Overdue member focus, but where is the data?

Some people will never care about the details being clear or wanting to get into it- they’re too busy – and rightly so. They want to get on with their lives. But there is the opportunity to better see what’s going on for super funds – and more so, equitably, for each member, with advances in technology and investment processes. Interested members, the funds’ governance bodies and the regulators would be in a far better position to assess what is going on. Sunlight is the best disinfectant.

Building a better member pathway in super may still be subject to all the continuing limitations in our understanding of what is going on a fund and member level. Unless the industry also addresses inadequacy in data and the supporting technologies those limitations may well continue:

The Productivity Commission has made some recommendations that resonate with many of us who have argued that that common sense, accountability and real transparency should prevail with the responsibility and privilege of looking after Australian’s retirement savings. Vested interests in the status quo may not be as excited.

It squarely makes the social transition from employer, industry or union driven agendas to a “Member” first approach. It so seems so logical, it begs the question as to why the transition from an employer, union or “trust us we’re a reputable brand” led approach to retirement savings and members best interests has been slower than some of us thought would occur.

The commission has been realistic though. They recommend a program to make super more member-centric while taking into account the real-world issues of building member engagement in early days, resolving multiple account balances and confusing information. To summarise, which we hope does justice to the report, this includes addressing:

  • “simple needs: high net returns, low fees, well managed risks and transparent product features.”
  • “Members should only be defaulted once” and “In other words, once members are in the super system, they — not someone else — should choose when they switch funds or open a new account.”
  • “of employee (rather than employer) choice. At its centre is a safer and simpler choice architecture to help all members choose their own super product”
  • “This consists of a single shortlist of ‘best in show’ products for all members. Members should be empowered to choose their own product from the shortlist or to switch, and this should be safe and easy to do” and
  • “Members will retain the option to choose from the wider set of MySuper and choice products (or establish their own SMSF), and elevated ‘outcomes tests’ will help to weed out persistently underperforming products from the system..”

Excessive fees, sub-scale funds, chronic poor investment performance for some types of funds, potential and real conflicts of interest, inadequate competition, poor governance and regulatory oversight, all however weigh in to the change equation to be solved and rightly so.

And one thing doesn’t seem to have changed much despite huge advances in the rest of our lives, and to quote the report:

“There are yawning gaps in the data”

Further, in relation to economies of scale and data:

“There is little evidence that realised economies of scale have systematically been passed through to members in the form of lower fees. Scale benefits may have been passed through in the form of member services or increases in reserves, or offset by the costs of meeting new regulatory requirements. And not for profit funds, on average, might have passed through some scale economies by investing more heavily in (higher cost) unlisted assets and obtaining higher returns. Data limitations preclude firm conclusions about the form of pass through of economies of scale, and thus how members are actually benefitting and whether they are benefitting in a form they value.”

“Data limitations mean it is difficult to tell precisely how members have benefited from greater scale.

On member outcomes (and data):

“there is remarkably little publicly available data on the outcomes that individual members are actually experiencing — in terms of the returns they earn, the fees they pay, the insurance they hold and the outcomes they receive over time.”

On where the money goes:

“Among other things, APRA fails to collect reliable data on funds’ true investment expenses, with pervasive non reporting and under reporting by funds. It also fails to collect robust data on funds’ outsourcing arrangements with related parties.”

On disclosure:

“Poor quality disclosure by funds appears to go unchecked and unpunished. Regulators have done much to improve the breadth and depth of their data holdings in recent years, but this has been off a low base.”

“Progress has been glacial in some areas. Regulators appear to be hamstrung by industry opposition…”

On returns:

“Stronger net returns among larger not for profit funds might be due to higher exposure to unlisted asset classes, but data limitations rule out strong conclusions.”

While the commission and government can work on the frameworks to build a better member pathway – the industry needs to work on the back end – and the data – to build trust. Understanding better how investment returns (and commensurate risks) come about, the impact of taxes, costs and other expenses – would help unpack what is going on at a fund and member level to the benefit of all.

Developments in technology and investment processes allow for greater transparency, analysis and attribution of “cause and effect” if put in place. The meteoric rise of SMSFs and Managed Accounts attest to the interest of some members – in their quest for transparency, true accountability, openness and cost management. The industry needs to work on taking more of these attributes and delivering them to the growing account balances of members. Investment performance doesn’t need to just be good or above average; It needs to be explained as well.