(03) 9020 2905PORTFOLIO POINT: Super funds and platforms are going to have to become inventive if they’re going to survive and thrive under “Cooper’s Super”.
All of the parties involved in the provision of super services are going to face considerable challenges as a result of Cooper’s super. The whole point of Cooper was to light a bit of a bonfire under them, certainly from a costs perspective, and that is almost certainly going to happen.
Both calendar years 2011 and 2012 are going to cause considerable administrative pain for all major service providers, whether they be industry, retail, government or corporate funds. You can throw the financial adviser community into the same mix, but the brunt of the administration hassle, by the looks of it, will be squarely on the service providers.
It’s not just Cooper’s Super. It’s also FOFA – the Future Of Financial Advice, which was largely a result of the Ripoll Report – and parts of the Henry Report.
The changes proposed in Cooper that the Gillard Government has adopted add up to some pretty fundamental changes.
So … it’s interesting to see how the service providers are reacting. Most of them, of course, will keep their ideas under wraps. Given the funds at stake, there is no chance they want to give competitors a glimpse of what they’re doing, for understandable reasons. Asking the likes of AMP, Colonial, AustralianSuper or Mercer, or anyone else with some scale, how they’re preparing is probably a pointless exercise at this time.
The good oil is, therefore, coming from outside sources.
Consulting group Milliman has pulled out their crystal ball and given it a bit of a shine. It’s having a punt at what funds and platforms might have to do in order to survive in a future where MySuper is the national default fund system.
Cooper asserts scale will bring lower costs. So, if you don’t have scale, you won’t be able to do MySuper at competitive costs and you’ll self destruct. Big is better, says Cooper.
Sure, they’re going to have to drop their fees. They’ll still make money – they won’t continue or will merge if they don’t – but they’re going to have to do it on thinner margins.
For a start, Wade Matterson, the author of Milliman’s report titled From Cradle to Grave: Evolution of a Super Fund, believes that super funds will have to become far more innovative than they are now. Because of the relative immaturity of the industry, funds largely concentrate on the accumulation portion of super.
But if they want to survive in a world where “whole of life” super funds – which is best described as being able to transition from accumulation to pension, which Matterson says is a little different to what they do now, which is focus on accumulation – they will also have to provide near seamless transition into pension products. They’re going to have to learn a lot more about their members. That comes back to knowing the client and tailoring advice to what they need, rather than one-size-fits-all products.
Those who get the extra servicing right have the potential to be winners. Which should/will mean that you win too.
It’s at this point that Matterson starts talking less “about” the industry and more “to” the industry.
Funds/platforms will be able to use (will probably have to use) their scale to provide other relevant services to their members. These could include discounted travel services, health insurance, legal services, online communities, lifestyle benefits, etc.
Retirement income products are going to be crucial. In order to do the best thing by your clients, longevity risk is going to become a crucial selling point – you want to make sure members’ funds last as long as they do, or at least add to their quality of life for as long as possible.
But they will have to engage with members on the issue of super, and more broadly, and become more innovative in this space. Funds/platforms will have to become more inventiv and engage with their clients.
Milliman’s Matterson starts his argument with a discussion of the central tenets of the Cooper report. He questions some of the fundamentals of the report (much as I did in my column regarding Cooper’s report on July 7).
“It is our belief that focusing on levels of engagement as a means for designing retirement savings products is a blunt and inappropriate tool. Whilst it is easier to institutionalise an approach that relies on disengagement, funds should concentrate on providing appropriate advice and increasing levels of engagement earlier within their membership.
(I argue that the government should also play a role here. There has never been a public education campaign on the value of super. Never. The government made it compulsory the better part of two decades ago, but has never educated the public about its importance and the simple things people can do to make a huge difference to their super balances.)
Milliman argues that disengagement – the premise that drove Cooper’s recommendations – is a bit of a myth anyway. While it is understandable that those with small balances aren’t particularly interested in their super, there is an increasing interest as it starts to grow and becomes quite high as people reach retirement.
MySuper can, therefore, give out a wrong impression about its suitability to members.
“The key risk is that members without sufficient access to advice will accept MySuper as an appropriate or recommended retirement vehicle and not seek to validate it agaist other alternatives,’’ the report said.
Milliman expands on fears that Cooper’s super proposals could make disengagement worse.
“Extending MySuper beyond the core concepts (of Cooper’s recommendations) … could potentially result in an institutionalised model of apathy that results in sub-optimal outcomes for particular market segments.” (My emphasis.)
“The sheer complexity and individual nature of retirement – together with increasing innovation across income-based solutions and strategies means that we should strive for member engagement rather than attempt to extend default arrangements into a whole of life proposition.”
Lower costs, which is what Cooper is striving for, are a good thing. But they are not the be-all and end-all. If it “institutionalises apathy”, the saving of, perhaps 30 to 50 basis points a year, could be more than chewed up by having members sitting in funds that are inappropriate for their circumstances.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.