The prudential regulator has warned super fund trustees to provide concrete evidence that they understand what their members want before making decisions on their behalf.
The call was made by Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell at a Financial Services Council Leaders Summit panel.
While Rowell acknowledged that super fund directors believed their decisions were made in the best interests of members, she said that was not enough.
“The question is, how are they making that judgement, and are they doing enough to actually really understand what their members want?” she asked. “And that's where we see the gap... but we're not seeing the concrete evidence of how trustees are turning their minds to that and translating that into an objective assessment.”
It’s a gap that the regulator is currently targeting. New draft legislation aimed at giving Australians more power over their retirement savings will provide it with greater impetus.
The changes include an annual MySuper outcomes assessment, aimed at ensuring funds have the scale and ability to meet members’ needs, as well as more transparent reporting standards and the introduction of annual general meetings.
APRA will also be given stronger powers to take preventive and corrective action, including cancelling a MySuper authorisation, where funds are not acting in the best interests of members.
Meeting members’ needs requires more than strong investment returns
The regulator’s Insight publication accompanying the legislation announcement makes it clear that focusing on investment returns is not enough to deliver quality outcomes for members.
“It is not just investment performance and fees or costs that should be considered, but also the nature and quality of the benefits and services being provided and the adequacy of the RSE licensee’s governance and risk management frameworks and practices,” according to the regulator’s guidance.
There are several ways that funds incorporate these quantitative and qualitative criteria into their business plan to demonstrate they understand–and can then meet–the needs of members.
Funds already have the core building blocks: name, age, address, super balance, insurance coverage and an income estimate (based on employer contributions). This core information is bolstered by other data sets, such as industry analysis by APRA, population analysis by the Australian Bureau of Statistics and other industry surveys.
This leaves a huge gap for big data to help reveal the actual retirement needs and desires of members.
While many funds have valid concerns about collecting more personal data due to privacy concerns, engagement issues and cost, there are ways to fill in the gaps about how members are behaving and what they need.
It is becoming an expectation rather than an option. The Productivity Commission’s “How to Assess the Competitiveness and Efficiency of the Superannuation System” report has already noted “there is likely to be significant scope for improvement in the system” regarding the way funds are collecting member data.
“The Commission will examine ‘best practice’ behaviours employed by funds to gain more relevant information about their members and how they are using it in product design,” its draft report said.
Milliman Retirement ESP: A more accurate portrait of members and how their needs are changing
While the super system now holds more than $2.3 trillion in assets, it is not yet the central hub for most retirees. Funds are rarely privy to the substantial assets that many members hold outside of super; whether they own their own home (and may still be paying it off in retirement) or rent; and what their qualitative lifestyle expectations are.
These are just some of the major factors that should have a substantial impact on funds’ member communications, advice and product development.
Milliman’s quarterly Retirement Expectations and Spending Profiles (ESP) service is a classic example of big data–it is based on 300,000-plus retirees’ spending data–combined with actuarial analysis that finally turns a spotlight on to these areas.
The Milliman ESP reveals what retirees really spend from all income sources, segmented by wealth bands, age, singles versus couples and location as well as shows their essential versus discretionary spending and how it changes through retirement.
Funds can use this information in many ways to bridge the divide highlighted by APRA: taking action in members’ best interests without demonstrably understanding what they want.
For example, overlaying the Milliman ESP real world data about customer behaviour can radically change “optimal” portfolios based on limited surveys about retiree preferences. In some cases, the level of portfolio risk needed may be overstated if retirement goals are well out of reach and based on limited surveys about needs rather than real world behaviour. Location provides another crucial element--knowing just how much the actual cost of living is in different cities and regional areas can radically alter default investment portfolios.
Greater insights leads to better products and member engagement
Funds with more accurate information about the behaviour of retirees can also create better products. The industry is littered with retirement income products that have never attracted significant inflows because they were based on incorrect assumptions about member behaviour.
There is often a huge divide between what members say they want (such as retirees who say they want guaranteed income) and what their actual behaviour shows they want (such as more flexible retirement products). Accurate big data combined with analysis can help discern the differences between members’ stated preferences and revealed preferences.
Funds can interpret this in a variety of ways. For example, some funds may use the Retirement ESP data (which also breaks down expenditure across several categories and tracks how it changes over time) to create retirement income streams based on discretionary versus essential spend.
Member engagement through general advice, communications and marketing is one of the most crucial areas that can be bolstered with more accurate data about members.
The early success of tech-focused super fund Spaceship, which has targeted younger investors, shows the power of understanding and engaging with members. Pointing out the shortcomings of the product–no matter how warranted–is unlikely to have any impact when its customers feel understood.
This should serve as a wakeup call to all super funds. Now is the time to use big data such as the Milliman Retirement ESP to understand how members are behaving in the real world if communications are going to resonate with them.
We are now in an era where it is commonplace for organisations to deeply understand customer behaviour–companies such as Facebook, Google and Amazon have been built on this ethos. APRA is demanding that super funds also understand their member behaviour at a more fundamental level and funds that ignore that advice will do so at their own peril.
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