be complained about. Super respondents also reported the burden to raise jurisdictional issues had risen under AFCA compared to its predecessor, the Superannuation Complaints Tribunal (SCT). “Feedback from the superannuation sector in particular was that the SCT was much more proactive in closing matters outside its jurisdiction very early in the piece, while the burden to raise jurisdictional issues falls more to the financial firms when it comes to AFCA,” it said. “It was also said that this can have an adverse impact on the complainant by raising their expectations, only to be disappointed later in the process.”
QSuper members file class action BY JASSMYN GOH
QSuper members have filed a class action against the superannuation fund, alleging they were overcharged for life insurance policies. The class action to the Federal Court of Australia claimed the fund breached its obligations under the Corporations Act 2001 and the Superannuation Industry (Supervision) Act 1993 by failing to notify its members of changes to premiums. Shine Lawyers class action practice leader, Joshua Aylward, said the lack of notification resulted in financial loss for up to 140,000 members. “QSuper changed their life insurance policy on 1 July, 2016, and failed to adequately notify its members of how to get cheaper premiums,” Aylward said. “Significantly, most of the fund members impacted are Queensland Government employees and their spouses, teachers and health industry workers like doctors and psychiatrists.” Shine said white collar workers were charged the same increased premiums despite not having the same risk-factors present in their lines of work. A spokesperson for QSuper told Super Review: “QSuper has no comment on a matter before the courts”. 4 | Super Review
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NEWS
‘Retrograde step’ to charge for building reserves: Hume
ASIC sues MLC Life for insurance failures BY CHRIS DASTOOR
BY LAURA DEW
The move by superannuation funds to charge for building a trustee financial contingency reserve is a “retrograde step”, according to Senator Jane Hume. Addressing the Australian Financial Review Super and Wealth summit in Sydney, Hume, minister for superannuation, financial services and the digital economy, said several super funds had applied to the courts for this permission. Charging members’ extra fees at a time when Your Future, Your Super reforms were about lowering fees meant the decision was a retrograde step. “Let’s not kid ourselves as to what this really is; taking member’s money out of their retirement savings to set up a pool of funds – owned by the trustee – to ensure they can pay for penalties due to their own misconduct. “If it appears that trustees are confusing their own interests – saving their own skins – with the best financial interests of members whose money is unlikely to be imperiled by a change of trustee, I would expect regulators to take action and Parliament might too. “I’m not sure how many members would vote to give away some of their hard-earned retirement savings to bail out a trustee for wrongdoing. “Particularly when trustees and those organisations that stand behind them have their own resources which they could alternatively draw on rather than milking their members.” She urged superannuation trustees to raise the question with their super funds at the next annual members’ meeting.
The Australian Securities and Investments Commission (ASIC) has commenced civil penalty proceedings in the Federal Court against MLC Life Insurance for insurance policy and service failures resulting from poor systems and controls. ASIC claimed that MLC Life’s failure to implement appropriate systems and controls resulted in unpaid insurance benefits, premiums being charged without notice and underpaid refunds. It was alleged MLC Life’s conduct led to over $17.5 million in financial harm to over 260,000 customers. ASIC alleged that from 1999 to November 2020, MLC Life failed to: • Pay a life insurance benefit, known as a ‘rehabilitation bonus benefit’, to 297 eligible customers who were undergoing rehabilitation following an insured injury or disability; • Update its definition of ‘Severe Rheumatoid Arthritis’ in a timely way, resulting in 12 customers suffering from Severe Rheumatoid Arthritis being denied insurance cover and MLC Life having to update the definition in over 190,000 insurance policies; • Notify over 800 customers that their annual premiums had increased, their premiums were overdue, or that their insurance policies had been cancelled or lapsed; and • Fully refund premiums to over 260,000 customers who had cancelled their loan insurance policies or paid out their loans.
ASIC claimed MLC Life breached its obligations as a financial services provider and its duty to act with the utmost good faith when handling claims. ASIC was seeking declarations, pecuniary penalties and other relief from the Federal Court. ASIC noted poor claims handling and the failure of life insurers to update medical definitions in their insurance policies to accord with current medical practice were both issues considered by the Royal Commission. MLC Life had advised ASIC that it had remediated customers impacted by the alleged conduct. Sarah Court, ASIC deputy chair, said consumers should be able to trust insurers to pay their full benefit in times of need and keep them informed about significant changes to their policies. “This case alleges failures by MLC, over many years, to ensure a reliable delivery of basic and everyday insurance services,” Court said. “Insurers need to make sure they have adequate systems and controls to manage risk and administer their insurance policies correctly. “Too often, we are seeing consumers harmed by implementation issues, legacy IT systems and failures resulting from poor governance and culture. ASIC will look to take enforcement action to ensure these systems improve.” The date for the first hearing was yet to be scheduled by the court. 5 | Super Review
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NEWS
Five to 10 mega super funds on the horizon BY LIAM CORMICAN
Australia will end up with about five to 10 superannuation mega funds in the future as smaller funds merge with larger players who will be jostling for dominance, according to PwC. Speaking on a webinar, Naresh Subramaniam, director – investment advisory at PwC Australia, said he had been involved in the due diligence phase of about 20 mergers in the past two to three years and that mid-tier funds would trend toward amalgamating into a mega fund. “We’re going to see these mid-tier funds starting to get together to aim at becoming sustainable and aim at becoming a mega fund,” he said. He said he had witnessed mid-tier funds starting to discuss mergers, pointing to Australian Prudential Regulation Authority (APRA) pressures and rising costs as what was driving the trend. Subramaniam said it would be complicated to conduct due diligence for the mid-tier mergers as it was likely there would be two to four entities attempting to mix into one. He said unit pricing and equivalency, the APRA term to make sure members were not worse off from a merger, were the critical elements in PwC’s due diligence process analysis. Conducting equivalency analysis meant looking at the super fund’s products and investment options, Subramaniam said, and analysing them from an asset allocation exposure or a growth asset exposure to see where there was commonality so they could be brought together. Mergers that were confirmed this year so far were Equip and BOC Super, Hostplus and Statewide Super, Australian Super and LUCRF Super, QSuper and Sunsuper, LGIAsuper and Energy Super, Hostplus and InTrust Super, Toyota Super and Equipsuper, and Tasplan and MTAA. There had also been discussions between Sunsuper and Australian Post Super, Aware Super and VISSF, and Hostplus and Maritime Super.
‘Middle ground’ super funds will struggle with value proposition BY CHRIS DASTOOR
Funds that are in the middle ground between being a behemoth and a niche fund will struggle in the future post-merger environment, according to Aware Super. Michael Dundon, Aware Super executive consultant – corporate development, was previously chief executive of Vic Super for the decade leading up to the merger with First State Super, which was now Aware Super. After the merger was completed, he took on his current role with the fund which involved looking after the merger team and activity. Looking at the broader marketplace, Dundon said it was the funds that made up the middle ground between the dominant super funds and the smaller niche funds that could struggle. “Those funds in the middle ground where they are not niche but they’re not big enough to get the scale benefits, it’s going to be hard for them to have a really strong, compelling value proposition in my view,” Dundon said. “We will probably see those funds consolidate and a number of those funds will end up in ‘destination’ funds, so they’ll do a merger into a large fund and be part of a very large fund in the future.” Dundon said the industry was evolving quickly and the structure was being driven by the level of competitiveness that we’re seeing across the industry. “There’s some big funds that are extremely competitive on investment performance and fees, and our view is that there will be a dozen or slightly less large funds of above $100 million [funds under management] and a small number of $250 billion plus,” Dundon said. “Then there will be funds that are very specific and very niche to some segments so they’ll be quite small but their offering will very tailored to that market segment and they will achieve some scale benefits to outsourcing, collaboration and those sort of things.” It echoed a similar view of Aware Super’s CEO, Deanne Stewart, who told Super Review in September she expected to see a dozen or so large funds along with room for niche funds. Dundon said he expected more funds to similarly have dedicated merger teams set up, if they did not already. “In our case, we have a dedicated team set up, we’ve got a really current playbook of experience that we can leverage each time we do a merger,” Dundon said. “You’re probably going to see a lot more funds thinking about that aspect because mergers are complex, they’re very time consuming [and] there are different ways to structure these things. “You want to be working on a merger with someone who’s done it before because there are significant learnings that can be leveraged to really enhance experience.” 6 | Super Review
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NEWS
APRA places new license conditions on EISS Super BY JASSMYN GOH
The prudential regulator has placed three license conditions on trustees of EISS Super to protect the best financial interests of its members, including the need for the fund to merge. The Australian Prudential Regulation Authority (APRA) said in an announcement the conditions were to address concerns regarding its investigation into expenditure and governance matters and because it failed the Your Future, Your Super performance test. The terms of the new licence conditions, which take effect immediately, require EISS to: • Implement better expenditure processes and greater board oversight of fund expenditure; • Review its expenditure and cease sponsorship arrangements and other expenditure that are not in the members’ best interests; and • Implement a strategy to merge with a larger, better-performing fund by 30 June, 2022, and report to APRA if the merger has not been executed by that date.
APRA member, Margaret Cole, said: “Being a trustee of an APRA-regulated super fund, and managing – and spending – billions of dollars of members’ money, is a privilege, not a right. “Although our investigation into EISS’s expenditure is ongoing, we have sufficient concerns about the trustee’s ability to demonstrate that some decisions are in members’ best financial interests that we believe it’s necessary to intervene now. Further action may follow, depending on what the rest of the investigation uncovers. “Ultimately, the best way for EISS to optimise outcomes for members of its struggling MySuper product is to transfer them to a more sustainable and better performing product as soon as possible. The new licence conditions ensure the trustee obtains independent advice and reports to APRA on progress before making a go-ahead decision for these members.”
Vanguard Super delayed until 2022 BY LAURA DEW
Vanguard has delayed the launch of its Vanguard Super until 2022 in order to work through regulatory requirements. The firm announced a board of directors back in April and said at the time, that it expected to launch a superannuation product in 2021. At the time, Vanguard Australia head of superannuation, Michael Lovett, said: “The current climate has only strengthened our resolve to support Australians in managing their retirement savings in a way that will enable financial peace of mind, and to contribute meaningfully to Australia’s superannuation system”.
However, eight months on and there had been no further announcements from the business. A page on the website invited visitors to sign up for information but offered no further details. A spokesperson for Vanguard said: “We’re making good progress towards a launch in 2022 but no specific launch date has been set yet. “We’re continuing to work through the relevant licencing and regulatory requirements, and are focused on ensuring that all elements of our offer, from investment strategy to member experience, benefit from the input of our local and international expertise in delivering retirement solutions.”
Super funds increasing offshore investments BY CHRIS DASTOOR
Superannuation funds have increased their allocations to offshore investments to an average of 46.8%, up from 41% over the past two financial years, according to a survey from NAB. The NAB 2021 Superannuation FX Survey found that 61% of funds reported plans to further increase the amount invested in foreign assets. Drew Bradford, NAB markets executive general manager, said findings revealed some funds had already crossed the 50% threshold for the first time. “This survey shows the move to increase offshore investments is continuing and funds are taking on more foreign currency exposure,” Bradford said. “Notably, many public sector funds have crossed the 50% threshold for the first time within the past two financial years. “Currency is now the biggest investment risk in the portfolio after equity market risk and super funds are increasingly treating foreign exchange as an asset allocation, just as they would for any other asset class. “What’s really interesting is that funds have started hedging more of that risk – reversing earlier declines – but continue to move away from traditional hedge ratios that used to dominate their offshore investments.” Despite the challenging economic period, the survey also found the top 20 balanced funds closed out the 2020/21 financial year with an average return of 18% and funds that fully hedged their AUD/USD exposure during the 2020/21 financial year would have added approximately 6% to member returns. 7 | Super Review
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MERGERS
When two become one BY CHRIS DASTOOR
With dozens of mergers having already taken place, the industry is starting to find it has a refined, formulaic process for consolidation.
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While it seems the superannuation industry is going through merger-mania, it has long been the call by the prudential regulator that there are too many funds. Even recently in a speech delivered to the Financial Services Council (FSC) in October, Australian Prudential Regulation Authority (APRA) executive board member, Margaret Cole, said the number of funds and investment options remained so large that it was “detrimental” to members. APRA stated that it expects anything less than $30 billion in funds under management (FUM) would be too small to compete. However, it also warned against trustees rushing into poorly-planned or sub-optimal mergers. There were many factors to consider when finding a merger partner, including member needs, workplace cultural fits, investment philosophy and demographics. Because of this complexity, it was now common for super funds to employ teams solely to organise and assess potential mergers.
Identifying merger partners It takes two to tango and without identifying an appropriate partner for a merger, the process is doomed to fail. In the case of Aware Super, AustralianSuper and Spirit Super, all three funds were the result of multiple mergers. In 2012, First State Super (established in 1992 for NSW Government employees) merged with Health Super, a health and community services-focused fund. In July 2020, First State Super merged with VicSuper and officially become known as Aware Super. In December 2020, Aware Super completed its merger with WA Super. In July 2021, Aware announced it had agreed to merge with the Victorian Independent Schools Superannuation Fund (VISSF). Michael Dundon, Aware Super executive consultant – corporate development, was formerly chief executive of VicSuper and now looked after the merger team at Aware Super. He was also acting chief operating officer (COO) as current COO, Jo Brennan, had taken
more responsibility over the platform transformation project. As CEO of VicSuper, Dundon said the fund had been exploring merger opportunities due to the belief that a $25 billion fund with 250,000 members was not going to be large enough for the future industry environment. “Organic growth was not going to give us scale benefits that we wanted and we were looking at larger funds – the $100 billion plus who were delivering a broader range of services and better investment performance all at a lower cost to members,” Dundon said. “Our view from a strategic perspective was we really needed to find a merger partner that would allow us to access those scale benefits quickly. “Looking through the industry at the time, our focus was on a fund that was like-minded culturally, strategically, and in a [similar] demographic.” Dundon said First State Super was the logical fit and it was a nice compliment to match a large Victorian and New South Wales fund together.
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MERGERS
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“In a cultural sense, we were both very aligned, similar sort of backgrounds from hiring staff, commitments to things strategically like responsible investing, very strong alignment around the views on the future of advice and the importance of advice and education in retirement outcomes,” Dundon said. “Then we went through a process where we approached them and held discussions. I led the Vic Super discussion and negotiations, we established a joint board steering committee, which oversaw the conversations, discussion and planning and made recommendations to their respective boards.” Dundon said there was a large universe of funds still in the industry so the fund had a process where it looked at individual funds and judged them both with quantitative and qualitative criteria. “Some of the quantitative criteria include things like are they still growing strongly, what’s their investment performance like, what’s their cost structure like, what’s their market share in particular segments – do they have a
“Managing through mergers is challenging; it’s challenging to engage and meet the needs of a broad membership.” – Kathleen Crawford, Spirit Super
presence in areas we’re not in that we would like to be?” Dundon said. “The VISSF merger is a good example: Victorian independent schools is a small fund but it has a presence in the independent school segment in Victoria. “That’s an area where neither First State Super or Vic Super have a very strong presence so it’s an opportunity for us to grow our presence in a new market segment. “There’s qualitative measures as well that come down to things like the alignment of strategies, culture, governance experience and models – those sort of things that all inform you as to whether a fund will make a good merger partner.” AustralianSuper may take the record for most fund mergers to date, having
completed 14, with two more mergers on the horizon. Rose Kerlin, AustralianSuper group executive – membership, said the fund wanted to continue to derive scale benefits from mergers as well as organic growth. “We are currently working through due diligence with Club Plus [representing club hospitality workers] and LUCRF – which combined have over $10 billion in members’ retirement assets and over 180,000 members,” Kerlin said. “AustralianSuper’s focus when it comes to mergers is about being members first; we want to achieve the best possible outcomes for members, that is the priority. “AustralianSuper assess potential mergers on key criteria including the payback period for the cost of merging, which includes all costs and investment performance and the impact the merger will have in terms of number of members, assets and future contributions. “We also look at cultural fit by assessing Continued on page 10
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MERGERS
Continued from page 9
culture, values, business partners and portfolio construction. There is also an assessment of the strategic value and importance of any merger, which relates to assets such as what markets are involved.” Kerlin said the success of AustralianSuper’s mergers had been because it had found partners who had a shared vision and aligned culture and strategic intent – without those attributes there was a low chance of success from the outset. “There must be a shared vision to work together on a members first basis to create a better future for members,” Kerlin said. “Ultimately being bigger only matters if it results in a level of outperformance in returns from what would be achieved if the fund continued along a standard path. “Mergers are expensive, disruptive and time consuming so analysing and understanding the opportunity cost is essential. “There also needs to be very strong focus on simplicity – ‘simple, targeted, excellence’ is our mantra. Don’t add products and services for the sake of it. Find out what do members actually care about because complexity drives costs and inefficiencies up.” In the case of Spirit Super, it was a consolidation for four Tasmanian super funds that now had scale to become fullyfledged national player. It started in 2015, when Tasplan merged
with Quadrant Super (established in 1944 for the local government sector in Tasmania). Tasplan became the successor fund, resulting in a combined 100,000 members with $3 billion FUM. In 2017, Tasplan merged with the Retirement Benefits Fund (RBF) which was established in 1904 to support State Government employees, with Tasplan once again becoming the successor fund. It was now 165,000 members strong with $7.6 billion FUM. In April 2021, Motor Trades Association of Australia (MTAA) Super merged with Tasplan. MTAA would be the successor fund of the new 326,000 member entity with $23 billion FUM and a re-brand to Spirit Super. Speaking at the Superannuation CX Forum, Kathleen Crawford, Spirit Super COO, said the merger was scheduled to be completed in October 2020 but it was delayed due to the COVID-19 pandemic. “Managing a merger through that time going to be impossible, we had market volatility in March and all the COVID implications,” Crawford said. “Given that heightened risk, our board of directors decided we would push that date out six months and the merger finally came to get in April [2021].”
Aligning cultures In the case of Vic Super and Aware Super, Dundon said it was a good example of putting the people first through the
merger process. “We made sure that we had all our communication to our staff before any external stakeholder discussions,” Dundon said. “We have brought the best elements of both organisations from a cultural perspective and brought those into the merged entity. Our leadership, values, beliefs and training are all very aligned, and all of those things are reinforced as we go through merger integration.” For example, Dundon said there was a very significant onboarding process for the Vic Super people that moved into the merger fund. “This allowed them to have a better understanding of the values of Aware Super, the processes and tools that we all have,” Dundon said. “All that was done with a very significant effort… before the merger date, all of the newly-appointed or existing group executives were all interviewed in front of staff.” When it came to appointing the CEO and board, Dundon said it was a straightforward process where both organisations agreed on what was appropriate. “Vic Super board wanted some [board] representation but basically were comfortable that it should reflect the membership of the merged fund,” Dundon said. “Given we were 250,000 members going into a fund with over 800,000
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MERGERS
Table 1: Major super fund mergers Completed
In Progress
Under discussion
First State Super + Vicsuper + WA Super (rebranded as Aware Super)
Aware Super + VISSF
AustralianSuper + LUCRF + Club Plus
Tasplan + MTAA + RBF + Quadrant (rebranded as Spirit Super)
Sunsuper + QSuper
HostPlus + Statewide + Intrust
Equip + Catholic Super
Cbus + Media Super
LGIAsuper + Energy Super
LGIAsuper + Suncorp Portfolio Services SOURCE: SUPERGUIDE
members, it was easy to work out the proportions for the board positions. When it came to deciding on the CEO, Dundon said he had made it clear he was not interested. “I was looking to slow down a little bit and explore other things in the industry and stay involved but not at a CEO level,” Dundon said. “But I was keen to be part of the merged entity for a period of time to make sure the integration of Vic Super went well and that I might have an opportunity to participate in other merger activity which is something I enjoy and is beneficial for the industry. “Then we had a process for all the senior leadership and broader staff positions where essentially we had a process where people could be considered for all roles and we used an independent consultant on a panel to assist with appointing the appropriate people into those roles.”
Assessing member needs Ultimately, a super fund was nothing without its members and all funds agreed that member needs were forefront of any merger discussion. Kerlin said any merger should be considered through the lens of whether or not it would present an improvement for members. “Scale can lead to improved net investment performance and cost
reductions for members, other benefits include improved ability to attract and retain talent and an improved advocacy impact,” Kerlin said. “Trustees should be scrutinising the member outcomes a merger will deliver before going ahead and apply rigor to the business case while also tracking benefits to members.” Kerlin said it was also important to also realise that mergers were not the only way to grow a membership base. “At AustralianSuper, 47% of members directly choose the fund (versus 53% default) last year and this is only likely to continue to increase over the coming years; over 1,000 members join every day,” Kerlin said. Like all matters that come up in merger negotiations, Dundon said it was important to have a strong lens around what was the members’ best interest. “If you focus on that, decisions around resourcing [and other] big strategic decisions become a lot easier because you have a clear objective around getting the best people, the most experienced and capable people into the right role,” Dundon said. Dundon said it started with a sideby-side comparison that looked at fees, investment performance, investment options, insurance coverage and cost. “Even things like the provision of additional services like estate planning
or advice, all those elements are put side by side and cumulatively you look at the impact of a merger and say ‘is this in members’ best interest’?” Dundon said. “It’s often the case in some funds, you might get cheaper insurance premiums in the merger target fund than in Aware but overall, the administration fees and all the other savings that come, the member is better off in the merged fund.” Not absolutely everything would be better, Dundon said, but the overall position needed to be considered better for the member. “The big drivers for retirement outcomes – sustained strong investment performance and low fees – that’s a very big focus for us in our merger discussion and preparations,” Dundon said. “That’s what we’re aiming to achieve: getting the diversification and scale benefits of having much greater FUM it can give significant retirement outcome improvements.” Crawford said each one of the legacy funds that Spirit Super was now comprised of had their own clear connection to its membership. “All the evidence suggests that by adopting a customer-centric operating model, we can improve customer satisfaction, generate top line growth and reduce costs,” Crawford said. “Managing through mergers is challenging; it’s challenging to engage and meet the needs of a broad membership.”
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INSURANCE
WHERE IS INSURANCE IN SUPER AT? BY JOHN BERRILL
T
Insurance in superannuation has been through a tough period with multiple legislation changes affecting the product but the full impact remains to be seen.
To say that insurance held inside superannuation funds has had a few challenging years is a bit of an understatement. After the closure of inactive accounts, switching off insurance in accounts under $6,000, excluding insurance for members under 25 and for new members until their accounts reach $6,000, and now the stapling and performance testing of super funds, the question is how is insurance in super holding up? The answer appears to be it is still surviving and continuing to offer relevant products that offer value for money, at least that is what the latest Australian Prudential Regulation Authority (APRA) data shows.
Up to now APRA life insurance statistics published for the 2020/21 year, highlight that the success rates for total and permanent disability (TPD), income protection, and death cover claims in group insurance in super (89%, 95% and 98% respectively) are higher than any of the other life insurance vehicles, namely individual advised and direct sale, and other group cover. In addition, the claims paid ratios are very high, indicative of well targeted products that are value for money. At 97% and 72% respectively, TPD and death cover claims paid ratios compare very favourably with other insurance products. For example general insurance for compulsory third party (CTP), public and product liability, and home and contents policies (from APRA general insurance statistics published in July 2021). The claims paid ratio for income protection insurance in super is even more generous, currently sitting at 111%. However, APRA has rightly flagged that this is unsustainable in the longer term and has required that super funds and insurers take steps to ensure that insurance offerings are “sustainably designed and priced”. Individual income protection products have had even more direct measures imposed by APRA to maintain their viability, particularly regarding long term income protection. In a broader sense, insurance in super has experienced market volatility in the last decade, mainly a consequence of the push for market share that occurred after the introduction of choice of fund legislation in 2005. That together with increased consumer awareness and external pressure from regulators, various enquiries and media scrutiny, led to significant insurance losses in the 2010’s. This in turn led to significant increases in premiums, narrower terms and conditions
and problematic claims handling, the latter of which was highlighted in the Royal Commission into banking and financial services. Whilst these issues have stabilised somewhat in the last few years, some recent legislative changes pose new pressure points.
PYS and PMIF It has been nearly two years since the introduction of the Protecting Your Super (PYS) and Putting Members Interests First (PMIF) legislation. Designed to prevent the unnecessary erosion of retirement accounts by poorly targeted insurance, the legislation has led to a significant drop in the number of superannuation accounts with insurance. Some of this is welcome. The consolidation of duplicate accounts with income protection insurance that cannot be claimed twice and the scrapping of death cover for young workers under 25 has removed poorly targeted insurance cover. However, many Australians have lost the only life insurance and disability insurance cover they had, as existing accounts with under $6,000 had their cover switched off. Under the PMIF legislation, members were to be notified of the option to continue their insurance cover by 1 December, 2019. Approximately 16% did so but we have seen many examples of fund members who either did not receive the written notices or did not fully understand or pay attention in the lead up or subsequent to Christmas 2019. A case in point is Bernadette (not her real name) who set up a super account in 2009 as a vehicle for long term death and TPD cover. She paid initial contributions into the account sufficient to maintain the insurance cover and assumed it would continue in the long-term. However, the cover lapsed in July 2019 because the account was inactive for 16 months. She only became aware of this after she was diagnosed with stage four cancer in 2020 and unsuccessfully claimed a terminal illness benefit. She is now dependent on Centrelink benefits. It is also noteworthy that the Australian Financial Complaints Authority’s (AFCA’s) 2020/21 Annual Review reported receipts of complaints about the cancellation of insurance consequent on PYS and PMIF. How they will unravel administrative errors or compensate successful complainants remains to be seen. Such scenarios were entirely predictable, but the Federal Government included the small account transition measures, despite the warnings of some of us in the consumer movement.
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INSURANCE
Stapling
“Insurance in super has experience market volatility in the last decade, mainly a consequence of the push for market share after the introduction of choice of fund legislation.”
The other major issue is the potential impact of stapling. Introduced in July 2021, stapling will lead to super fund membership becoming more diverse and less occupationally aligned as members are stapled to their first (or existing) super fund as they move from job to job. The median age and account balance of members will likely rise but the pool may include a wider range of casual workers, those with broken work patterns and those in high-risk occupations. This could lead to cross subsidisation, more basic levels of default cover and the greater use of blunt general underwriting tools such as occupational, pre-existing condition and mental health exclusions. The Financial Services Council (FSC) has announced it will introduce a standard for its members to prohibit the use of exclusions and narrow disability definitions for high-risk occupations, including in default group insurance in super. This is welcome. However, a more broad ranging introduction of universal terms and conditions, as recommended by the Hayne Royal Commission, was side-stepped by the Federal Government. The recommendation was for Treasury to consult with industry with a view to legislating key definitions, terms and conditions for default MySuper group life policies. Treasury conducted a limited consultation in May 2019 but disappointingly, no legislation followed, despite the Government’s assertion that it had implemented the recommendation.
1. Superannuation members shifting from funds that fail the Your Future, Your Super performance test and lose existing insurance – although in the first iteration, only a modest 7% have moved funds; 2. The COVID-19 early release of two tranches of super up to $10,000 each, which has reportedly drained upwards of 500,000 accounts. Many of these accounts will have included insurance – although some will have insurance reinstated (perhaps with some underwriting restrictions) as accounts are replenished; and 3. COVID-19 support measures such as JobSeeker and JobKeeper payments and working from home which have kept many workers in employment and reduced the number and size of disability claims. However, the potential impact of long-COVID claims is yet to be felt.
Summary
Other measures
Insurance in super has come through a tough period in reasonable shape. However, the full impact of the changes from the last few years and the industry response is still a close watch for consumers. The protection of the basic tenet of insurance in super to provide affordable insurance for the millions of Australians who otherwise have no insurance cover is vital to support the retirement incomes of those whose working lives may be cut short from disability or death and to reduce dependence on the welfare system.
Other measures which could impact the availability and affordability of insurance in super include:
John Berrill is a director at Berrill and Watson Lawyers.
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CUSTODY
The digital future of asset servicing BY LEON STAVROU
C
The asset servicing industry is simultaneously going through digitisation and digitalisation which will create new markets and products despite uncertainty about their ultimate form.
Custodians have come a long way since their origins as the guardians of assets over a century ago. As an industry, asset servicing is becoming increasingly disintermediated, integrated, and collaborative. Industry participants will need to evolve and collaborate if they want to competitively position themselves for the future. Emerging digital infrastructures, and the rapid digitisation of existing processes, are fundamentally changing the asset servicing industry, driven by increasing demand for efficiency and insight. This evolution will require that each step becomes increasingly agile and collaborative. These changes will create new markets and products which, whilst there is still uncertainty about their ultimate form, have the potential to be truly disruptive.
Change in a brave new digital world Today, custody is seen as a niche sector operated by a group of specialists, but the required skillset is evolving and is expected to change significantly by 2030. Asset servicers have been supporting their clients using artificial intelligence, cloud computing, data analytics and blockchain technology. Beyond 2030, the industry will go even further. We anticipate that new, collaborative ecosystems will emerge that allow both digital and traditional electronic solutions to exist side by side. By 2030, with the use of smart contract technology, we consider transactions could report themselves and asset servicers will have strengthened real-time assurance via blockchain to support more efficiency. Digitalisation is also a significant driver of disruption. Today, the asset servicing industry is going through a process of digitisation and
digitalisation simultaneously, though these are two very distinct things. Digitisation is the process of moving paper content forward into the digital world, using machine learning and artificial intelligence to classify, ingest and analyse even nonstructured data whilst digitalisation involves no paper in the process at all, assets, data and processes are digital native and at source. Digitalisation is being driven by the growth of distributed ledger technology (DLT) and shared infrastructure, with standardised, commoditised processes being developed on those technologies. It is bringing about the advent of digital assets and other innovations including a growing shift towards decentralised finance (DeFi). Two local examples of how this landscape is changing for securities service providers, is the Australian Securities Exchange (ASX) becoming the world’s first market infrastructure to deploy DLT at the heart of its clearing and settlement infrastructure by 2023. In February 2020, the National Stock Exchange of Australia revealed a joint venture project to introduce a blockchain-based clearing and settlement system. This will help securities services providers connect to an immutable source of data, get access to real time data and also consider operational changes that allow concurrent workflow management and a move away from sequential messaging-based workflows.
Challenges with DeFi Although the shift to a DeFi world has made digital assets more accessible to a wider group of investors, it is not without its challenges. Institutional financial structures are likely to follow the trends we’re currently seeing in the retail space with an increasing demand for
transparency and personalisation. Democratisation of investment access — enabled by advancements such as tokenisation and fractionalisation alongside the proliferation of digital assets — is likely to see the great democratisation of asset classes previously only accessible to large institutional asset managers or pension funds. Last year, Northern Trust and Singapore based BondEvalue partnered to deliver integrated asset servicing for the fractional ownership of fixed income bonds. BondEvalue’s regulated exchange facilitates the trading of fractionalised investable assets based on wholesale assets, with Northern Trust as a strategic asset servicing provider. The platform allows investors access to investments that were historically only available to larger institutions. This means any private individual, with even just a small amount to invest, can allocate to individual wholesale assets that they currently would not be able to access. By 2030, this type of service may be offered as standard by any asset servicer especially in alternative assets. However, the variety of new developments, whilst offering significant opportunity for the industry, have the potential to create operational fragmentation, resulting in the necessity to navigate and manage multiple ecosystems simultaneously. From this arises a need for greater industry collaboration and standardisation. We believe that the move from traditional, electronic solutions and capabilities to digital ones will not happen overnight and asset servicers will have a role in continuing to evolve. If investors allocate up to 10% of their portfolios to digital assets, for example, custodians will need to ensure that they have built the architecture to service and support
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CUSTODY
that 10%. Otherwise, they may end up losing the other 90% of their business. An example of this is the emergence of cryptocurrencies as an investable asset class. Northern Trust and SC Ventures, the innovation and ventures unit of Standard Chartered, launched Zodia, an institutional-grade custody solution for cryptocurrencies.
servicing industry must adapt, and custodians’ competitive advantage will be determined based on their level of service and expertise for managing complex events.
Sustainability at the core
Increased regulatory burden Globally, regulators are approaching the industry’s digital evolution with similar intentions but different methodologies, resulting in potential for ‘regulatory arbitrage’. This emphasises the need for a shared taxonomy in how emerging technologies are regulated but also the requirement for a flexible and adaptive approach underpinned by a commitment to investor protection. Taxonomy is important because, as new markets develop, and operational functions become self-learning and self-functioning, and with the integration of data becoming far easier, the issue of standardisation will be paramount. The need for an efficient, regulated marketplace is essential in an industry juggling multiple ecosystems and stakeholders. If emerging digital assets are treated differently to other assets, there is a risk that regulation will create a disparity across regions. Market advocacy is also an important value add for securities service providers to bring their voice to industry and influence regulatory outcomes to benefit clients. The Australian Securities and Investment Commission (ASIC) recently released information for product issuers and market operators on how they can meet their regulatory obligations in relation to crypto asset exchange traded products (ETPs) and other investment products.
LEON STAVROU
Key matters covered by ASIC include admission and monitoring standards, custody of crypto assets, pricing methodologies, disclosure and risk management. The Senate Select Committee on Australia as a Technology and Financial Centre also released its final report on 20 October, 2021, with recommendations on developing a regulatory framework for crypto assets. We also see opportunities in the future for markets to regulate themselves, based on algorithmic updates. Robo-auditors could also be used, which will make the markets more efficient, even for complex assets. Recent regulations with a focus on accountability and governance have already encouraged the creation of new technologies for dramatically enhancing transparency. By 2030, questions of tax rates and repetition of associated data may well be eliminated through the intermediary chain. For effective regulation in a fast-moving technological world, it must be flexible and adaptive. Similarly, in corporate actions, regulations will have significantly reduced competitive differentiation from corporate event announcements and disclosures. The asset
Sustainability is another driver of change within the industry — driven by investor demand and enabled by technological developments, asset servicers have an important part to play in enabling investors and stakeholders to track data, manage standards and inform decisions to create a more sustainable future. It is clear following the recent COP26 summit that the private sector will lead the green recovery post COVID-19, committing over US$130 trillion ($179.6 trillion) of private capital to transforming the economy to net zero over the next three decades. All these trends and themes will have significant ramifications and opportunities for the asset servicing industry. We believe that custodians and service providers must collaborate as members of a shared ecosystem. Asset servicers and other industry participants will need to work together on platforms, and on shared infrastructure, to leverage market positions and to mutualise costs and create new revenue streams. The asset servicers of the future will continue to be client centric and focused on asset safety. But they must also be flexible, agile, creative, and digitally enabled in ways we have never seen before, as new technologies, shifting institutional investing models and emerging market infrastructure entirely transform the financial landscape. The future for the new digital world is collaboration. Leon Stavrou is head of Australia and New Zealand at Northern Trust.
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ROLLOVER THE OTHER SIDE OF SUPERANNUATION
The reality of mergers With rainy weather abound in Sydney, Rollover was sat in front of his TV watching the smorgasbord of niche documentaries free-to-air has to offer. From giga factories to shipping logistics to even our own metro system being built, it seems like a documentary can be made about anything. This led to Rollover wondering why there is yet to be a documentary series about the high-stake world of superannuation fund mergers. After all, it has been one of the hot topics in our industry this year and will continue to in the coming years. With an election due too, there will be no shortage of drama in the industry next year either. One such likely political football, EISS Super, would be the prime
When the Vanguard fails to advance As a history buff, Rollover is well-aware of the importance of the role the vanguard plays in a military force, as the leader at the front of battle. Which is why Rollover found it ironic that Vanguard, the well-known leader in ETFs and managed investments, has delayed the launch of Vanguard Super until 2022. The launch has been a hot topic in the super industry; after all, it is another big player joining in a time of consolidation, but it is also already one of the largest holders of securities on the ASX. As an avid super industry aficionado, or as one might say part of the vanguard of super industry news, Rollover is quite excited to see how this will play out. Rollover has found 2021 to have no shortage of headlines in the super space, with the Your Future, Your Super reforms having been put into action which included the inaugural performance test, and he expects with a Federal Election due there will be no rest for the industry next year. Given Vanguard’s successful track record, Rollover is sure it will do fine and the delay was likely the most appropriate option under the circumstances, and he waits excitedly to see how the launch will play out next year.
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candidate as the prudential regulator has not been at all subtle about the fund’s need to merge. Speaking of the prudential regulator, Rollover wonders how much of the spotlight APRA board member, Margaret Cole, will be comfortable taking. Given her keen interest in the equine, Rollover hopes Cole has an affinity for the extravagant. Rollover can imagine the scene of Cole riding in on her beloved horse, Liam, as two super funds wait on a podium to learn the fate of the regulator’s approval for a merger. It’s the sort of TV that will glue eyeballs to the screen and Rollover is waiting for offers from TV producers as you read this.
ALL ABOARD THE CRYPTO TRAIN Now that crypto investing is mainstream, with Rest Super announcing it will put a portion of its funds into it, Rollover wonders whether his grandkids will think he is hip when he shows them his crypto balance in his new digital wallet. Rollover thought it was a good time to invest in crypto after coming into a bit of cash from this year’s tax return, which was higher than last year’s on account of his new negatively-geared investment properties. After becoming jealous from seeing a friend bragging about his crypto gains on Facebook, Rollover decided to not pester his grandkids about how to invest
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in crypto, instead opting to ask for advice from his new “hey Google” machine. You see, Rollover likes to think of himself as somewhat of a tech connoisseur – within his cohort at least. Down the crypto rabbit hole Rollover went, spending an afternoon working out how to verify his identity on the crypto exchange his Google machine directed him to. After failing to verify his account because he couldn’t find his Medicare card, Rollover ended up begrudgingly asking his peacocking friend how he got his crypto. “Your grandson – are you serious?” Rollover exclaimed.
F IND U S O N
25/11/2021 1:06:27 PM
