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
Disengagement due to the introduction of the MySuper regime urgently needs to be corrected
How Government changes have contributed to higher group premiums
New stapling arrangements will have inherent pitfalls
Emerging from COVID-19
How changes from the pandemic will help the return to normality
VOLUME 35 - ISSUE 1, APRIL 2021
15/04/2021 1:01:57 PM
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TOP STORIES & FEATURES
Super funds need real-time data
Analysis from research house Rice Warner says the best situation for super funds would be one where data was processed on a near real-time basis.
6 | Will Govt’s YFYS legislation force a cull of superannuation associations? Collateral damage from the Your Future, Your Super changes could mean funds are asked to justify the payment of large membership fees.
7 | Govt lambasted over lack of detail on super performance tests The Federal Government is being asked to undertake consultations with super funds over how the performance test will work under the Your Future, Your Super legislation.
8 | How PMIF and PYS contributed to higher group premiums
12 | Stapling – another bandage for superannuation
14 | Emerging from COVID-19
The Putting Members Interests First and Protecting Your Super legislations have led to higher premiums and costs to members.
The upcoming superannuation fund stapling arrangements has its pitfalls, despite its positive intentions.
The pandemic has accelerated some trends in the pipeline for institutional funds, but what will help the return to normality?
2 | Super Review
15/04/2021 1:02:09 PM
Member engagement needs to be back at the top of the agenda With 20/20 hindsight, the disengagement which occurred with the introduction of the MySuper regime was a mistake which now needs to be urgently corrected.
It is now more than a decade since the so-called Cooper Review effects of the PYSP and PMIF legislative arrangements have driven down delivered its final report and gave rise to a range of key changes still insurance coverage within superannuation and there are justifiably filtering through the Australian superannuation system, not least mounting concerns about how the passage of the Your Future, Your MySuper, SuperStream, and the push for greater scale amongst Super legislation may magnify some of the effects. Australian Prudential Regulation Authority (APRA) regulated funds. Indeed, there are suggestions that there are those in the Government And in recommending the establishment of MySuper, the review who are committed to pursuing an agenda which would see insurance panel led by now Challenger executive, Jeremy Cooper, referenced a inside superannuation as entirely voluntary across all age cohorts, “simple, well-designed product suitable for the majority of members”. something which would have significant implications for the nation’s The panel said the MySuper concept “is aimed at lowering overall already large insurance gap but for the profitability of the major life costs while maintaining a competitive market-based, insurers. private sector infrastructure for super. The concept Forgotten in much of the discussion around draws on and enhances an existing and well-known insurance inside superannuation is the fact that, for “As with everything, product (the default investment option). MySuper takes many Australians, it is the only significant life in superannuation this product, simplifies it, adds scale, transparency insurance cover that they hold and that they would be knowledge is power and comparability, all aimed at achieving better most unlikely to pursue alternative cover either and members need member outcomes”. directly or through a life/risk adviser. This fact alone, to be educated and informed about what A decade down the track, what can be said about should make elected representatives and their they’ve really got and MySuper is that, on the available information, it has non-elected advisers take pause. what it is worth.” resulted in generally lower fees but it cannot be said to Then, too, there is the reality that for many have generated greater member engagement. Australians working in dangerous occupations, In fact, those with long enough memories will obtaining insurance cover outside of superannuation recall that before the Cooper Review came along and suggested would be simply too difficult and too expensive to afford. MySuper, a significant part of the work carried out by organisations such These are just a few of the reasons why superannuation funds and as the Association of Superannuation Funds of Australia (ASFA) and the superannuation industry organisations need to be encouraging Australian Institute of Superannuation Trustees (AIST) was the members to understand what their funds are delivering and what it is encouragement of fund members to actually engage with their super; to really worth to them. This would at least help members to make an understand how much they had and what it delivered. informed judgement about whether what the Government is legislating is Today, as the Morrison Coalition Government pursues its Your Future, in their best interests or its own – something which was entirely Your Super legislation on the back of its earlier Protecting Your Super questionable with respect to the COVID-19 hardship superannuation Package (PYSP) and Putting Members’ Interests First (PMIF) legislation, early release regime. there is good reason to suggest that superannuation funds and their As with everything, in superannuation knowledge is power and representative bodies should once again be vigorously pursuing the members need to be educated and informed about what they’ve really encouragement of member education and engagement. got and what it is worth. Quite simply, there is already abundant evidence that the combined
Mike Taylor, Managing Editor
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3 | Super Review
14/04/2021 1:58:01 PM
Global equity super funds return best in Q1 BY JASSMYN GOH
Vanguard Australia names chair and directors of Vanguard Super BY OKSANA PATRON
The first quarter of 2021 saw the average global equity-focused superannuation funds beat out returns of its Australian equity and Asia Pacific ex Japan equity counterparts, according to data. FE Analytics data found the global equity super sector average return was 6.07% over the three months to 31 March, 2021. This was compared to 4.15% from Australian equity super funds and 3.87% from Asia Pacific ex Japan equity super funds. The top-performing global equity super fund was CFS FC PSup-Acadian Geared Global Equity at 18.47%. This was followed by CFS FC W PSupAcadian W Geared Global Equity (18.45%), ANZ ASA Optimix Global Smaller Companies (15.1%), OnePath OA Frontier TTR-OptiMix Global Smaller Companies Share (15.06%), and OnePath OA Frontier PS-OptiMix Global Smaller Companies Shares (15.05%). Returns of Asia Pacific ex Japan, Global, and Australian equity super fund sectors during Q1 2021. The CFS Acadian Geared Global Equity fund had its largest geographic allocation towards North America at 62.33%, followed by Europe at 23.28%, Asia at 7.95%, Japan at 4.56%, and the Middle East at 1.43%. Four out of its five top holdings, as at 30 November, 2020, were tech firms Apple, Microsoft, Amazon, Alphabet, and rounding the five was Procter and Gamble. However, over the longer term it was the Asia Pacific ex Japan focused super funds that took the lead with the sector average returning 77.9% over the five years to 31 March, 2021. This was followed by global equity focused super funds at 69.9%, and Australian equity focused super funds at 52%.
Vanguard Australia, which has announced the establishment of Vanguard Super, has appointed Peggy O’Neal as its chair while Jeremy Duffield, Anne Flanagan and Cynthia Lui will also join the board of directors. The launch of Vanguard Super would be subject to obtaining regulatory licences and successfully registering the fund, the firm said. “The board brings decades of local and global experience to Vanguard Super. I am confident they will successfully lead our entry into the Australian superannuation market with a compelling offer that best serves our future members,” Vanguard Australia’s head of superannuation, Michael Lovett, said. Lovett also acknowledged the current social and economic challenges facing the superannuation industry as a result of COVID-19. “We will continue to refine our superannuation offer in the coming months, with the guidance of the board, and look forward to bringing it to Australians later this year,” he said. “Vanguard prides itself on taking a stand for investors by providing access to low-cost, high-value investments that gives them the best chance for investment success. Vanguard Super will continue this mission through a fund designed to allow members to keep more of their savings and evolve with members right through their lifetimes.”
Personal investments market to grow 4.4% per annum over 15 years The personal investments market is under recognised and market providers need to understand the opportunities in the sector to remain competitive and gain market share, according to Rice Warner. In an analysis, the research house said there were three forces that would have the biggest impact on the $2.85 trillion personal investments market as it was headed to grow at 4.4% per annum over the next 15 years. The first force was superannuation legislation as individuals considered their overall financial position and future financial needs, including both super and non-super investments as a holistic position. The analysis said recent legislative changes had reduced the flow of savings to super products, especially from wealthier investors. The second was product development as Rice Warner expected exchange traded funds (ETFs), enhanced index funds, and environmental, social and governance (ESG) factors to have a large impact on the market. The third force was governance and technology with landmark changes such as the Future of Financial Advice and the upcoming Design and Distribution Obligations shaping the governance space. “As these changes come into effect, we expect continued scrutiny of the provision of financial advice and the remuneration models used within the sector, as well as governance pressure on the financial services industry, particularly in respect of product design,” it said. “More generally, there is a heightened sense of community expectation in relation to the governance standards that investors expect their investment managers and providers to live up to.” On technology, Rice Warner said consumers and investors were accustomed to sophisticated and convenient service delivery via web and mobile applications. “The drive for efficiency and competitive advantage coupled with the continued expansion of internet and mobile functionality has seen ongoing innovation both in products and services, leading to a demand for more accessible, transparent and low-cost products,” the analysis said. “We anticipate that market participants with a focus on these products can expect to see a larger market share, with newer, younger participants favouring these products.” 4 | Super Review
15/04/2021 2:19:41 PM
Super funds need real-time data
Key RC recommendation ‘kicked down the road’ BY JASSMYN GOH
The Government has stopped short in reviewing the Royal Commission’s recommendation to legislate universal key definitions, terms, and exclusions for default MySuper group life policies, according to a lawyer. Berrill and Watson Lawyers principal, John Berrill, told Super Review the Government went as far as collecting submissions during March and April 2019 but that is where it had stopped. “Literally nothing has happened since. What I read six months ago was that the Government said: ‘we’ve complied with that Royal Commission recommendation’,” he said. “But no they haven’t, all they’ve done is put out an issues paper and called out for submissions. They haven’t produced any legislation or follow ups, nor have they come up with any set of universal terms and conditions. Nothing has happened. It’s now nearly been two years.” Berrill said the Government had not done anything as it was not a priority for them as Treasury had a lot on its plate and the COVID-19 pandemic had been a distraction. “But COVID-19 makes some of this stuff, such as consumer protection, really important and yet the response has been to sort of kick it down the road,” he said. “Vulnerable consumers are more at risk because of COVID-19 due to employment uncertainty, people getting laid off, and people getting sick.” Berrill said as many people who were laid off during the pandemic were cocooned by JobKeeper and JobSeeker, now that it had stopped these issues were going to come to light. “The issues around whether their insurance policies respond and whether they’re going to get covered there are now more important, and going to come to light,” Berrill said. “We need to make the system as good for value for money as possible – those are thing that are more important than ever and are certainly coming to the fore now. But we’ve seen nothing yet from Treasury.”
The ideal data model for superannuation funds would be one where data was processed on a near real-time basis and a single source could be used to drive all engagement activity, according to Rice Warner. An analysis by the research house said more holistic and timely data allowed funds to have more specific individualised engagement with members. However, it said many superannuation funds were unable to effectively reach their desired goals to due a lack of data or lack of ability to integrate data in an effective or timely manner. Rice Warner noted that super funds had a small number of data points for default members which were often limited to date of birth, account balance and contribution information. “Funds are striving to engage more effectively around particular life and activity milestones, for example engaging with a member with who has recently married or has newly-dependent children,” the analysis said. “However, funds are often limited in their ability to so do efficiently by data which is dated and less insightful. This is often a consequence of the frequency with which data is extracted from the administration system and the time taken to run models and generate insight.” It said the most advanced funds were using real-time data to drive the next best conversations with members as they made contact with the fund, but that this was generally in the early stages of development. The analysis noted the key focus areas for administrators were cybersecurity, financial planning and advice, technology/ digital strategy, and pension transfer bonus.
EISS Super and TWUSuper confirm merger moves BY MIKE TAYLOR
NSW-based industry superannuation fund, EISS Super has confirmed it has entered into a Memorandum of Understanding (MOU) for a merger with TWUSuper. A successful merger would see the creation of a fund with 130,000 members and over $12 billion in funds under management. The two funds said that initial discussions on the merger had been very positive. Commenting on the move, EISS Super chief executive, Alexander Hutchison, said he believed the fund had an obligation to its members to consider the benefits of a potential merger and to proceed if it was in their best interests. “It is early days, but we are seeing a lot of potential benefits for members so a merger looks promising,” he said. For his part, TWUSuper chief executive, Frank Sandy, said that there appeared to be strong synergy between the funds operationally. “This merger can provide greater scale for both funds and has the potential to deliver cost savings to members across trustee services, administration and investments,” he said. Both noted that the funds’ memberships shared similarities with a high proportion of members working in high-risk occupations meaning both funds placed great importance on providing quality insurance that was tailored to the needs of their members. 5 | Super Review
15/04/2021 10:53:08 AM
Will Govt’s YFYS legislation force a cull of superannuation associations?
Signiﬁcant danger in lack of YFYS detail BY MIKE TAYLOR
The Federal Government is finding itself under increasing pressure from all segments of the superannuation industry over its failure to provide sufficient detail around its Your Future, Your Super legislation, particularly the super fund performance test. The Senate Economics Legislation Committee has heard from virtually all parties that it is almost impossible to determine what the new regime will look like in the absence of the Government providing the fine detail of its regulations. The committee has been told by a range of parties, including Mercer, that implementation of the legislation needs to be delayed beyond 1 July, this year, and that a significant consultation period will be needed once the regulations are ultimately released. Mercer senior partner and superannuation specialist, Dr David Knox, said the new arrangements would place increased responsibility and pressure on employers who would be left unprepared under the current legislative timetable. “Employers need to be given time and the 1 July start date is impractical,” Knox told the committee’s hearings. Both Mercer and the McKell Institute also warned that the super fund performance test would risk driving down superannuation funds as fund trustees became more conservative and limited the range of investments they were prepared to pursue. As well, the McKell Institute argued that any performance test which excluded the impact of fees risked distorting the market.
Major superannuation industry organisations may find themselves suffering collateral damage from the Government’s new Your Future, Your Superannuation (YFYS) with funds being asked to justify the payment of large membership fees. There are three significant industry associations representing the superannuation industry with the two organisations expected to be the most exposed being the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST). ASFA represents a cross-section of superannuation funds, while the AIST is regarded as mostly representing industry and profit to member superannuation entities. The acting chairman of the committee hearings reviewing the YFYS legislation, NSW Liberal backbencher, Senator Andrew Bragg, specifically challenged superannuation funds and others giving evidence about the industry organisations in which they held membership. Bragg also queried whether there were too many organisations seeking to represent the superannuation industry. Later, answering a query from Super Review, Bragg said the current situation of half a dozen industry organisations seeking to represent the industry was “intolerable and unsustainable”. When the question of how many associations were active in seeking to represent the superannuation industry, the AMP representative acknowledged that “some consolidation would be sensible”. The committee hearing heard from the Financial Services Council (FSC) that in terms of the proposed new legislative arrangements around members’ best financial interests, it was possible that superannuation funds could be challenged on whether their membership of particular industry associations was delivering members value for money. The FSC deputy chief executive, Blake Briggs, said that the FSC would be comfortable with that sort of scrutiny with respect to its superannuation fund members.
IFM Investor’s ﬁrms boost renewable energy investment BY JASSMYN GOH
Institutional fund manager IFM Investors-owned companies Buckeye Partners and Nala Renewables have together acquired a majority ownership in clean energy development investment platform Swift Current Energy. The acquisition, an announcement by Buckeye and Nala said, would allow the firms to invest in a renewable energy platform that aligned with their priorities and further participate in energy transition. Buckeye president and chief executive, Clark Smith, said: “This strategic partnership offers an exciting opportunity to further advance critical renewable energy generation and storage development projects across the United States while growing this platform”. Nala incoming chief executive, Jasandra Nyker, said she saw North America as a dynamic and growing segment of the global renewable energy landscape. Buckeye was a wholly owned investment of the IFM Global Infrastructure fund based in Houston, Texas; Nala was a joint venture between Trafigura and IFM Investors based in Geneva, Switzerland; and Swift was headquartered in Boston, Massachusetts. 6 | Super Review
14/04/2021 4:35:46 PM
Govt lambasted over lack of detail on super performance tests BY MIKE TAYLOR
The Federal Government is being urged to undertake detailed consultations with superannuation funds about how, precisely, its performance test will operate under the new Your Future, Your Super legislation. Both AMP Limited and IOOF have used their submissions to the Senate Economics Legislation Committee to call for the detailed industry consultation warning that the absence of critical detail could prove to be significantly detrimental to both superannuation funds and their members. The IOOF submission points to the fact that while the legislation outlines the need for a performance measurement it provides no specific detail beyond suggesting that the methodology be contained within yet to be determined regulations. “The bill provides that details of performance measurement criteria will be set out in the regulations,” it said. “IOOF supports an extensive and robust consultation process to determine the content of these regulations. “IOOF believes an industry consultation process should be established, providing input to the proposed performance benchmarking methodology that ultimately forms the regulations. As APRA has a role in determining which ranking formulae to choose, we suggest it would appropriate to include the regulator in these consultations to ensure consistency and transparency of approach.” For its part, AMP expressed concern that critical details to be contained in the regulations were not yet available. “Without the regulations, and no formal indication of when these will be released, trustees are unable to understand the annual performance assessment methodology, determine the application of the performance assessment to their MySuper product or identify potential issues relating to its implementation,” the AMP submission said. “The magnitude and absence of such critical details suggests that the Government has not yet decided what the requirements for the annual performance assessment should be. AMP raised this concern in our submission to Treasury in December 2020 and three months later, the situation remains unchanged; consequently, our concern has escalated.”
Not easy for industry superannuation fund members to find total fees BY JASSMYN GOH
The idea that industry superannuation funds are always cheaper than retail funds is incorrect as fees disclosed by industry funds omit property operating costs, borrowing costs, and implicit and explicit costs, according to an adviser. Speaking to Super Review, HH Wealth director and financial adviser, Chris Holme, said he had to dig through the product disclosure statement (PDS) and the supplementary PDS to find out all the fees involved with the fund. “If we include some of those costs that they put into their fees guide, investment guide or supplementary PDS we’re finding their fees are a fair bit higher than what we originally thought or that are disclosed to clients,” he said. “Now these are fees that are taken out before clients see investment returns they don’t have to put them on statements but I do count them as costs because they’re coming out of a client’s performance before they receive it. “I still like industry funds and I’ve got a lot of clients in those funds and haven’t moved them specifically because they are still adequate for my client needs but I think the whole conception that industry funds are always cheaper than retail funds is pretty wrong to be honest,” he said. Holme said he had a client whose
industry super fund claimed their total fees were 0.93% but, in actuality, the total fees were 1.94%, over a per cent higher than what the fund disclosed. “The fees are in the supplementary PDS but the funds are not making clients aware of it or making it easy for advisers to accurately compare like-for-like,” Holme said. “I won’t change super funds if there is no benefit but previously we were looking at staying in a lot of the industry funds because we weren’t aware of these additional fees. “It’s not fully hidden but what client is going to comb through the PDS an then after that look at their fee guide or supplementary PDS?” He noted that when the super fund was approached about the fee discrepancy, they originally claimed the higher fee was incorrect but when the fees were broken down they retracted their statement and said it was correct. “Because they take these fees out before performance is shown to the client it’s taken as a ‘that’s not our fees that’s the fund manager’s fees’ but at the end of the day if you’re getting a net return, those fees should be included,” he said. Holme also noted that he did not think a lot of advisers realised the hidden fees as he had to adjust the comparison software he used to factor these fees to compare like-for-like super funds.
7 | Super Review
14/04/2021 1:57:18 PM
How PMIF and PYS contributed to higher group premiums BY MIKE TAYLOR
Many of the objectives of the Government’s changes to insurance in superannuation may have been laudable but one of the outcomes has been higher premiums and higher costs to members.
In the approximately two years since the Government introduced its Protecting Your Super (PYS) legislation and its allied Putting Members Interests First (PMIF) the number of people covered by insurance inside superannuation has declined while premiums have risen. Given that one of the key objectives of PYS and PMIF was to reduce account balance erosion by effectively making insurance inside superannuation opt-in for younger and low income members the outcome, at this stage, appears to have fallen significant short of what the Government had hoped for. As a reminder, the PMIF legislation provided for the cancellation of insurance cover for members with balances below $6,000 (where they didn’t request to keep the cover) from 1 April, 2020, and only start insurance cover for members where they have reached a balance of $6,000 and are age 25 or older.
So, what has the bottom line been? According to data compiled by specialist life insurance research house, Dexx&r, total in-force premiums for group life are down 3.2%. They stood at $6.226 billion at December 2018 and at December 2020 stood at just $6.013 billion. What is more, the data show that premium charged to members for default cover death and total and permanent disability (TPD) have increased by 15% since January 2018 with Dexx&r’s Mark Kachor making the point that if premiums charged to members had not been increased by 15% over the past two years, the decline of in-force premiums would have been around 18%. This is telling because it remains generally acknowledged that insurance inside superannuation remains the most common form of life insurance cover carried by Australians and the phenomenon of the PMIF legislation
coming at a significant cost to superannuation fund members remaining in the insurance pool was predicted well before 2019. But the Government’s legislative efforts have not been the only driver for increased premiums in the superannuation arena, with the insurers themselves having broadly sought to reshape what represented chronically unprofitable disability insurance offerings. This much has been recognised by the Australian Prudential Regulation Authority (APRA) which has expressed long-term concerns about the profitability of disability insurance and as recently as March saw fit to write to superannuation fund licensees and the chief executives of the major life insurers warning about the re-emergence of bad practices. What APRA said it was worried about was premium volatility and the re-emergence of tendering practices
8 | Super Review
15/04/2021 10:59:45 AM
which put price above service with respect to group insurance mandates. In short, APRA’s letter suggested that there was a danger that insurers and superannuation funds could repeat the mistakes which gave rise to the significant losses which occurred between 2012 and 2016. Under the heading “Key areas of concern” APRA’s letter stated: “Following a period of significant premium reductions and benefit increases for life insurance provided through superannuation, between 2012 and 2016 insurers experienced significant losses. As a result, there were large premium increases, more restrictive cover terms were introduced, and a number of trustees experienced difficulty in obtaining quotes for cover for their members as insurers and reinsurers declined to participate in many tenders. The significant changes in premiums (as a result of premium
“The trends and practices which APRA has observed recently appear similar to those seen in 2012-2016.” reductions followed relatively quickly by large increases) was a poor outcome for members.” “The trends and practices which APRA has observed recently appear similar to those seen in 2012-2016, and have similarly been accompanied by a deterioration in group life insurance claims experience and significant impact on life insurer profitability. “APRA is concerned that, should these trends continue, members are likely to be adversely impacted through further substantial increases in insurance
premiums and/or a reduction in the value and quality of life insurance in superannuation. Indeed, the ongoing viability and availability of life insurance through superannuation may be at risk, adversely impacting access to life insurance cover for a large part of the Australian community.” Dealing with premium volatility, the letter said that the deterioration in life insurance claims experience within superannuation, and consequent unprecedented losses for insurers, recent APRA data illustrates that insurance premiums per insured member have been escalating during 2020. “APRA has also observed that material premium increases by insurers have contributed to RSE [registrable superannuation entities] licensees tendering insurance arrangements more frequently. Continued on page 10
9 | Super Review
15/04/2021 11:11:36 AM
Table 1: Risk products net proﬁt after tax ($ million) Year to 31 Dec 2019 653.3 -1,472.8 -240.6 -270.9 -1,331.0
Individual lump sum Individual disability income insurance Group lump sum Group disability income insurance Total
Year to 31 Dec 2020 543.7 -739.9 -173.5 -122.5 -492.3
Dec Quarter 2020 73.0 -97.5 -7.8 -108.0 -140.3
Chart 1: Net proﬁt after tax (risk products)
Continued from page 9
APRA is concerned that, in some cases, the pricing on which tenders are being won by insurers, whilst initially attractive to RSE licensees, may prove to be unsustainable, and therefore likely to lead to significant increases in premiums at the end of premium guarantee or contractual periods.” “Such price volatility was observed in 2012-2016, following the losses in the group insurance market at that time. Ultimately, members are not best served by such unpredictability and volatility in insurance premiums, with members paying more in future for insurance as a result of unsustainable prices being offered to win tenders in a prior period. This volatility makes it more difficult for members to assess insurance costs and the value of the insurance.” Hardly surprisingly, APRA ended on the note that it expected life insurers and superannuation funds to “take steps
to ensure that insurance offerings and benefits are sustainably designed and priced, provide appropriate value for members, and adequately reflect the underlying risk and expected experience”. Deloitte superannuation partner, Russell Mason said that there was no question that insurance inside superannuation had gone through a problematic period but he continued to believe that group life insurance represented one of the key benefits which could be delivered by superannuation funds. He said he was therefore concerned when he heard suggestions from some quarters that insurance inside superannuation should be entirely opt-in. “If that were to happen then I believe that tens of thousands of superannuation fund members could find themselves at substantial financial risk,” he said. The implications of making group
insurance opt-in for superannuation fund members has also not been lost on specialist actuarial consultancy, Rice Warner, which earlier this year published an analysis noting that the Australian Securities and Investments Commission (ASIC) had estimated that almost 10 million superannuation accounts currently had insurance attached, of which 86% had insurance on default settings. It was in these circumstances that Rice Warner was exhorting superannuation funds to become more familiar with insurance data. “The introduction of PYS and PMIF legislation has for many members changed their insurance status and introduced new complex rules for switching cover on and off. This has heightened the risk and prevalence of administrative errors which are notoriously difficult to successfully unwind.”
10 | Super Review
15/04/2021 10:59:00 AM
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12/04/2021 9:53:04 AM
STAPLING – another bandage for superannuation BY HELENA MCGEORGE AND JENNA MOLLROSS
The superannuation fund stapling arrangements contained in Government legislation have laudable objectives but they also come with inherent pitfalls.
The Your Future, Your Super package announced in October 2020 as part of the Government’s 2020-21 Budget is designed to “make your super work harder for you”. Following the findings and recommendations of the recent Productivity and Royal Commissions, these reforms are aimed at improving retirement outcomes achieved for all Australians. The Government undertook consultation in relation proposed legislation, with the bill introduced into Parliament for a first reading on 17 February, 2021. An issue that this package tries to tackle is the unintended creation of multiple superannuation accounts, a common consequence of people changing jobs and not electing to have future superannuation contributions paid into an existing account. This can see a person paying duplicate fees and insurance premiums on multiple accounts, eroding their savings that have been accumulated over time. To prevent Australians from facing a proliferation of unintended superannuation accounts, from 1 July, 2021, a person’s existing superannuation account will follow them from job to job (referred to as ‘stapling’), unless they opt to select another fund. The Government estimates that stopping the creation of unintended multiple accounts will boost balances in super by about $2.8 billion over the next decade. While good in principle, there are a number of potential pitfalls that should be considered to ensure this reform achieves the outcomes intended.
Implications for the appropriateness of default insurance cover A key component of Australia’s superannuation system is the life insurance cover available to members. Funds aim to develop an
insurance strategy and design that is appropriate for its membership, taking into account key risk factors such as age and nature of employment. A member’s occupation will likely determine their eligibility for cover, the definitions of illness/disablement that apply and the premiums payable. Funds aligned to industries and employers with more risky occupations tend to have a default insurance design that better caters for this. In the presence of ‘stapling’, it will be important that a member’s default insurance cover is adjusted appropriately as they shift into and out of riskier occupations.
Implicit advantage for funds aligned to the younger workforce Funds aligned to industries that typically employ young people, such as retail and hospitality, will likely disproportionately benefit from ‘stapling’ superannuation accounts to individuals across their lifetimes. With low engagement rates in superannuation, both at younger ages and in general, some funds will have a better opportunity to set up superannuation accounts for new workers at the start of their careers. This could drive complacency among those funds that benefit, while others face the risk of an increasingly ageing membership and its associated challenges. Further, of the handful of funds that are likely to benefit the most from the stapling measures, the majority offer members a single strategy MySuper product as opposed to a lifecycle or glidepath strategy. For a disengaged member, which the ‘stapled’ member may well be, this is disadvantageous as their risk exposure will not adjust with age, having implications for their retirement outcomes.
12 | Super Review
15/04/2021 10:42:25 AM
Risk that Australians are ‘stapled’ to underperforming funds
“The root cause for the majority of the underperforming and eroded superannuation balances remains the lack of member engagement in superannuation.”
The Your Future, Your Super package introduces measures to hold funds to account for underperformance. However, the new annual performance test will look at historical net investment returns achieved over the previous financial year and see members of underperforming funds notified by the following 1 October. ‘Stapling’ superannuation accounts to individuals may see employers make contributions into funds that are underperforming when compared to the net investment returns of the default fund offered to employees.
Ability for employers to set up a competitive staff superannuation plan Under Australia’s compulsory superannuation system, employers are required to have a ‘default’ fund that they can pay compulsory contributions into if an employee does not choose their own fund. For larger employers, it is common to establish a superannuation plan through its default superannuation fund to cater for the specific nature and needs of its employees. An employer can then work with its chosen fund to cater for the needs of its staff through initiatives such as financial wellness seminars or advice services. However, funds may now view employers that do not employ a significant number of young people as less attractive, as ‘stapling’ will likely mean less new members are gained by default at older ages. This
may create challenges for employers in setting up comprehensive superannuation plans for their staff in the future and see a potential dilution in the specific needs of employee groups being addressed. A number of the legislative changes to superannuation over the past few years have been focussed on protecting member balances; whether through the Productivity and Royal Commissions or the Protecting Your Super changes. Stapling is the latest of these. In theory, it should protect balances at the inception of an individual’s superannuation
journey. However, stapling is not without its pitfalls, as has been noted in this article. The root cause for the majority of the underperforming and eroded superannuation balances remains the lack of member engagement in superannuation. Increasing an individual’s engagement with their superannuation, supplemented by education to help them make an informed choice, should still be a key focus of each superannuation fund’s strategic initiatives to ensure that it operates in its members’ best financial interests. Although sound in rationale, regard must be given to the unintended consequences of the legislation. Ultimately, these highlight the important of increasing individuals’ engagement with superannuation to ensure they are getting the best financial outcomes. Helena McGeorge is senior consultant and Jenna Mollross is senior manager at Deloitte.
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Emerging from COVID-19 BY SALLY SURGEON
The pandemic has accelerated trends for institutional funds that were already in the pipeline and some will shape the journey back to normality.
As we all dare to dream about the light at the end of the COVID-19 tunnel, it is increasingly clear that the institutional funds sector is already moving to codify the lessons learned from the pandemic. It was just over 12 months ago that the entire institutional funds sector, alongside the rest of the workforce, had to adapt to different ways of working almost overnight. Together, the entire financial services system has demonstrated an enormous amount of flexibility to ensure everything kept working in an efficient and secure manner. At Northern Trust, we believe the past 12 months has accelerated some trends already in the pipeline. Like most journeys, there will be twists and turns and every participant will have a unique experience. However, we believe the following trends will play a significant role in shaping the path back to normality.
Scale and efficiency considerations As a natural reaction to uncertainty, the onset of the COVID-19 pandemic resulted in some institutional investors pausing significant projects around consolidation and changing operating models. This pause was a temporary response and institutional investors have or are now recommencing these important projects as they seek to mitigate risk, and enhance scale and capabilities to future proof their operations. At a macro-level, superannuation funds are expected to continue to focus on reducing costs to ensure they meet the Australian Prudential Regulation Authority’s (APRA’s) mandated standards around performance and
value to members. This will lead to further consolidation through mergers which will provide opportunities for increasing scale, operational efficiency and benefits to members. Additionally, institutional investors are continuing the 30-year trend towards outsourcing certain functions. Beginning in the early 1990s, outsourcing kicked off with custody and fund accounting. In the 2000s it extended to the middle office with outsourcing of post-trade execution activities, including trade matching, reconciliations and client and regulatory reporting. Fast forward to today, where we are increasingly witnessing the outsourcing of front office functions. For example, at Northern Trust, our Integrated Trading Solutions (ITS) offering, which is outsourced trade execution, is increasingly in demand from institutional investors seeking to future-proof their operations and enhance their operational efficiency. Overall, institutional investors are realising great value in outsourcing their back, middle and select front office functions such as institutional brokerage to service providers like Northern Trust who have a global operating model, innovative technology solutions, as well as proven scale and experience to meet the ongoing needs of sophisticated institutional investors.
Data demands to continue Asset servicing providers are playing a key role in assisting institutional investors to meet a variety of data and reporting needs. The thirst for increased data and transparency on
investments has been a theme for a number of years and the impact of COVID-19 has continued to accelerate this trend. During the onset of COVID-19, asset servicing providers were processing and reporting unprecedented volumes of transaction activity as institutional investors responded to the evolving market volatility. During this time, the role of asset servicing providers in maintaining consistent servicing and providing up-to-date portfolio information was never more important. Many institutional investors have been evaluating their data management governance and operating models. The pandemic highlighted the importance of strong data governance and many are now continuing on that journey to future-proof their operating models with enhanced tools, talent and data to support decision making, oversight activities, and ongoing changes to regulatory reporting obligations.
New types of investments Another trend is the increasing array of assets that are on offer to institutional investors. The sophistication and complexity of these emerging opportunities will require a strong ecosystem to ensure they are properly accounted for, valued, and serviced. With the potential emergence of new asset classes we can also expect a continued focus on digitalisation. Digitalisation continues to accelerate, and institutional investors are continuing to show a strong appetite for conversations in this direction. Northern Trust developed the first distributed ledger technology solution for private equity administration, and we continue to work with Singapore-based BondEvalue
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while they rollout their world-first blockchain solution for trading bonds. We are also taking part in conversations about cryptocurrencies and their role in the portfolios of institutional investors. Like other digital assets, the creation of an ecosystem to account, value and service the asset will be required to provide investors with the requisite level of confidence and assurance. In this space, Northern Trust recently announced it had partnered with Standard Chartered to launch Zodia, a cryptocurrency custodian for institutional investors. Separate to digitalisation, the prevalence of lower for longer returns is another COVID-19 legacy which has given rise to the trend for institutional investors investing into private assets in search of additional returns.
Regulatory conversations back in the spotlight During 2020, financial services regulators went to great lengths to understand and accommodate the impact COVID-19 had on both the broader economy and the financial services and super funds sector, including a lightening of the regulatory change agenda. As the economy returns to a more normal post-COVID setting, we anticipate that ongoing regulatory conversations will be front and centre for institutional investors as they adapt to new regulatory requirements.
“The past 12 months has accelerated some trends already in the pipeline. Like most journeys, there will be twists and turns and every participant will have a unique experience.” There is no doubt that asset servicing providers will play an important role in helping clients meet these new requirements and standards. Further from our shores, global regulatory changes, like derivatives regulations and upcoming LIBOR changes, continue at pace and will continue to impact local institutional investors as they seek returns in markets beyond Australia.
Diversity, equity and inclusion outcomes COVID-19’s impact on the office and how we work is expected to have far-reaching impacts on diversity, equity and inclusion outcomes. The financial services system was able to quickly adapt to the need to work from home. Temporary regulatory relief and quick thinking ensured challenges around wet ink signatures, document execution and cheques were overcome in a timely fashion. As work from home orders begin to lift, the industry is
well placed to continue leveraging these efficiency gains. On the same topic, accelerated investments in technology and online collaboration tools proved that working from home was not only possible, but in many cases supported greater inclusion because everyone was working remotely. Whilst the lines between work and home were blurred and the hours increased, there were also the benefits of increased flexibility due to the elimination of daily travel time between home and office. That said, many of us look forward to returning to the office and face to face meetings with our colleagues and clients. COVID-19 has normalised working from home and challenged any perceptions of the effectiveness of remote work. Looking forward, maintaining a level of workplace flexibility will encourage and facilitate an increased participation of women in financial services and ultimately the number of female leaders within our industry. In conclusion, the journey out of COVID-19 will have twists and turns and will be unique for each and every institutional investor. It is clear the journey will be made easier with a committed, service driven partner. Sally Surgeon is head of client services and head of the Sydney office at Northern Trust.
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14/04/2021 1:54:09 PM
ROLLOVER THE OTHER SIDE OF SUPERANNUATION
Merger mania or left-foot tango Rollover is almost as fascinated by superannuation fund mergers as the deputy chair of the Australian Prudential Regulation Authority (APRA), Helen Rowell. Recent fund mergers have come in all shapes and sizes with the result that sometimes Rollover fully understands the rationale behind the transactions while, sometimes, he simply does not. For instance, Rollover fully understood the rationale behind the rather mammoth merger of Sunsuper and Q Super (geography and demography) while he is still struggling to understand the rationale behind the merger of Media Super and Cbus unless it has something to do with political ideology. Rollover remembers the origins of Media Super with the old Journalists Union Super Trust (JUST) merging with Print Super. He
also remembers the journalist union merging with Actors Equity to become the Media Entertainment and Arts Alliance – sometimes known as a rare combination of scribblers and jugglers, but he is not sure how, scale aside, that all fits with a building and construction industry fund like Cbus. Which brings us to the recent announcement of the impending merger of EISS Super and TWU Super, where at least it can be argued that both are high touch funds with members working in dangerous callings demanding highly specific insurance offerings. That said, perhaps a fund representing those in the electrical trades might have sat more comfortably with Cbus until you consider the divide between chippies and sparkies and the factional divide between Sydney and Melbourne.
Bragging about value for money
WILL THE SPICE OF RICE CONTINUE BEYOND DELOITTE?
Rollover notes the manner in which former Financial Services Council (FSC) policy operative and now NSW Liberal Senator, Andrew Bragg, made much of his time this month as the acting chair of the Senate Economics Legislation Committee. Bragg, who has become an almost incessant critic of the existing superannuation regime, chose to ask nearly every witness to the Senate Committee’s review of the Your Future, Your Super legislation whether groups representing the superannuation industry should be rationalised. Having drawn his salary from the FSC under the benevolent leadership of former NSW Liberal Opposition leader, John Brogden, Bragg would have been pleased to note that his former colleague, the FSC’s current deputy chief executive, Blake Briggs, believed the organisation provided good value for money for its members. “…unlike the other associations, we don’t just represent superannuation; our members comprise of life insurance companies, fund managers, advice licensees and some in the superannuation sector. Taking that into account, our total headcount, full-time equivalent, is 15 people. But I note that we only have one full-time equivalent for superannuation—my colleague Jane. She’s worth the 40 or 50 you get at some of the other associations. And the FSC’s total budget is I think around $6 million, so I think we’re the lowest funded of the associations,” Briggs told Bragg.
So, with eponymous actuarial consultancy Rice Warner being rolled into Deloitte, Rollover is wondering how many client overlaps will need to be rationalised? It has been Rollover’s experience that many superannuation funds have not bothered to choose between Deloitte or Rice Warner but have often decided to use both depending on the nature of the project at hand so the client lists for both outfits would be remarkably similar. Rollover knows that Rice Warner founder, Michael Rice, will continue
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to contribute to his firm beyond the Deloitte transaction, but he wonders how long the separate branding will remain in existence. He also wonders whether Rice Warner will be allowed to continue with publishing its regular analyses of the state of the superannuation industry in the somewhat more constrained environment that is Deloitte. On the upside, however, at least Deloitte superannuation partner, Russell Mason and Rice Warner chief executive, Andrew Boal, have known each other a very long time.
F IND U S O N
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