Australia has one of the largest, most robust and fastest growing pension systems, we are recognised around the world for the rate of growth and returns delivered to members.
So when the Federal Government announced its decision to defer the increase in superannuation guarantee (SG), it was met with strong criticism from Australia’s super funds. While I can’t comment on the decision to defer the increase, I do remember thinking at the time, does this present an opportunity for Super Funds to look at how they can work harder and smarter with each member dollar?
Of course the results will not be equal in quantum and I’m not suggesting that they would be.
However, today Australian superannuation funds are under extreme pressure; constant regulatory change such as the Stronger Super reforms stemming from the Cooper Review, heightened transparency and disclosure regimes and increasing competition for members as well as changes mooted as part of the Financial System Inquiry. These changes are putting pressure on existing business structures, fee models and economies of scale and have created a tough environment for the sector.
The new regulatory requirements, on top of the pressures associated with heightened competition, requires funds to re-think operating structures and strategies in an effort to optimise operations, enhance efficiency and get more out of every dollar.
To put it simply, improving member outcomes can be driven by higher returns and lower costs. Investment returns are determined by the asset and market and are much harder to predict and control. However, what is within the funds’ direct control is cost. Costs within a superannuation fund are driven by administration (including compliance) and investment management. While the regulatory reforms are aimed at improving efficiency of administration such as the introduction of the MySuper product, SuperStream and account consolidation, a number of funds are also addressing the cost of investment management by internalising investment management activities.
In conversation with funds who are setting up internal investment teams, a key driver for establishing internal teams is the benefits associated with reduced investment related costs stemming from investment manager fees, including performance-based fees. In fact, according to the Rotman International Journal of Pension Management, for every 10 percent increase in funds managed internally, there was an increase of 3.6 basis points in net value added, driven largely by the lower costs attributed to internal management*. These in-house operations will continue to assist in reducing investment related costs and improving efficiency, provided they are supported by appropriate investment governance.
There is no single template for achieving operational excellence, and the challenge of delivering sustainable returns to shareholders or in this case, members, is fundamentally no different from the challenges that all other corporates grapple with. But super funds are now acutely focusing on addressing common operational methodologies like process optimisation, cost optimisation, lean principles, cross-fund collaboration and merger, asset pooling and outsourcing and we are partnering with a number of super funds to help them look to drive operational efficiencies.
If operating more productively means that members will have greater discretionary contributions after fees and taxes, which delivers the same outcome as increasing the compulsory contribution rate – the member impact of the delay can be partly mitigated.
Australia has a great superannuation system – ensuring it remains great and every dollar that goes into the system is working a little bit smarter. At the end of the day, this system exists for one thing only – delivering better retirement outcomes for Australians now and into the future.*Rotman International Journal of Pension Management, ‘How Large Pension Funds Organise Themselves’, Volume 5, Number 1, 2012, Page 34
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