With retirement a huge challenge for super funds, it is interesting to consider how well funds have structured their organisational leadership and governance to meet the challenge. In this article we address management, the board and associated board committees.
While we see positive steps at many funds, some funds have barely started. There is much more to be done, especially around structuring fund boards and board committees to provide effective oversight of the development of retirement income strategies (RIS).
Retirement is different
Retirement is fundamentally different to accumulation. It demands specialist management and oversight. Shoe-horning retirement into existing management and governance structures – many of which were purpose built for an accumulation-focused industry – won’t work.
Accumulation is characterised by a focus on balances and returns, and member engagement is typically low. Default settings work (reasonably) well in looking after members who do not engage. Accumulation entails mass-delivery of return-generating investment products, with choice options and assistance being made available for members who seek them. In essence, largely a ‘wholesale’ exercise with some side add-ons.
Retirement needs to be much more ‘personalised’. The aim is to provide income to individuals who may differ significantly in their needs and how they engage. Funds are tasked with tailoring for – and ideally engaging with – members around their retirement in varying ways. Retirement solutions can be a complex combination of investments, products and strategies. Technical difficultly is high behind the scenes. However, delivery to members needs to be as simple as possible.
Commitment and specialisation
Consider the challenges that super funds face in developing a RIS. Funds need to:
- Create a culture that celebrates paying out pensions (i.e. giving up assets) as success;
- Frame a business case for retirement addressing both financial parameters and time frames;
- Coordinate systems, processes and teams across the business;
- Facilitate various models of engagement, with triaging into multiple pathways leading to a solution;
- Build data processes to collect, manage and update member personal information;
- Engineer delivery of solutions involving multiple building blocks and a capacity to tailor;
- Determine fee structures, while accounting for a degree of member cross-subsidisation;
- Develop a RIS self-assessment framework; and
- Make progress notwithstanding an unsettled policy and business environment.
Developing a quality RIS requires considerable organisational commitment and specialist capabilities. Funds are unlikely to succeed unless they make retirement a strategic priority.
Different management approaches
It’s great to see that most funds now have a dedicated retirement head. It is interesting that some funds, such as AustralianSuper (Shawn Blackmore) and ART (Kathy Vincent) have created executive-level roles. Meanwhile, other funds have created retirement leads further down the management structure, sometimes two levels below executive.
While the choice may be a function of firm size and structure, the key elements are making retirement a priority and fostering coordination across the organisation. We are sceptical that these elements can be achieved without appointing a dedicated and senior retirement executive – ideally C-suite – with the responsibility to lead and authority to drive the effort.
That said, there are good examples of funds (such as Aware Super, CSC, Telstra Super and UniSuper) that appear to be making good progress without a dedicated retirement executive. So there may be other ways of getting the organisation behind the cause.
How well prepared are boards?
While management of the retirement effort has been a point of focus, we detect much less attention being paid to fund boards. Here there seems far fewer positive developments, which is somewhat surprising given that the board is ultimately responsible for the RIS.
At a recent retirement seminar, an experienced former super fund director openly questioned the preparedness and capabilities of super fund boards regarding RIS design and implementation. This led to further reflection on whether board compositions based around employer and employee representatives left some funds with a board skillset that is biased to accumulation and underprepared for retirement.
A natural starting place in ensuring that boards have the required expertise is updating the board skills matrix to ensure it is appropriate for the challenges of retirement.
A further step may be to re-examine board composition. Functionally one could query how many super fund boards have members with expertise in areas such as retirement solution design, financial advice and digital delivery. One of the big challenges is culture and change management: a skill more common amongst board members.
We suspect that most boards currently have many bases left uncovered when it comes to the skillset required to provide effective oversight of a RIS.
The case for dedicated retirement committees
To our knowledge there is no super fund that has a dedicated retirement committee reporting through to the board. We see a strong case to put one in place to build out the required skillset.
Board committees can focus on operational elements where specialist expertise is needed. It is commonplace for super funds to have such committees covering areas such as investment, insurance, audit and finance, compliance, remuneration, and member services.
A strong case for a dedicated committee emerges whenever oversight is required of highly specialised matters that are important for member outcomes. Retirement clearly exceeds the threshold.
If funds are struggling to bring the necessary skillsets onto the main board, then a dedicated retirement committee makes even greater sense. It would provide an avenue to bring in specialists with valuable knowledge, skills and experience in an accessible way. The talent pool is larger (for example, consultants can be part of the candidate pool), and can be implemented in a more-timely manner than through a slowly-moving board rotation cycle.
Without a dedicated retirement committee, our concern is that oversight of the retirement effort would be ineffective due to a significant skill and knowledge gap between management and the board.
Board structures require attention
There has been progress on the management structures that underpin development of RIS. However, fund boards also require attention. Adjustments at the board level take time and can be difficult to implement, but are needed.
Retirement demands a high level of specialisation and has potential for large member impacts. A dedicated retirement committee seems an effective way to quickly close any expertise gap between management and boards to ensure effective oversight as funds grapple with the complexity of delivering their retirement offerings.
David Bell is executive director and Geoff Warren is research fellow at The Conexus Institute, a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Investment Magazine.
As usual, Geoff and David seem to be further down the track than most in the industry. One point I would add is that the fundamental operational structure of superannuation fund member options generally requires investment earnings to be immediatey reinvested in the market. This is logical for accumulation but illogical for pension phase where investment income should ideally be used to finance pensions and NOT reinvested. The basic operational side of the business has been built for accumulation and needs to be reengineered for Account Based Pensions.