Being called a one-trick pony is not a compliment and yet many Australian super funds have been satisfied possessing only one core skill for almost 30 years.
Their main area of expertise is allocating long-term capital when their mandate to secure a dignified retirement for all members and minimise dependence on the Aged Pension demands so much more than that.
But Covid-19 presents a unique opportunity for the industry to pursue a different approach to managing members’ retirement savings.
In the same way that many Australians are using their time in quarantine to learn a new language, play an instrument and master the art of baking bread; funds must also use this crisis for self-improvement.
They should emerge with a resolve to become experts at risk management too. That requires a sharper focus on members’ liabilities.
The task of liability matching is fundamental to the role of trustees, but prudent risk management is not only about matching a fund’s long-term pension liabilities with appropriate long-term investments. It is also about understanding the liability profile of individual members.
As fiduciaries (and not mere asset owners), super fund trustees have a responsibility to give equal attention to members’ liabilities, and not just their financial goals and aspirations.
But this is not a pitch to return to the principles that underpin defined benefit schemes. Members’ liabilities are not as simple as 60 per cent of final salary. They are certainly not as straightforward as the defined contribution yardstick of CPI+.
In fact, the language of risk and liability management is problematic in its own right and reflects the technical focus and background of much of the industry (and particularly actuaries and investment professionals). It neglects the fact that the ultimate output of a superannuation fund, is an innately personal and emotional one.
Super fund members represent a complex web of disparate lifestyles, occupations and degrees of health and affluence, all of which are subject to continuous change.
One person’s idea of a comfortable retirement will differ from another’s. Each individual member has deeply personal hopes and dreams.
Any number of uncontrollable events can see these dreams shattered, including long-term unemployment, a sudden health crisis, a major market correction and a good old-fashioned pandemic.
These are the risks that matter for the members that have placed their retirement aspirations in our care and must be appropriately managed.
Yet, the industry’s approach to this dilemma has largely hinged on the asset component of this asset and liability equation, hence its myopic focus on growth and accumulation.
To bridge this gap, funds need to gain a deeper understanding of what really matters to members, understand the nature of retirement, and then use that knowledge to shape policy, drive engagement and develop solutions that address the needs of various member cohorts.
While the answers to some of these questions may be confronting, the benefits through a deeper understanding and relevance to our members are substantial. Moving away from using averages and arbitrary benchmarks like the ASFA retirement standard will demonstrate a genuine desire to understand the lifestyles and concerns of our members.
For the funds that rise to this challenge, there is an opportunity to also attract new members seeking a more personal and empathetic experience.
Implementation, however, will require an approach that coordinates the traditional silos that exist within a superannuation fund’s structure, and complements it with the necessary governance and focus on retirement outcomes, traversing education, advice, administration, and investment seamlessly and with a shared purpose.
Systems to capture and use member data already exist and a small number of local players already offer tailored investment solutions to match their members’ unique circumstances. A differentiated suite of solutions for particular segments, combined with ongoing education, advice and communication that is personalised will round this out.
This is a unique opportunity to lead from the front and break free from the herd.
There are challenges to navigate, from the development of an appropriate framework to monitor and assess a new business model focused on member outcomes, through to the need to collaborate with regulators and policymakers to help remove existing roadblocks and impediments to the delivery of greater personalisation.
The Financial Services Royal Commission and the Productivity Commission Superannuation Inquiry emphasised the role of trustees to help their members achieve optimal retirement outcomes. Furthermore, APRA’s prudential standard (SPS 515) requires funds to regularly assess the outcomes provided to members and identify opportunities for improvement.
Fortunately, at 28 years old, Australia’s retirement income system is still young. It does not have the legacy problems that inhibit traditional sectors, like banking and life insurance.
There are no major impediments to cultural change.
If fund members can learn how to use Zoom and work remotely while home-schooling children and running their household, there is no good reason why their super fund can’t emerge from COVID-19 with a reinvigorated roadmap for the future.
Even if their equivalent of homemade sourdough bread is only a sharper focus on members’ liabilities and a commitment to change for the better, it is enough to get started.
While my last column Reality bites for super’s long-term theory raised the possibility of another 1-in-100 year pandemic or economic crisis lurking around the corner, Covid-19 is here and now.
Like any crisis, it is making the ordinarily difficult task of questioning the status quo easier.
Funds must act to fend off government intervention and the threat of disruption from new entrants who claim to know their members better than they do.
As Winston Churchill famously said: “Never waste a good crisis”.
Wade Matterson is a principal and leads the Australian practice of Milliman, a global actuarial management consultancy firm.