Superannuation – the next decade

Society has benefited from the technology revolution of the last 30 years. A separate revolution has taken place in superannuation with the industry shifting from transactions to services around member engagement. While the changes in both areas have been profound, we can anticipate the next decade being even more dynamic.

At this week’s Canberra Summit for industry leaders, we canvassed how funds might adapt over the next century, noting that some young people joining a fund today could be members for 80 years or even the century if longevity continues to improve!

We can’t foresee what changes might occur in our lives but we can make sure that governance standards and principles are robust enough to survive radical change in superannuation.

Segmentation of Super

In the next decade, we will see a change in the segmentation of super as shown in Table 1.

MySuper will continue to be the default strategy for employers and their employees, and we will analyse products by their features rather than by their sponsoring entities. Over time, as product values converge, we will end the media comparisons of retail and industry funds, which tend to damage the brand of superannuation.

SMSFs will continue but the rate of growth will slow and new members might be dominated by those who use financial advice on a regular basis.

There will also be Choice products designed for individuals who want an alternative to MySuper. Personal Super products have been offered by financial institutions for 40 years but we are now seeing a group of products based on marketing fads. While they have slick marketing, they often provide poor value. This is an emerging threat to the status quo.

Finally, we will see retirement products with a range of solutions to help members to drawdown their pensions smoothly. All funds will seek to provide liquidity for pension payments with different ways of dealing with longevity and inflation protection.

Table 1

The fee debate

The Financial System inquiry and the Productivity Commission believe our system is too expensive and it clearly is in many areas. However, some progress is being made against a background of complaints. We should note that our system is not comparable internationally because our funds include so many other benefits, including:

• Choice of members to select their own fund
• Choice of investment strategy
• Universal life insurance
• Flexible retirement products
• Intra-fund financial advice

There have been several factors leading to cost increases, including:

• Enhanced compliance – these costs are the fastest growing component of our annual expense benchmarking study
• Technology
• Higher asset fees on unlisted investments
• Member services and advice

While fees in our industry are growing in dollar terms, largely due to the increased engagement with members on many levels, they have been reducing steadily as a percentage of assets. Average member fees have reduced from 1.26% to 1.03% over the past decade (2006 to 2016).

The total fees do look large when expressed in billions of dollars. They are about $22 billion (not the $31 billion that has been quoted elsewhere recently, which includes life insurance premiums). We need to put this in perspective – the total is less than the total profits of the big four banks ($30 billion); all the while running an industry with assets that are more than five times the size of those same banks and more than 1.25 times the GDP of Australia. Is that expensive?

We anticipate fee levels falling despite a likely continuing growth in member services. In ten years, our largest fund will have $250 billion. With enhanced technology, could it operate for 45bps? That is, $1.125 billion. Could that fund get down to 30bps which is still $750m?