What is driving change in the custodian/administrator space?

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?

A Super Review roundtable recently examined the drivers of change in the superannuation custodian/administrator space.

Mike Taylor, managing editor, Super Review: What do you feel has been the driver for the [custodian/administrator turf] changes discussed. It’s certainly been going on, but not with a great deal of fanfare. It’s one of those things that’s happening.

As a journalist you hear about it happening or we’ve written about it happening a lot, but what has been the driver for that?

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David Mackaway, general manager of operations, Challenger: I’d be interested in Peter Curtis’ comments as well on this, but I think from the member end there’s a number of changes happening.

Obviously as people transition from accumulation into retirement, all of a sudden there’s a lot more focus from Australians on what they have in their retirement savings and what are they are going to do with it, and whether they should have it invested?

So all of a sudden I think today there’s a lot more engagement from the member themselves saying, ‘I really need to make some decisions around what I’m going to do with this pool of money’, which has led to more product being offered, and where the actual members have a lot more say through products like Member Direct, as one example, to play that role.

That’s one facet of what’s been happening. I think the other is that as the whole super pool has grown so significantly in Australia, the reality is it’s becoming too big just to invest in what I call the traditional vanilla type assets.

It’s not all going to be invested in equities or simple fixed income-type securities. So the pool itself has got so big that it needs to expand into the more complex and alternative asset classes, which again is putting pressure on the whole system.

How do I start to custody these, administer these, account for them back up to the members and so on? So I think a number of factors have been occurring over a while, and it’s mostly been happening behind the scenes because the pools are just growing at this ever-ongoing rate. 

Peter Baker, head of client strategy communications, BNP Paribas: But I guess it’s not only a case of how you value assets or how you enable product, it’s how you enable information to individual members of a superannuation fund earlier and in a more nimble fashion.

Alex Hutchison, CEO, Energy Industries Superannuation Scheme: I think you’re right. I think it’s consumer demand brought about by digitisation of the industry, and the fact is we do all work in frankly one of the most highly competitive industries in the country, right?  

It doesn’t stand still for anybody. Unless you’re giving the better product to your members, they will vote with their feet.

Peter Hill, managing director, SimCorp: Just to pick up on David’s point. The complexity of the asset classes starts to grow because of the size of the pool.  The cost to administer and support the various assets is a bit of a sleeper issue. So you bring your investment management in-house because you can save on fund manager fees.

But if you’re then going to take that saving and put it into a whole collusion of systems, either your own internal systems or the systems of your partner, you’re going to basically waste that sort of cost savings.

So I think there’s a sleeper issue – and yet it came out a bit in the MySuper discussions where it was said that the average punter needs to be spending less as a percentage of their total assets in administering the system.

I think that’s inevitably that’s going to continue down to say – ‘how can we simplify the system landscape to support an increasingly complex range of assets then needs to be supported?’.

Mike Taylor, Super Review: Peter Curtis? AusSuper has done quite a number of things and I think there’s an awful lot of the asset allocation now done in-house – as with Member Direct.

Is this entirely owed to the actual scale of the fund, or is this something that without that scale, you guys wouldn’t have approached it that way, or do you think there are other things underpinning it?

Peter Curtis, head of investment operations, AustralianSuper: The scale certainly allows you to look at doing things differently.

For example, one of the portfolios which we have managed by one of David’s boutiques, we started off in pooled fund.

But then the size of the mandate that we were going to give to that manager to allocate in that asset class was such that it didn’t make sense to do it in a pooled fund.

We wanted a discrete portfolio so that we had a clear line of sight to the underlying assets. That meant we suddenly needed a whole new type of systems capability from our custodian so that they could hold the assets and report the assets back to us.

That drove them come to us with a new solution to allow us to run that part of the portfolio.  

As we started to move away from pooled funds and infrastructure and property, we were looking for different capability as we looked to bring certain asset classes in-house – well, parts of those asset classes in-house.

We looked for new capability and technology to be able to do that, but underlying this we needed a single source that allowed us to look across the portfolios and pull out the information that we wanted. 

So scale has allowed us to think about how we manage the portfolio differently, and then that drives the types of systems and support that we need from our partners to be able to do that in a very effective manner.

The other thing we like about the relationship we’ve built up with JPMorgan is the speed that we can go into these areas. We went into syndicated loans. JPMorgan were able to say ‘yep, we have the capability, here it is, we connect the bits up, reports back’. And that allows us to move quickly.

Same as when we did Member Direct: we spoke with UBS about the platform. We spoke with JPMorgan. We were able to bring everybody together to get all the pipes connected up so that we could get the product out to the members quickly and efficiently.

We are very keen to find the partners. I’ve given up on the idea that there’s a single solution out there for all our technology needs.

We spend more of our time talking with JPMorgan now about, ‘okay, we want this data sent to that organisation, we want that data over there’, so that we can then access the information differently. 

We probably get JPMorgan sending data to 10 or 12 different organisations because we think they’re the organisations that are able to do the analysis or the enhancement to give us the best result.

We’re seeing more that JPMorgan, our custodian, just sits at the centre of our eco system of all the various parts that we are interacting with across the investment portfolio to give us the analysis and different cuts of the data that we need to allow us to manage it.  

I think that with the whole issue of the complexity, the ability to still look across the portfolio is just becoming more and more important to us, and also with super funds we then put another slice across with our different investment options.

For example, ‘what is the currency exposure of my stable option versus the balanced option, and how can I drive through all the different levels to be able to pull that information out quickly to work out what I want to do with that currency exposure?’.