Broadly there is agreement in the superannuation industry that “stapling” individuals to a single account is a good outcome for consumers, eliminating the wasteful duplication of fees from multiple accounts and increasing confidence in the system overall.
But when it comes to the timeframe and details of implementation, the consensus is less clear. Even likely “winners” from the Your Future, Your Super reforms–effective from November this year–hold deep concerns about unintended consequences such as increased systemic costs from marketing and administration, increased consumer confusion and apathy, and under-insured workers on dangerous worksites.
A wide spectrum of leading industry figures met to discuss their concerns in a virtual roundtable titled: ‘Stapling legislation: It’s coming and you need to get ready,’ hosted by Investment Magazine in partnership with MetLife.
Despite holding concerns over the details, David Bell, Executive Director at the Conexus Institute, came to the conclusion while looking through submissions to the draft legislation that there was a chance the reforms would not be put through, and this would have been a missed opportunity. One in four Australians have multiple accounts and eliminating this problem at the source is an important consumer outcome, Bell said.
“We came to the final conclusion that a stapling model, whether it’s the best stapling model or not, that’s an important outcome for consumers,” Bell said. “So we did come down on the side of recommending that aspect of it went through.”
Removing some costs, adding others
While aimed at reducing costs in the system, stapling will also add new costs. Bell said a “current employer” stapling model where a person’s superannuation account rolls over to a person’s new employer when he or she changes jobs–as opposed to stapling a member to their first fund–would add about $200 million dollars a year of transaction, administration and investment expenses to the system.
As they rely less on default sign-ups, funds will also need to step up their marketing game. Bell said while in some cases marketing will be smarter and more targeted and not necessarily more expensive, it is likely marketing spending will go up at a system level.
“The natural response would have to be to spend some money to build up retention activities, and as a group who is focused on consumer outcomes as a whole, marketing is a zero-sum game but with a guaranteed cost,” Bell said.
The case of UniSuper–which has received multiple awards for its performance and member satisfaction–illustrates this. Due to enterprise bargaining agreements, 95 per cent of people joining the university sector are automatically signed up to UniSuper, but this will change in November when the new legislation comes in.
Kevin O’Sullivan, chief executive at UniSuper, said despite a number of young people tutoring at universities who will join UniSuper as their first fund, a lot of people who become academics or professionals at university will have first worked in other organisations so there will be fewer than 95 per cent joining UniSuper after November.
In response the fund is considering marketing directly to students to keep member growth strong, although this approach hasn’t yet been fully signed off by the board.
“We’ve got a presence on campus, so why not use that presence?” O’Sullivan said. “So I’m expecting that’s an angle the fund will take.”
O’Sullivan said he wouldn’t be surprised if the system-level increase in marketing spend is a similar figure to the earlier-mentioned $200 million of additional administration costs associated with the “current employer” stapling model.
Jason Sommer, director, transformation and investments at AMP, said an increase in marketing costs will be a necessary expense to reduce fees by increasing member numbers. But we are unlikely to see funds engaging in “big, splashy” marketing campaigns, he said.
“I think winning brand awareness probably only gets you to a short list, then you have to win on performance, fees and service, and all funds trying to lick the game in those areas will produce much better outcomes in the longer run,” Sommer said.
Stapled to a dud
Administratively, stapling a member to their first fund rather than their current employer’s fund may be simpler and cheaper for funds to implement. But it will come with disadvantages of its own.
Demonstrating how hard it is to predict consumer behaviour after these reforms, Tim Barber, CEO at Mercer Super, said stapling consumers to their first fund could actually increase consumer apathy.
“Along the way, there’s less potentially less prompters for consumers to change funds or think about their superannuation if it’s all being done automatically through an ATO tool…when they join a new job,” Barber said. “So, potentially, the apathy that we have around the product might actually grow slightly as a result of this.”
With a large incoming cohort of young hospitality workers who will be ‘stapled’ to the fund, HostPlus is likely to emerge as a winner of a ‘first fund’ stapling model. But Paul Watson, Group executive, member performance at HostPlus, said it would be a poor outcome under this model for those who receive the “losing ticket” of being stapled to a poor performer.
Of course, consumers can change funds themselves at any time. But will they? Employer default funds will probably still play a significant role, particularly for young employees taking up their first job in a bar, Watson said. Retirement couldn’t be further from their minds.
With government and regulators keen to push consumers towards greater engagement with their super, the Productivity Commission’s 2019 recommendation to create a ‘best in show’ shortlist of top performing funds has been widely seen as key to driving competition by encouraging consumers to switch based on fund performance.
But Bell said he had concerns the stapling model could interfere with this fundamental reform that is yet to be implemented.
“Best in show is being left behind and didn’t even get a mention in any of this,” Bell said. “So that’s a real institutional measure of competition, and it’s not going to be there. It’s all going to be marketing-based competition, and is that effective for consumers or not? That remains to be seen.”
Bell said various incoming reforms can’t be looked at in isolation of each other, and APRA’s performance test does aim to create a minimum standard, although the performance test in its current form “is pretty flawed”.
Chesne Stafford, chief customer and marketing officer at MetLife, said the standard wording members will receive from funds who are found to be underperforming will not correlate to any form of commentary that will help with a decision about what to do next.
“I think we [will be] faced with these challenges of customers being more confused, and potentially, not acting again in light of that confusion.”
Pairing stapling with a best in show list seems crucial, said Kelly Power, Chief executive officer, superannuation, Colonial First State Investments, because it “removes the arbitrary link to a particular part of the IR framework or to a particular fund.”
“How do we rationalise that link being missing?” she asked. “It feels like the best in show has been replaced by…assuming the performance test will reduce the number of funds, but by this [online] portal, which is incredibly confusing…I don’t really understand how any consumer will be able to navigate it.”
Uninsured miners, builders, firemen
Stapling members to their first fund will also throw up challenges for the provision of default insurance cover that is appropriate for a person’s employment if, for example, a person switches from being a bartender to working in construction or mining but retains the insurance policy from their original hospitality-focused fund.
Stapling to a current employer will resolve this issue in cases where workers have a single job. But the situation is less clear for the schoolteacher who also works as a firefighter. Having multiple jobs with potentially very different insurance requirements is becoming more common with the so-called “gig economy”.
REST is another fund likely to benefit from the reforms due to large numbers of first-time workers becoming its members. But Brendan Daly, Group executive, product and operations at REST, said complexities come with the roughly 1.5 million workers who have two concurrent jobs, and the 400,000 who have three.
“If you think about the nature of multiple jobs and the automatic rollover of funds, it creates a really tricky environment for a range of things including following up outstanding contributions,” Daly said. “If employers are making contributions on a quarterly basis, how do you marry that to where the account ends up?”
Indeed, if a member starts working in one industry or job segment and changes roles but stays with the same insurance arrangements, then stapling reforms can lead to unintended consequences particularly as individuals are left with incorrect or ill-fitting insurance coverage, Richard Nunn, chief executive at MetLife summarised.
It’s these unintended consequences the industry will continue to work with government and industry groups to address as the impact of the new rules continue to play our, Nunn said.
Overall Nunn highlighted that the crux of the problem policy makers are trying to address with so called stapling reforms is a member engagement issue.
“We see stapling as a logical extension of government trying to address this engagement issue making sure that members that aren’t engaged are looked after which is definitely an important issue to solve,” Nunn said.
Michael Mulholland, chief distribution officer at MetLife, said stapling will ultimately push the balance even more in favour of funds with scale.
“Your book of members will be stable from day one, but when you forecast out five, seven, ten years and beyond, then super funds with big brands, big marketing budgets, great consumer and member education tools and with great performance will probably win,” Mulholland said.
This will fall in line with APRA’s push for fewer, bigger funds, and create even less breathing space for much smaller funds that argue they provide value to a well-defined cohort.
Christian Super makes for an interesting example of the interplay between the performance test and stapling. The fund has been seeing double-digit annual net member growth, albeit off a low base as a small fund with 30,000 members and around $2 billion of funds under management. Its members are typically arriving by choice and conviction, not by employer default.
While a fund like this might normally benefit from stapling, a conservative cash position at the wrong time under previous management means the fund is bracing for a major communications headache.
Christian Super will “absolutely get a first strike on the performance test”, said Ross Piper, Chief executive of Christian Super for about 3.5 years, despite a restructuring of its portfolio to be “right on or just slightly under benchmark” over the last three years.
“We’re an example of a fund that has made all the changes necessary to ensure that we are fit for purpose in the future, but we will run afoul of the first strike on the performance,” Piper said. “We do want to actually try and thoughtfully tell the story in the marketplace around…some of the unintended consequences of Your Future, Your Super.”
Said David Bell, the performance test is applied retrospectively and ignores all the things a fund might have done under feedback from APRA to address its problems.
Piper’s sentiment that there is a place for small, specialised funds was echoed by Andrew Proebstl, chief executive of Legal Super. With a brand that resonates with a clearly defined target market, and a dedication to supporting professional development of lawyers and barristers across Australia, Legal Super will be advantaged in a stapling environment, Proebstl said.
But referring to the regulator’s push for greater scale, the staff at Legal Super “do get disappointed where people, particularly regulators, go out with single, binary ways of determining whether certain firms should be in existence or not,” he said.
Looking ahead five years
With a fund’s net inflow position informing its allocation to illiquid assets, will the way funds invest have to change after November? With survival depending on passing the test, Barber said there is indeed the behavioural risk that funds “managing” the performance test may make decisions that aren’t in the best interests of their members.
“For us at Mercer in terms of our investment strategy, we believe in that life cycle investment profile where we have a glide path where risk comes off as members approach retirement age,” Barber said. “And arguably that’s actually penalised in a performance test where growth assets are rewarded certainly in times of a bull market.”
Bell shared this concern–that funds will be incentivised to have larger percentages of growth assets, “risking up” to get higher rankings on return.
But in five years’ time there will probably be no funds failing the performance test having learned the ropes, he said, with any opportunity costs associated with this having long disappeared from the conversation.
It is unfortunate, lamented Colin Tate, Founder and CEO of Conexus Financial, that funds didn’t self-regulate long ago on the issue of multiple accounts to avoid the government stepping in.
But now that it is happening, funds need to make the best of it. Having more engaged members will be key to thriving post-stapling, and the reforms drive funds to work on their performance and their service as well as members’ understandings of what they offer, to push up member retention.
Watson said funds are inevitably “all becoming wider churches” as they broaden their member base and also as a result of the gig economy. Mulholland said employers who want to stand out as great places to work will get on the front foot and ensure their default funds are good funds.
Daly admitted he would have preferred to see stapling introduced a few years later to give funds a chance to adapt to the swathe of new legislation they are already facing.
The reforms are a challenge, he said, but also an opportunity to thrive in an environment pushing towards greater consumer choice.
“Like any fund, we still need to work to attract, and retain, and make sure our members are happy so they stay with us in the long-term,” Daly said. “So, you know, I think that it’s more of an evolution of the competitive environment rather than a real tectonic shift when it comes to what’s going to happen from a broad consumer perspective.”