Magazine editors from time immemorial have used the simple device of listing 10 things – 10 ways to lose weight, to pay off mortgages, achieve better orgasms, discover the best ciders, harness the real you, and so on – simply to keep readers from dozing off and tuning out. Whether there’s any science to it, only the media gods would know. But there’s no reason why the not-so-sexy world of not-for-profit superannuation, including the challenges it faces and the way it’s run, shouldn’t be subjected to the same treatment.
CHALLENGE 1 Riding the political wave
Over the past 18 months, fund trustees have seen fall into place one of the big picture political and financial reforms of the past decade: a commitment to lift the nine per cent superannuation guarantee charge to 12 per cent within six years.
What chance it could be dismantled? Superannuation Minister Bill Shorten has introduced laws to start the clock running. But if there’s a change of government in September, it is far from a sure thing that the SG will make its way up six separate steps until 2019 – at least three elections away. The opposition has made all sorts of noises – yes we’ll stick with it, maybe, probably, dunno – depending on who is doing the talking. It will be a major test of trustees to keep the coalition’s collective feet to the 12 per cent fire. The trick will be to de-politicise the situation, so that the Libs and the Nats don’t feel they need to ditch this reform, just because it is labelled Labor.
CHALLENGE 2 Protecting a great governance system
Western Australian Liberal Senator and the opposition’s super shadow minister Matthias Cormann seems intent on forcing so-called ‘independents’ onto equal representation boards, as a wedge to break apart what he sees as union influence in super. If there’s a change of government, expect some version of a super governance shakeup. But the industry fund response shouldn’t be hysterical. It’s hardly a novelty to have ‘nonaligned’ directors on industry fund boards. HOSTPlus and MTAA Super have three such directors on each board, appointed by the board itself. The Australian Institute of Superannuation Trustees estimates there are 60 of the 600 trustees in the not-for- profit sector who are non-aligned. That is, they are neither employer-nominated nor employee-nominated, and generally chosen for specific skills where a board has a skill gap. It hasn’t changed the nature of the equal representation system. And a review would give us all an opportunity to focus on the very patchy “independence” of the governing bodies of the bankowned retail funds.
Oh, and if Labor is returned (six months is a long time in politics, remember), super isn’t likely to face much political attention, given that Minister Shorten (and before him Chris Bowen and Nick Sherry) have already done all the heavy lifting on 12 per cent and My Super.
CHALLENGE 3 Keeping the regulators happy (or at least at bay)
Ross Jones and his people down at APRA have been given a big stick with the Stronger Super/My Super changes. Jones is already saying that he’ll use the stick. Common sense says take heed, if you’re a trustee, as the one thing the APRA strongman insists is that he’s focused almost exclusively on the role of trustees in ensuring proper governance of the $900 billion chunk of the superannuation sector for which he – and we – are responsible. (The other $400 billion sits in SMSFs, over which, ridiculously, APRA has no jurisdiction.) That’s as it should be, which is why we all need to pull up our socks on continuing education, getting our skill set right and getting sponsoring organisations to continue to put their best people forward and ensure regular renewal. As a sector, our governance is already superior to anything else going in corporate Australia. Let’s keep it that way.
However don’t assume that everything the regulator does is completely kosher. For instance the regulator’s approach to risk needs constant scrutiny. In seeking to make all funds easily comparable to the greater Australian population, for instance, the ‘risk measures’ that APRA is pushing are closer to volatility measures rather than true risk measures. Risk and return are the Gemini twins of investment and prudence.
Volatility is just one factor in managing an asset like super, which has a 40-year effective shelf life. So we should continue to argue the case that we don’t want to be sitting around at CMSF 2030 and find we’ve sacrificed a decade and a half of sound returns for our younger members on the altar of risk aversion.
CHALLENGE 4 Making our members love us (or at least)
I think we’re too comfortable thinking that our members admire what we do. Or that, when given the choice, they’ll stick by us. The truth is that reliance on inertia and member confusion is a poor basis for a satisfaction and retention strategy. We will need to smarten up with our marketing, initiate much greater and regular contact with our members, foster better outreach and higher service levels. We’re also going to require far smarter differentiation of our members by age, gender, account balance, interests, other assets held, etcetera – and drive these initiatives from the Trustee boardroom in a systematic way, not just leave it to “the creatives” in the executive office.
CHALLENGE 5 Taking on the big banks
Our rivals at the four major banks have many, many more ‘touch points’ for their customers than a typical super fund, and they are aggressively using these to siphon people into their superannuation arms – Commonwealth Bank into Colonial First State, National Australia Bank into MLC, Westpac into BP for Life and ANZ into OnePath. Better marketing by industry funds will need to be accompanied by far more sophisticated information technology solutions.
But the trickiest challenge that all industry funds will face is rooting out examples of the inappropriate use of a bank’s influence over a company to persuade them to join the bank’s own super fund just because they have a mortgage or overdraft with the same bank. It’s an attractive ploy to propose a “one-stop shop” for all financial transactions to a harassed business owner. Some funds’ field staff report that it already happens in some instances. It’s also potentially illegal – known in the trade as “third-line forcing”. It is, however, very difficult to detect. The banks need to be put on notice that good trustees will be on the lookout for this behaviour, and will be prepared to back their judgement by going to the courts.
CHALLENGE 6 Dealing with a lopsided media
As a journalist, I’ve become pretty familiar with the media over a number of years. But in the past two years, the worm has certainly turned. Most trustees would recognise there has been a hardening of media attitudes towards the not-for-profit sector not matched by scepticism about the retail fund sector or the self-managed super fund promoters.
Not-for-profit industry funds are typically dubbed “union” funds, despite the obvious fact they have equal numbers of representatives of employers and employees on their trustee boards. One newspaper almost always cites the Health Services Union and a New South Wales Labor powerbroker as the ‘baddies’ in any story about industry super, whether there is any connection to the actual story or not. Other systematically refer to industry funds in quite ordinary stories as “union influenced” or “union controlled” funds. Media outlets can do what they like, but they need to be fair.
So how do you, as trustees, deal with this sort of dog-whistle journalism?
One simple suggestion is “speak up”. Individual trustees and chairs need to put up, write letters to editors debunking silly myths, tweet, phone up, be a burr under the saddle and challenge the implied assertion that industry funds don’t have a place in the superannuation landscape.
CHALLENGE 7 SMSF – one-way street?
Most funds have seen a significant outflow of members to SMSFs. My own fund, Media Super, is witnessing a younger cohort, with relatively low balances, leaving to join SMSFs. Some are lured by aggressive advertising, some by poor advice from accountants or financial planners, while others have a genuine view they can better manage their own super. It’s too late to convince someone they are likely to be making an expensive and embarrassing mistake when they’ve already had their best mate (naturally well informed on investment methodologies) badger them at a Saturday afternoon barbeque. Or be told by their accountant they’d be a mug to do otherwise. Managing the SMSF rush needs far earlier, and more frequent involvement with our members, especially those in vulnerable cohorts. For those who genuinely want to create an SMSF – and deal with trustee obligations, good (and bad) investment periods and steep fees – we should be gracious as they leave. The problem, of course, is that it’s generally a one-way street they enter. Collectively, we need to challenge the rosy message from the SMSF promoters. And work on strategies to facilitate SMSF members to return to the fold when they recognise in a year or two that it’s far harder and less beneficial than they thought.
CHALLENGE 8 Cheap insurance
Practically, all funds will need to face up to the phenomenon where some smart alec advisers are recommending people take most of their funds into a self-managed fund (assisted by the adviser for a fee, you understand) and leave just enough to have highly effective and extremely cheap insurance cover offered by an industry fund. Good for the departing member. But in many cases, this can involve a cross subsidy in favour of the departee, underwritten by long standing fund members. Fair? Well, you be the judge.
CHALLENGE 9 Holding our performance nerve
Industry funds have, for almost all of the past 25 years, outperformed retail funds. The banks, to keep involved in the business of offering workplace super, have been obliged to create low-cost retail super products to compete in the MySuper world. For a period at least, they will bear down on fees, and probably start to improve in the performance tables. Industry funds therefore need to re-learn their own history: they weren’t only low cost funds. They have performed better in general because they were prepared to take positions in assets like infrastructure and property and private equity, which, over the long term, tend to higher returns. Now is the time to keep our nerve and our product differentiation. It’s tempting to simply buy the index and get our MERs down in a race to the “lower cost” bottom, but the aim of the fiduciary exercise is to get the best risk-adjusted net return after taxes and fees over the long term.
CHALLENGE 10 Keeping it in perspective (or simply the best)
With all the challenges facing trustees in governing their funds properly, it’s often easy to forget that the part of the system that we govern is world class. Yes, there are flaws and we should never rest on our shovels. But we also need to keep in perspective that the Australian retirement income architecture is superior to that operating in all but a handful of countries. And our performance is also top class. When someone whinges that they’d be better off keeping their money under their mattress, or that governments fiddle too much, ask them what they think citizens of the USA, or Britain, or Italy, or China think of their superannuation or pension prospects. Approach the world with confidence and give your well performing executives a pat on the back.