The cost of Stronger Super

The technology revolution roundtable

Part 1: Super custodians and administrators contest their share
Part 2: How does technology impact custody mandates?
Part 3: What is driving change in the custodian/administrator space?
Part 4: The impact of currency hedging
Part 5: The cost of Stronger Super
Part 6: What will technological change bring to superannuation?

There have been widely differing estimates as to the costs of implementing Stronger Super. A Super Review roundtable decided to find out what it has actually cost the industry.

Mike Taylor, managing editor, Super Review: If you were to weigh up the impact of Stronger Super, there have been a number of costings put on what it’s actually costing the industry and providers such as yourself.

On a scale of one to ten, where does it rate in terms of the changes it’s forced you all to make in one way or another.

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I’ll start with Peter Hill because I know as a service provider to these people, you must be very conscious of what it is they’re demanding in terms of technology.

Peter Hill, managing director, SimCorp: Our clients are primarily large fund managers. Obviously Challenger is a good example.

And frankly, the nature of our technology made it relatively simple – without going into all the whys and wherefores of that – fundamentally we try and move the capabilities and make those sort of changes into the client’s hands.

So we’re talking about things like generating their own instrument classes, being able to get that into the system and accounted for and reported on relatively quickly.

Our focus frankly is more about moving capabilities to the client to allow them to be able to respond more quickly. So that’s more the sort of challenges that we focused on ... David, do you have something?

David Mackaway, general manager of operations, Challenger: Yeah, I think that’s a really fair comment. I’ll be interested to hear the super funds’ perspective of what it’s cost them versus sitting here predominately as a supplier of manufactured goods to the super funds.

Within Challenger, we have a super fund and we’ve had to make changes in the way that super fund operates to deal with MySuper and SuperStream. But interestingly that’s been predominately around our member systems.

With some support from the alternative investment administration systems we clearly hear Peter’s comment on data consistency – and once you do get out of publicly traded securities the consistency becomes a problem for us.

We do have as the core of our sort of encoded system a single administration system, so that does help to solve a lot of the consistency problems.

So on the investment administration side, not a significant investment is required for us in relation to MySuper, but certainly on our member administration platforms quite a bit.

I’d be really interested to hear from Pettyer. I hear your comment about JPMorgan sitting at the centre of your eco system, and I totally understand why that’s the case.

I’d be interested in your views on whether you ever envisage a time where the services that JPMorgan are providing to you expand into providing portfolio management and trading portfolio execution capability for those components that you’ve decided to insource for portfolio management?

Peter Curtis, head of investment operations, AustralianSuper: JPMorgan is one of the brokers on the panel for the listed equity capability. We already do swaps and execution activity – we do foreign exchange execution ...

David Mackaway, Challenger: But would you ever consider using them as your underlying technology provider for the portfolio management capability?

Peter Curtis, AustralianSuper: If they came up with a solution that met our needs, yeah, certainly. We took a look at anything that they had which was going to fill a gap.

In fact we spent a fair bit of time talking to other parts of the JPMorgan group about what sorts of systems that the asset management business is using around research, around broker reports, and endless notes and all those sort of things. 

We see them as one of our sources for obtaining insights as to what options are out there and how they approach different opportunities.

We’ve looked at this whole internalisation and which parts we bring in and how we might do it.

We’re pretty fortunate that it’s a very open relationship across a number of their different business groups where we can draw on their experience, because we just don’t have the time to make all the mistakes ourselves. 

Peter Baker, head of client strategy communications, BNP Paribas: Well, put another way, that is the way – globally at least – where custody services are heading, around pre-trade risk analysis.

Obviously there are then linkages between front and back office, and how you utilise data warehouse-type information, at least around risk modelling.

So I can see in the future that being something that any large global custodian would be offering as a product.

Peter Hill, SimCorp: What about the next step, as David suggested, in the actual portfolio management and the trade execution and an integrated solution right through. You see that as a likely offering?

Peter Baker, BNP Paribas: I could see how that could be happening. And I see trends in Europe where some of those discussions are underway. 

Mike Taylor, Super Review: Alex, I’ve noticed you’ve been sitting here quietly and I’m wondering the point of view of your fund regarding the Stronger Super big costs you’ve had to accommodate

Alex Hutchison, CEO, Energy Industries Superannuation Scheme: I think they’re financial costs Mike, and also the people cost in relation to your organisation being focussed on implementing regulatory reform.  

So whilst you’re doing that and having most of your organisation focus on that, they are not necessarily focussing as effectively as they could on the member needs.

Hopefully we are moving towards the end on that. In relation to custodians providing more, that was my central point before.

The logical conclusion is that if I’m a consumer of the service and I can go to a trusted vendor and receive that service and not have to go anywhere else and I get the benefits of scale and my risk is less – well, I’m going to go there.

But if there is a better offer by a competing provider regarding needs not been met now then right now, well I’m going to examine that other non-traditional provider.

I think that’s a very good point because at the end of the day what do you want?  You want the service.  You want it at a good cost but you want it on a risk-adjusted basis.

That’s what it boils down to – and custodians are right, we do have a natural advantage.  I’m not really sure that – as you say – they’ve developed the capabilities as far as what they could have as yet, but if they don’t I think other people will look to get some of their trade.

Mike Taylor, Super Review: Well, custodians – we’ve got two of them here. Are you developing, are you actually looking to either expand the offering and prevent people from eating your cake?  

David Braga, J.P Morgan WSS: The short simple answer is yes and absolutely. I think the market space has adapted and moved.

The other comment that I would have made from what we were describing before is that it has been so driven by each fund needing to re-examine its own value proposition and saying ‘how do I make sure that I’m meeting my value proposition?’

Then exactly as Alex just described, you turn around then and you say ‘right now I need the capability to do that, where am I going to get that from the kick bag of all the opportunities, and I want to get those from as few places as I can’.

We all want to buy as much as we can from the same providers; you’ve got the existing relationships, you want to get the maximum leverage out of those.

We’ve already talked around the capability outcomes, whether it’s the inhousing of asset management, whether it’s the data warehousing, the risk analytics.

I’ll go back to my comment about when you’ve got an asset of the fund, that’s what we’ll be looking to provide services and capabilities around, and looking to address the needs of our clients as they are looking to meet their value proposition to their members.

Peter Baker, BNP Paribas: I think we’re seeing this as a trend in Australia now with regulatory trends too. You look at the capabilities to meet certain regulatory demands, but that’s not only a capability that we’re offering as a custodian to service the fund, but also the fund administrator.  So there are examples where we’re aligning to not only the client but also the administrator.

Mike Taylor, Super Review: There’s lots of things that funds want; there’s lots of things you want to give them. Technology isn’t really keeping pace, it seems to me that an outsider looking in...

Peter Baker, BNP Paribas: Well technology’s keeping pace for sure it is. That’s the technology capability, whether you’ve got the desire and willingness as any custodian to be able to invest appropriately in it. 

Peter Hill, SimCorp: I think that’s a different question. And here is the unique opportunity for the super industry in Australia.  Because traditionally they focus very much on member administration, member support and they outsource everything downstream from that. 

Because of scale they’re now bringing their investments in-house and they’ve got that opportunity, frankly, to encourage the custodian and the administrator to provide those end-to-end solutions – or if not go somewhere where they can find an administrator and a custodian who can provide that end-to-end facility.

Because the underlying issue here that hasn’t been discussed a lot – a lot of its regulation as you say, a StrongerSuper – but the other half of it is cost, and that cost can’t be hidden.

It’s going to be in the value chain somewhere, whether it’s in the custodian or whether it’s in the super fund. So the cost of multiple systems bringing all the data together – whether it’s a look view, whether it’s a universal holistic sort of view – the cost of doing that can be very easily addressed by technology.

Or it can be screwed up by technology having too many systems, too many hands touching the data as it goes through the value chain.

David Mackaway, Challenger: I think it comes back to this point of differentiation. So how does everyone differentiate themselves?

And in my mind you can do it a few ways.  One is the member experience into the fund, and part of that member experience is the breadth of the products that I can buy within the fund.

Then – what’s coupled with that?  What’s the investment capability to provide those products? There’ll be some what I call vanilla-type products in there that are really differentiated on cost alone, but there’s also other differentiators. Is it a unique investment style and do they bring specific characteristics to it? 

I think then when we get to the back end of how we administer that investment approach, the reality is it should be pretty vanilla, plain and simple, and everyone can provide it in one way or another.

So at the end of the day I think that will come down to really two things: can it cope with the breadth, and how cost effective is it?  

Actually the differentiation will come more and more from the front end. But I think that’s a journey. I don’t think we’re there yet. It’s a journey that the whole industry needs to go on.