Following the recent structural reforms across the super industry, and the introduction of more digital platforms to provide transparency and control across superannuation managements, Australians are more switched on about super than ever before.
Services, such as the ATO’s SuperMatch, have allowed for the easier consolidation of multiple superannuation funds to a single account. Beyond this, it’s also never been easier for employees to direct their employers to deposit contributions into a fund of their choosing.
New players in the superannuation market are continuing to gain traction by using B2C propositions to their advantage, and these changes are predominantly beneficial for the consumer.
It’s all thanks to the digital age—and switched-on new entrants, who know that their purpose is to provide a more engaging customer experience into the future.
Super, reporting for duty
Earlier this year, following the Financial Services Royal Commission’s (“FSRC”) inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne made 76 recommendations for change across banking, superannuation, insurance, financial advice and regulators in his final report. 1
Thanks to the sheer technological power that now drives superannuation data collection and customer research, the opaque super structures—which have existed for years, and lead to poor accountability and poor outcomes for members—are finally beginning to break down. 2 It’s clear that a chronic lack of transparency, and underinvestment in the infrastructure that underpins the governance of superannuation fund systems, needs to be remedied.
Within the FSRC report, Hayne focused on why the financial services sector is in desperate need of a larger overhaul.
He addressed four key pillars:
- Can the law be simplified so that intent is met instead of complied with, and how can this be done?
- To address conflicts of interest, should they be managed or removed altogether, and how does this fit within current industry structures?
- How can legal compliance and effective regulation be improved to deter misconduct?
- What can be done to improve effective leadership, governance and culture within the financial services industry?
When discussing the superannuation sector, Hayne made it clear that those who act in the capacity of super trustees cannot take on any external obligations beyond the capacity of their role. He continued to detail that deducting any advice fee from a MySuper account should be prohibited, and that these fees are only accepted when certain requirements are met. 3
However, as Hayne points out, these requests are covered under Australian legislation and are subject to regulation complexities. Though some key players in the current market recognise the necessity for change, there is still an obvious disparity between the need to refresh superannuation strategy, and the type of action being taken.
This begs the question: Will further piecemeal change be enough to improve what’s fast become a digital landscape?
Human VS. technology
It’s clear that despite the conservative decisions made by those who are well-educated and in charge—bankers, wealth executives, legal advisers, accountants, financial advisers—plenty has gone wrong thanks to human decision-making in the face of generational superannuation change.
A lack of transparency and clear information provided directly to investors has dramatically affected the superannuation market. Until recently, many retail and industry funds have struggled to apply technology to appropriately address this issue. The digital age is making waves, and funds that can’t swim are drowning.
“It is now clear that over the last decade, many who sought and obtained advice from a financial adviser, and many members of superannuation funds, were charged ongoing fees for services that were not provided. The fees were charged ‘invisibly’, in that they were deducted from consumers’ investment accounts…” 4
Superannuation has been considered a traditional landscape for years, but it’s clear that perspective needs to be reconsidered. With younger generations set to take over one of the largest transfers of wealth in Australia’s history, super funds must keep up with new technology, or risk being left behind in the wake of those forging the digital frontier.
Beware the investor-investigator
Hidden investments—combined with “net” unit pricing, “implicit” fees and underlying costs—have long created a convenient structure to hide how much the end customer is actually paying for the services they’re receiving. During the 1980’s and 1990’s, this structure was popular as a way to compensate for limitations in processing power and information technology.
The Productivity Commissioner recently identified that retail funds with 4 million accounts, representing $275 billion, were continuing to charge over 1.5% in fees—despite a vast majority of those organisations having other products available with better features at materially lower costs. 5
Though some funds blame legacy systems and processes, this situation should have been improved a long time ago with the speed of technological progression. However, the benefits of living in a digital age have mostly been ignored at large by these funds.
It’s 2019. People talk with their wallets, and investors are more savvy than ever. The risk that traditional super funds run by underestimating the intelligence and digital confidence of their consumers is potentially losing those consumers to newer, transparent and more intuitive funds.
So what’s the way forward?
It’s clear that the industry must revise its definition of “services fit for purpose” as a step in the right direction. True transparency and scrutiny is a necessary part of improvement. Customers are concerned, and they are acting loudly—voting with their feet and running from discredited commercial retail funds to industry funds at an ever-increasing rate.
The Sydney Morning Herald reported:
“Australia’s largest industry fund, Australian Super, says it has received nearly $4 billion in super savings directly from the retail sector in the past seven months. And the $37 billion hospitality sector fund Hostplus said membership had jumped a net 350 per cent during 2018.” 6
Furthermore, Industry Super was seen calling on parliament to urgently pass super changes, lobbying for a time limit to be placed on the Australian Tax Office transferring balances it has swept up from inactive accounts:
“Last year, the Turnbull government hoovered up more than $2 billion in inactive superannuation accounts and claimed the revenue as its own—smoothing the return to surplus.” 7
It should also be noted that the recent Productivity Commission report could not easily account for the differences in returns between retail and industry funds. With fairly opaque industry funds promising “all profit to members” and high investment return propositions, it will be interesting to see how the market continues to transform under ongoing pressure from customers and the Commission itself.
At its centre, Hayne’s perspective can be summarised into six key principles: 8
- Obey the law
- Do not deceive
- Act fairly
- Provide legitimate services
- Deliver services with care and skill
- When acting for another, act in their best interests
Seems simple, right? In theory, Australia’s key super players must put in the hard yards to align their internal philosophies with these principles. For many, it’s harder said than done.
Despite the findings of the Commission, this much is clear: given technological advancement, financial services have managed to get away with providing little transparency for a very long time. Too few in the industry are keen to take up the challenge to provide a service focused on transparency, choice and ease of management.
With recent structural reforms allowing for the consolidation of multiple superannuation funds, and traditional funds grappling with the Banking Royal Commission fall out, the opportunity to disrupt legacy systems has never been stronger.
More customers are unhappy with traditional superannuation structures than ever before, and there is a clear market for a better alternative. With a sharp increase in customers already on the move to managed account structures, the floor is now wide-open to the possibility of innovative superannuation.
Someone just has to take the leap.
2. https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf, pg. 62.
3. https://static.treasury.gov.au/uploads/sites/1/2019/02/fsrc-volume1.pdf Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Volume 1. pp. 28-30.
4. Ibid. Pg. 136.
5. Superannuation: Assessing Efficiency and Competitiveness, Productivity Commission Inquiry Report Overview, No. 91, 21 December 2018, pg. 15 https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf
6. Billions in super savings moves from retail to industry funds, Sydney Morning Herald. Lucy Battersby, February 13, 2019.
7. Industry Super calls on Parliament to urgently pass super changes, Sydney Morning Herald. Eryk Bagshaw, February 12, 2019.