According to Mercer’s white paper ‘Pathways to success,’ super funds must be proactive in making decisions about their future before industry regulators take charge.
With increasing surveillance by regulators and the need for a growing spend on technology; scale, or access to scale, is becoming a real issue. This was recently evidenced by the Australian Securities & Investments Commission’s (ASIC) intervention of 21 superannuation funds, highlighting that the 21 super funds had failed to meet the Transparency Requirements under s29QB of the Superannuation Industry (Supervision) Act 1993.
Furthermore, there has been a growing focus on actual outcomes, with the Australian Prudential Regulation Authority (APRA) increasingly monitoring whether superannuation funds are delivering long-term quality and value for members.
Consequently, to ensure that members’ best interests are protected, some super funds are under increasing pressure to develop and implement plans to address areas of underperformance and access to efficiencies – or plan to merge or consolidate.
Mercer’s white paper highlights several pathways available that offer funds a road to growth and sustainability, and a way around problems of scale.
Pressure on funds is coming from regulatory scrutiny, greater competition, and lower growth. Combined, this has created an environment where funds need to adapt and review alternative operating models. Through a highly flexible service suite, Mercer is uniquely positioned to offer funds an end-to-end solution that can be tailored to specific needs. Mercer offers a true business partnership model that provides stability and growth opportunities for these funds.
“While the scale test is in a state of policy evolution, funds need to take affirmative action and take control of their destiny, rather than being pushed into action – change or be changed,” said Ben Walsh, Managing Director & CEO of Mercer Australia.
“We know that super funds are passionate about their connection to members and delivering that connection through their brand identity. Therefore we have structured our solutions to help funds take advantage of the benefits in outsourcing multiple segments such as investment, administration, technology, and client service. By accessing these services through one provider, funds can achieve scale, significant cost efficiencies and better member outcomes.
“Through our total outsourcing solution, funds can successfully reduce their costs to members by between 20-50% while retaining trusteeship and their brand, and outsourcing all other aspects of fund operations to Mercer,” said Mr Walsh.
Beyond APRA’s focus on fund performance, legislation and regulatory change are dominant forces shaping the superannuation industry. According to the 2020 – Change or Be Changed report by Mercer, 58% of funds regard this as their top risk. In addition, 65% believe that consolidation will be the top influencer of how the market will look by 2020 and 71% believe that forced mergers will occur in the industry.
Mercer’s research suggests that around 36% of Australia’s super funds should be taking serious action now to ensure they continue to deliver member benefits long into the future.
While FUM will certainly be on APRA’s radar, funds that are experiencing negative member-benefit flows will also be in the regulator’s line of sight.
In the paper, Mercer highlights that of the funds with $1 billion or less of FUM, over half (56%) have experienced negative net member-benefit flows in the past year.
“What we can start to see is a downward spiral,” said Mr Walsh. “As the number of members decline, average costs naturally increase. Funds then have to adopt more conservative investment strategies with the need for higher levels of liquidity, resulting potentially in lower rates of return.”
Also high on the agenda for APRA is how the financial position of funds has an impact on their ability to deliver member services that match rising expectations.
“The ability for members to switch funds is getting easier. Therefore it has never been so important for funds to truly understand their members and deliver experiences that meet their needs,” said Mr Walsh.
For some smaller funds, self-sufficiency may no longer be an option, and the solution to providing better member outcomes might lie in a strategic industry alliance.
By encouraging funds to focus on their core competencies and consider partnership opportunities that leverage complementary skills, Mercer hopes to be part of creating a strong and sustainable industry that remains open and competitive, but true to its overarching charter of delivering superannuation outcomes that are in the best interests of members.
In a climate of ongoing regulatory uncertainty, funds should not wait for absolute clarity; rather, follow pathways to growth and sustainability that are available today.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset—their people. Mercer’s more than 21,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With more than 59,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com.au Follow Mercer on Twitter @MercerAu