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This content is produced by The Australian Financial Review in commercial partnership with Mercer.
Australia's $2.2 trillion superannuation system – which swells by about a net $100 million a day – is coming to a turning point. Financial and regulatory pressures, disruptive technologies, demographic shifts and changing member expectations are all converging on the super industry, creating a unique set of issues – that many funds seem ill-prepared to manage.
David Knox, senior partner and senior actuary at wealth and retirement consultancy Mercer, says the industry is "somewhat frozen" in the face of external pressure. "Super funds are all facing the question, if we don't change ourselves, will someone else change us?"
Knox says his firm's recently released 2020 Super Fund Executive Report Change or be Changed shows that super industry leaders are worried about the future; believe they are overburdened by regulation and change; and are talking about – but not acting on – merger opportunities. "Most worryingly, they seem apathetic to the forces of change that could dismantle or disrupt their core business," he says.
From Mercer's work, government regulation – from the Australian Prudential Regulation Authority (APRA) and the Productivity Commission's superannuation inquiry – tops the list of perceived risks, with 58 per cent of funds in its survey nominating this as their top risk, and 55 per cent of funds identifying "government and regulatory change" as a dominant industry-shaping force.
Super funds are facing a "pincer movement of change", he says. "At one end they face possibly APRA bringing the sledgehammer to force mergers, and at the other end they face rising member expectations. Super funds are consumer businesses, but they don't think like that."
To a large extent, Knox says super funds appear to be comforting themselves that the future is out of their hands. "There is also classic denial: 68 per cent of funds believe that there will be consolidation between funds, but only 13 per cent expect their fund to be involved. It's seen as necessary – as long as it happens to someone else.
"We're really encouraging the industry to think that through carefully. How are you different, that you expect to not feature in rationalisation?"
Nonchalant view
Mercer's work also found an alarmingly nonchalant view of the potential for disruption: 94 per cent of fund executives do not think pressure from disrupters is a serious risk to their fund's future. Also, retirement income solutions – an area that Knox says is "the next battleground" – does not appear to have had the required thought put into it, with 55 per cent of funds having "no clear strategy" on how to service the needs of retirees and pensioners.
This indifference to retirement income strategy should be "a real red flag" for the industry, says Knox. "This is actually a critical issue for trustees. This is a space where (a) the government is moving, but more importantly, (b) where members are moving, and (c) where money is moving – if you don't have a strategy in place for retirement products, what are you doing?"
But in one area, Knox is heartened that super fund leadership is "getting it" – respondents to the Mercer survey rated member service, outcomes and engagement "twice as important" to success as investment returns. "The member is boss, and funds do see that their future is in delivering better member engagement and outcomes.
"And they see the importance of technology: members expect to be able to access their super fund on their mobile, or their iPad – maybe even on a piece of paper – but they want to be able to access it and to understand what's happening, in whatever format suits them, whenever they want," he says.
Kirby Rappell, head of research at superannuation research firm SuperRatings, says there are three main questions keeping fund executives awake at night. "One, do we currently have the scale required to be sustainable? Two, are we doing enough to retain current members and attract new ones? And three, how do we leverage and demonstrate the benefits we are achieving by growing scale?"
The biggest challenge, says Rappell, will be for those funds who try to resist change.
Dramatic changes
Alex Dunnin, head of research at financial services research firm Rainmaker, says it is not so much "change, or be changed," but "change, or wither on the vine". Dunnin says that there are too many funds, and the regulator will attempt to force mergers, but he says the changes being forced on the industry by technology are "much more dramatic than anything the regulator can come up with".
Dunnin says "scale" is the new arbiter of staying power – but no-one really knows how to define it. "Scale is not a size thing – it's all the things that make you sustainable. It's so vague – nobody but APRA knows what the scale test is.
"The acid test is going to be, 'are you bringing more money each year in contributions than you're pushing out in benefits?'. Some of the big funds don't actually pass that test, so I wouldn't be too draconian on that just yet. And some of the small funds have remarkably strong cashflow. There are small funds that can say to APRA, if necessary, being small doesn't mean we're unsustainable: we have partnerships with the best fund managers, the best IT groups, the best administrators."
This is the route down which many smaller funds will be forced by the market to go, says Knox: to outsource, or partner, into someone else's scale. "You can white-label, you can keep your brand and your trust deed, but actually bring in the economies of scale from a player that you can trust and work with."
Warren Chant, principal at superannuation research firm Chant West, says the big are only going to get bigger.
"The biggest funds, the nine or 10 not-for-profit funds, are all $30 billion-plus in size – AustralianSuper is $110 billion – and they're going to be twice the size in the next five to 10 years. They're going to dominate the landscape even more than they do now, and the gap between them and the rest is only going to get bigger," says Chant.
To find out more, click here to download the full Mercer 2020 Super Fund Executive Survey Report.