We often hear that the Australian superannuation system is the envy of many policy makers around the world.
There are many elements we can be proud of – starting with compulsory contributions, the diversified investment approach across super plans and continuous improvement in our governance framework.
But equally there are many areas for improvement. We all know that the core objective of superannuation is about providing adequate income in retirement, yet there are still key aspects of our industry that fail to align to this central tenet.
The level of member disengagement when it comes to all things super is a litmus test of how much work remains to be done. There is a strong argument that this disengagement is the result of our industry failing to connect with members.
A look at how the industry has evolved from defined benefit to defined accumulation is a case in point. While there are obvious limitations to defined benefit pensions, they did provide clarity to members, something that is arguably lacking in today’s approach.
Good old days
Back then, the information provided to the member was simple: expected income in retirement. The member understood that they bore no investment market risk, unlike today.
For the trustees of the defined benefit fund, there was no driving objective of keeping up with peers. The focus was on meeting the overarching member goal, which was typically a multiple of their employees’ final average salary. In that way, the investment focus was about matching liabilities to meet this objective rather than a market weighted benchmark.
Compare that to today’s defined contribution or accumulation fund. Whilst the shift to a defined contribution structure effectively moved the investment risk from the employer to the employee, it also supposedly enabled the employee to customise a more relevant experience.
However, something must have been lost in transition.
The member who once understood how much “income” they would have in their retirement years now lacks clarity. I believe today’s focus on reporting member lump sum amounts is virtually meaningless in terms of understanding whether a member is on track – yet the industry is slow to re-adopt the “income” focus it once had.
The industry asking the average investor to understand and take control of the inherent risks associated with what is effectively asset/liability management but we don’t even provide the right tools to do this.
The disconnect with member outcomes is further exemplified by the way many fund trustees continue to measure superannuation fund success. As an industry, we are still too focused on peer relativity, which can drive the wrong investment decisions, and too focused on maximising capital regardless of where the member is on their path to retirement.
The tide went out
The Global Financial Crisis (GFC) was a good example of the impact a typical default 70/30 balanced fund had on member outcomes. The trustee may have been satisfied if the fund lost less money than the median. And for the 30-something year old, there was time to recover from the heady fall in listed assets. For the member that was two years from retirement though, it was a different story.
Our industry has come a long way and yet it could be argued that it is still in its infancy.
We are still 20 years away from having a workforce of Australians who have had compulsory super their entire working life enter retirement.
We would expect that these Australians will have a higher standard of living in retirement than those who worked without compulsory super yet there is a risk that the industry will fail to meet this outcome if it doesn’t keep the member focus.
We as an industry need to better understand the risks we face.
The Mercer 2020 Super Fund Executive Report showed that regulation and the changing policy environment were the dominant risks sited by fund executives over the next five years and these concerns were largely viewed as being beyond their control.
Interestingly, only two out of 31 funds surveyed listed potential disruptors and new entrants as a threat to their fund, both in the accumulation and retirement space. My sense is that if fund executives don’t feel this threat in the current environment of member disengagement then ultimately it is hard to see how member outcomes will take priority.
Our industry is in a state of disruption. Our response should be to bring the member back to the front and centre of all we do; to continue the evolution from defined benefit to defined contribution to the defined goal.
The goal is managing volatility and providing certainty around income, not only up to retirement, but through retirement as well.
The Stronger Super reforms were a step in the right direction with many superannuation providers, including AMP, introducing a lifecycle approach as the default MySuper offering instead of the one-size-fits-all balanced fund.
AMP’s MySuper Lifecycle offering is not managed to be peer relative and is not included in peer surveys. We believe that this approach ensures our investment decisions keep the member at the centre of everything we do.
It’s a step in the right direction, but there is still more we can do. AMP Capital’s strategic focus on goals-based investing plays to the heart of this issue. People have different attitudes to risk and some may have savings outside their superannuation fund. They will also have different attitudes to what constitutes a “comfortable” retirement and different spending goals within retirement.
Goals-based investing is about taking all of these factors into account and devising a strategy to meet a member’s specific goal. It’s a whole-of-life approach.
I believe we as an industry have a responsibility to collaborate and do things for the better good of all working – and retired – Australians.
More meaningful communication and focus on members outcomes should be the core of what we do. We also need to think more broadly around collaboration in IP, co-investment and social projects. The industry has grown rapidly and will continue to grow. Benefiting the greater good should be the focus of all fund managers in the superannuation industry.
To my mind this could be our greatest legacy, banding together as an industry and putting the sole, competition-based metric of success behind us.
About the authorSean is a member of the AMP Capital Leadership Team and also sits on the AMP Capital Investment Committee. Having spent over 28 years’ in the industry, Sean has extensive manager research and investment strategy experience stemming from his investment consulting background. Sean has a BA degree from Otago University majoring in Statistics and Economics.
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