The scale of the retirement challenge for super funds is immense. We believe super funds need to structurally recalibrate to effectively meet this challenge.
Consider the broad differences between the accumulation and drawdown phases. Accumulation is characterised by low member engagement, homogeneity, and a focus on balances and returns. Default settings work (reasonably) well and provide scale benefits. Overall, you could describe it as a “wholesale” experience.
The retirement phase presents a sharp contrast. Features include higher member engagement and greater heterogeneity. Retirement needs to be framed through an income lens, and will incorporate multiple products as well as tailored solutions. These solutions are best provided through some form of advice, so much more of a ‘retail’ experience.
In addition, funds face an uncertain policy and regulatory framework (with a new retirement review flagged alongside ongoing consultation on the Quality of Advice Review), and the business model challenges of cross-subsidisation. The scale of the challenge becomes stark.
The pathway forward will be led by those funds that set themselves up as best practice retirement providers. We see four key steps.
- Make retirement a top priority
At the recent Retirement Conference, hosted by The Conexus Institute and Conexus Financial (publisher of Investment Magazine) the message from the government and regulators was clear and coordinated: funds need to do more in developing their retirement income strategies.
For funds to address the retirement challenge in a timely and high-quality manner, retirement must be a top priority. The scale and complexity of the challenge and the need for organisation-wide coordination demands nothing less. Otherwise funds will struggle to move forward as other challenges receive more attention.
- Resolved organisation structure
Most funds are not currently structured to meet the retirement challenge. Some funds have acknowledged this, and are now working to develop a fit-for-purpose organisational design.
Recently, Nick Callil of WTW set out the two candidate organisation structures. One option is a separate retirement division under which many existing functions are replicated (for example, investments, operations and engagement) alongside some unique areas like retirement solution design. The other option is a dedicated retirement division that utilises the existing internal functions under a shared services arrangement. There is also scope for models that combine elements of both structures.
- Senior retirement leadership role
While retirement leads are increasingly common amongst super funds, the level of seniority varies from group executive level to two-to-three levels below. There is also variation in how these roles are being populated, from seasoned executive leaders through to specialists in some aspect of retirement (like product).
The size and complexity of the challenge and the need to prioritise retirement requires the retirement executive to cover a broad operational footprint and have authority.
- Enhanced board structure … the dedicated retirement committee
The board must oversee, and is ultimately responsible for, the shift to best practice in retirement. The topic requires the board to get on top of a range of often-complex issues. Examples include technical product design, engagement strategy, personal advice and data governance. Some issues overlap with existing challenges, while others will be new.
Boards could be enhanced in two ways. One could be to raise the level of retirement expertise on the main board. That is, include various elements of retirement into the board skills matrix, and ensure that these skill boxes are ticked.
The alternative is a dedicated retirement committee that reports through to the board, ideally chaired by a board member with retirement expertise. This provides the access to the specialist expertise required for effective oversight of management. Establishing a dedicated committee would further recognise retirement as an organisational priority. A retirement committee could drive management to develop and improve the fund’s retirement income strategy.
One interesting dynamic at play is the supply of relevant retirement expertise. Funds that start early may get first dibs at what may currently be a relatively small pool of expertise.
The steps to become a leading retirement fund are clear: prioritise, reconfigure the organisational structure, create the leadership function and enhance the board structure.
No fund has yet addressed all four of these criteria. The ones that take these important steps will be the best-placed to lead on retirement and deliver the best outcomes to their members.