Economic transformation will shape superannuation

The 2020 Federal Budget has reminded us that the direction and structure of the superannuation sector are substantially shaped by legislative and regulatory change. The transition to so-called ‘stapled’ accounts that follow members from one job to the next is the latest change with the potential to accelerate consolidation of superannuation funds and enhance debate about the validity and methodology of performance measurement.

Most significantly, the COVID-19 pandemic’s impact on the personal finances of Australians has resulted in withdrawals of over $40 billion from super accounts as cash-strapped members redeploy their retirement savings to meet more pressing and immediate needs.

The debate will continue to rage over the depth of consideration given to the profound impact of this on retirement savings and whether there were better alternatives, but it’s largely academic and an issue for the future. There is a side conversation is equally engaging. It’s about what has it told us about the need for super funds to empathetically connect with members about their financial circumstances and priorities.

The early release provision to help members through the COVID-driven recession is an anathema to the core purpose of super funds and their trustees to achieve optimal retirement outcomes for members but, by all accounts, funds have generally paid out quickly and in the spirit of recognising the more urgent financial requirements of members over recent months.

This empathy for the challenges facing members will be stretched further in the months and years ahead, because there is another, powerful and less-discussed driver of change in the sector - the transformation of economic landscape and key commercial sectors within it.

The energy sector is undergoing substantial transition from fossil fuels via less polluting fossil fuel to renewables; the media and arts sectors are undergoing financial stress, major restructuring, downsizing and consolidation; the manufacturing sector is shifting focus from mass production to specialised, high-end production; the education sector has been forced online and may never fully emerge from it; the tourism and hospitality sectors face an unknown future as the delivery of experiences is framed by a more cautious clientele; and telehealth will inevitably become a permanent feature of patient care and monitoring.

These forces are creating an environment more encouraging of merger and acquisition activity, increased automation and robotics, a transformation of what the customer experience looks like and the skills and education that will be required to evolve successful strategy and manage this new world order.

It is inevitable, therefore, that the shape of the superannuation industry, originally borne of an industrial accord back in the 1980s will need to align with the underlying changes facing their members.

It will demand an extension into the future of the empathetic connection with members learned during the current pandemic crisis.

Members will experience uncertainty and dislocation in their workplace. Employment may become more tenuous and ad hoc, despite the weaknesses in this model that have been cruelly exposed for those rendered ineligible for government support through the COVID crisis.

These workplace transformations are anxious times for members. Except for those facing imminent retirement, superannuation usually becomes a second-tier, perhaps lower, concern and priority. Super funds need to consider their communications and interactions with these members at these times.

For example, does it reflect empathy with members’ circumstances when they receive broadcast emails promoting salary sacrifice and voluntary contributions? Maybe even encouraging them to consolidate with their fund or to nominate it as their choice fund when they gain employment can look out of touch and self-serving.

The oft-discussed matter of culture will direct fund empathy with members and influence the nature of their response to supporting members through these changes. This is why cultural rather than industrial alignment will become more important to successful fund consolidation as industries transform.

Changes driven by economics will make it no longer viable for some super funds to exclusively service shrinking businesses and commercial sectors. The argument for the benefits of specialisation and niche understanding of unique member needs proffered in earlier days by sub-scale funds will become untenable.

This was referenced in a different context by Superannuation Minister, Jane Hume. Speaking at an industry retirement conference in April 2020*, she said the outbreak of the coronavirus had highlighted homogeneity of member cohorts as being a whole new risk that the government had not considered before. 

Ms Hume said: “There is always the opportunity for one particular industry or a number of industries to be affected by a particular issue in the economy and I think that is the systemic risk we hadn’t really considered before, It’s something that we would look at in the future.”

Her comments were prompted by the potential impact of cash outflows of up to $20,000 each from funds to members under the government’s early release package, but her underlying concern could equally apply to fund exposure to substantive transformation of the sectors to which their members belong.

It was not long ago that super fund mergers were considered most likely within industry sectors. This is true of the recent merger between public sector funds First State Super and VicSuper, the former now rebranded Aware Super umbrella.

But recently completed and intended mergers across sectors have become the more common experience - Equipsuper with Catholic Super, CBus with Media Super and Energy Super with LGIA Super. Super fund brands may remain in place, but the back-end operations where the trusteeship, investments, risks and administration are managed are where the real benefits for members are derived.

These types of mergers are set to become the norm, an inevitable foundation for the next phase of consolidation, where the Australian retirement system transitions towards a small number of less than ten megafunds and a smattering of smaller, bespoke funds, many of which may not hold default status in workplaces and be ‘choice’ funds.

The future of successful funds will be built around their relationships with and their capacity to retain members. This will require total alignment of values and behaviours in the amalgamated funds of tomorrow and how this translates into their approach to supporting members through the approaching tsunami of economic and workplace changes.

* https://www.investmentmagazine.com.au/2020/04/super-fund-cohorts-seen-as-systemic-risk/