Member value to determine default winners

The default super environment has become increasingly competitive and, with the introduction of MySuper legislation, super funds that do not look to reinvent themselves may fall behind, or be swallowed up, by those that move more quickly.

In response to MySuper, we are seeing a spate of innovations grow from within Australian superannuation funds, each vying to stand out in today’s more homogenous, low-cost, default environment.

The superannuation landscape has undergone a vast amount of change since its inception (30 years ago) with competition fuelling consolidation.

Industry consolidation and convergence has led to fewer, fiercer competitors in the default fund pool – where there were 1350 funds in November 2003, 325 remain today with 116 registered as default providers.

Legislating a low-cost model and automatic levels of insurance cover has closed the gap between retail and industry default superannuation offerings and highlighted any added benefits funds provides as their point of difference.

It is up to employers to choose the best fit for employees but we think it’s fair to say that innovative funds that speak to members’ needs and wants directly are more likely to thrive in this increasingly tight market. The upside is significant, considering the vast majority of members (over 50% according to CoreData) do not exercise choice and end up with their employer’s default provider. company formation .

Here are some of the ways in which funds are innovating to stand apart.

Funds are trying to broker the best coverage for specific cohorts at the cheapest premiums at a time when premiums are rising. A growing awareness of default levels of insurance cover within super has increased the incidence of member claims and, in turn, put pressure on the cost of group insurance.
Funds with members concentrated in similar work functions, will benefit from the ability of wholesale insurers to effectively price risk into insurance offerings.

Member control
The rise of SMSFs appears to be moving unabated – more than 31,500 new SMSFs were established in the 12 months to September 2013.
In a bid to stem the flow of capital into DIY funds, super funds are giving members a lot more control over where their money is directed through the provision of member-directed investment options.
Rice Warner found close to 30% of funds now offer member-directed investment options with ASX200, ASX300 and term deposits most popular.
Direct property may the next asset class on the cards as some funds look to slice up and package property units for members..

Lifecycle products
Superannuation, as a compulsory retirement savings system, with a largely disengaged member base, has failed to ensure retirement adequacy and ease of access for people with low levels of financial literacy, or for those, that simply do not understand the importance of saving for retirement.
A recent MySuper Trends Analysis published by Mercer showed that 22 of the 116 default funds now on offer are lifecycle options – double the amount available prior to the reforms.
Lifecycle options attempt to match and automate investment and risk profiles with different life stages, transitioning automatically from one risk/return profile to another at certain junctions in the life of a member.
Although the products seem to answer duelling concerns – that of matching investment options and strategies with life stages, and ensuring the needs of the disengaged are met – not all options are equal and some models have received criticism for their simplicity.

Big Data
Super funds are also looking to carve up the massive amounts of member information they have in order to create more meaningful and direct communications with members.
A front-runner in the push for better communications are ‘retirement income projections’, a tool used in the US to show a big picture view of a member’s retirement savings patterns and the impact it will have in retirement.
Commentators have advised that eventually, this type of messaging will even appear as ‘pop-ups’ via online apps and super fund member portals.

Planning as a Value-Add
The financial planning industry has received a significant shake-up as well, not least because of the Future of Financial Advice (FoFA) reforms.
The industry has finally received some clarification around scaled advice, but many super funds have their own holistic planning businesses as well.
As a value-add, many industry funds are looking to beef up the advice they provide, moving into new areas such mortgage advice.
One fund even seems to have adopted the motto – ‘if you can’t beat them , join them’ – as they train up their financial advisers in SMSF advice.

So where to from here?
Although the new default funds are now receiving Super Guarantee payments, funds are still tweaking offerings around the edges.
As the super industry continues to consolidate and funds attempt to differentiate themselves from the herd, 2014 should prove to be a year of continued super fund innovation.

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