In the early 1980s, American Airlines was struggling for cash − a familiar position for an airline.
To achieve an urgent cash injection, AA executives devised the ‘AAirpass’ membership offering. The AAirpass entitled its holder to unlimited first-class travel, anywhere in the world on American Airlines, for life. AAirpass membership cost US$250,000 ($375,000) with companion passes sold for an additional US$150,000.
Some 66 Americans purchased the AAirpass including Steven Rothstein. By 2012, Rothstein had flown more than 30 million miles on his pass and was costing AA more than one million dollars per year. Rothstein got himself a great deal and AA had clearly identified one very expensive way of engaging its customer base.
Member engagement is a significant issue in the super sector.
The Productivity Commission’s report on the superannuation sector from December 2018 identified considerable challenges around engagement. Whilst the report might be a little outdated, its conclusions about engagement seem to have stood the test of time. The report addressed issues that drive engagement levels such as financial literacy, information and guidance offered to members and the degree to which members want to understand more about their Super.
One proxy measure for member engagement used by the Productivity Commission was that annual super fund switching rates vary between a mere 2 per cent and 10 per cent of members and those figures are from a pre-stapling regime.
Since the release of the report, further evidence for lack of engagement has been shown through the low level of fund switching following Super performance test failure letters. The Australian Institute of Superannuation Trustees have said that less than 20 per cent of members who have received letters confirming their super fund’s performance test failure have switched super funds. That said, this number could increase with the extension of the performance test to ‘choice’ funds.
Here are two suggestions for what super funds could do to improving engagement with their members:
Lift financial literacy
Super funds could offer guidance or information that assists in lifting the financial literacy of their members.
As reported by the Productivity Commission, low financial literacy often results in poor economic decision making. Broadly speaking, Australians are less financially literate in matters relating to Super and retirement planning than in financial matters generally. Improving financial literacy should give members greater confidence in making financial decisions.
Offering more information and guidance to members should ideally lead clients to question the impact of their decisions concerning Super on their wealth. This feels particularly relevant for super funds given the Retirement Income Covenant.
Delivering guidance or information falls short of financial advice and members who are unable to afford comprehensive advice are likely only looking for guidance or information for a narrow scope of areas.
Super funds are rightly concerned about how to navigate the legislative and regulatory uncertainty concerning issues such as general advice and intra-fund advice. General advice in particular makes funds nervous in light of judicial treatment of this issue in recent years.
The Quality of Advice Review suggests that super funds have a role to play in the delivery of more advice to their members. However, there is no guarantee that these recommendations will be legislated.
In the event that there is no clarity in the medium term concerning the legislative regime for advice, Super funds will need to think about how to assist their members with guidance or information that works within legislative and regulatory guidelines. A number of funds do a good job at this however there is the opportunity for greater consistency across the sector.
This guidance could include for example calculators specific to postcode around potential costs in retirement and how long the money will last. Educational content regarding the implications of making additional contributions to S\super would also be valuable for members. Connecting the investments of the Super fund to ESG issues will be of interest to a considerable number of members and this information is now easily available through partnerships with suitable providers.
Offering relevant educational content to members at appropriate life stages would assist in educating members at a time when this educational content will be of most relevance and interest. Members who are educated about the importance of their Super are more likely to be engaged with their Super fund.
Make super more interesting
Super funds might offer greater insight to their members into their investments and wealth to make super more interesting.
One issue that is less well documented than poor financial literacy is whether members are interested in engaging with their super fund. Is there anything about the experience that leads them to want to do more than just check their balance or use a standard on-line calculator. According to the Productivity Commission report, only 17 per cent of members have done? Stapling has changed the dynamic meaning potentially even less touch points for members to contemplate their super.
A thoughtfully designed member portal offered by a super fund may be the tool that helps members change their financial behaviour for the better. Enhanced exposure to their goals and financial plan will lead clients to question the impact of their decisions on their wealth. Funds have access to significant amounts of data through member contributions. This data would allow funds to, on an anonymised basis, surface all kinds of insights on member wealth.
Think about the opportunities that exist to intrigue super fund members with comparison tools that compare their wealth to others in their age bracket, city, income category etc. Thomas J Stanley’s classic work, ‘The Millionaire Next Door’ demonstrated the power of debunking our false beliefs about how wealth is generated. The opportunity to bring this kind of insight to clients is limited only by the imagination of Super funds. These insights could offer members a better sense of their level of wealth relative to a range of cohorts.
And why wouldn’t super fund members, who spend considerable time comparing their lives to that of their peers via social media, be interested in understanding how their level of wealth via super compares to their peer set?
Partnering with the right external providers could also offer super funds the opportunity to expose their members to information super funds do not hold. This could include simple research concerning investments, calculators to help members with cashflow and budgeting, and tools to assist members with understanding their risk tolerance.
This could also extend to disclosing portfolio holdings of a Super fund in a more comprehendible way. This might involve an interactive experience where members can view the Super fund’s holdings in the context of the experiences they engage in each day, for example their banking, grocery shopping and transport.
Between lifting financial literacy and finding ways to intrigue members with insights, super funds have two meaningful ways to improve member engagement.
Peter Bryant is managing director, enterprise products, Morningstar Australasia.