Do heatmaps work when one size does not fit all?

As the superannuation industry has moved in 2020, executives and trustees have continued to express concern about how the Australian Prudential Regulation Authority’s (APRA’s) inaugural heatmap exercise may have misrepresented the performance of some funds.

A roundtable conducted by Super Review during the Association of Superannuation Funds of Australia national conference in Melbourne and ahead of APRA’s release of the heatmaps revealed that some of the industry’s most senior executives had legitimate concerns about the regulator’s approach, not least whether APRA could or would recognise that one size does not fit all.

The broad concerns of the executives of the roundtable, sponsored by Tech Mahindra, were reflected by NESS chief executive, Paul Cahill, who said there needed to be a clear understanding of what constituted performance for superannuation funds.

“Performance from an investment perspective is one thing, but what about insurance, what about governance and other matters,” he said.

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However, he said that the importance of investment performance should not be under-estimated.

“If you can generate good performance, people will follow,” Cahill said. “Good performance will drive a lot of members through the door.”

NGS Super chief operating officer, Ben Facer, agreed with Cahill but said that while investment performance was obviously a key fact, it was not the ultimate determinant.

“Obviously it [investment performance] should have very heavy weight because it is a key driver of outcomes but we should not be looking at just absolute performance,” he said. “Funds are different with respect to profiles and objectives. If there are two funds with two separate sets of objectives you would expect them to perform differently.”

EISS Super chief executive, Alex Hutchison, said he believed any assessment of superannuation funds should not ignore the concept of “social license”.

He said that, on that basis, he believed financial and non-financial metrics should be given equal weight.

“We [EISS Super] are an outlier fund. Our members have balances which are three times greater than the industry average and we have lots of reginal members within an industry that is going through structural change,” Hutchison said.

“How do you measure social license? Well, when I’m in Broken Hill I don’t see any of the ‘reg tech’ funds coming out there to service members, but we’re there,” he said.

“Our promise to members is preservation and so on a pure investment return point of view, we are bottom of the table because we are about capital preservation. My fear is that because we are an outlier we will not be appropriately measured [in terms of the heatmaps],” Hutchison said.

“Hopefully, there can be a mature dialogue about how that is measured and treated,” he said.
Rice Warner’s Andrew Boal said he believed that a risk-adjusted approach was critical to the acceptance of the heatmaps

“Whether objectives are achieved ought to be the main issue,” he said. “A fund meeting its own objectives should be adequate for the heatmap. There should not be undue reference to other funds.”

Boal said that funds should be measured against their own objectives and their own benchmarks recognising that diversity was important.

“I don’t think it is healthy to have all funds looking the same and trying to do the same thing,” he said.
AustralianSuper’s Paul Schroder said that notwithstanding some misgivings around the heatmaps, he welcomed the involvement of APRA in measuring fund performance and believed the industry needed to accept it as an iterative process.

“We’ve had a history of Morningstar, Chant West and SuperRatings all trying to rate funds. We should welcome APRA trying to do this,” he said. “Whether it is initially accurate is one thing, but we welcome the idea that APRA is going to become involved in this discussion because the general public has no idea and they need someone to help guide them through it.” 

“I think the general idea that APRA is going to use general data that is explained is a positive, but the first outing won’t be 100% right,” Schroder said.

Deloitte’s Russell Mason said that it was imperative that APRA both communicated and consulted with trustees and that funds had every opportunity to put their case and remove any misconceptions that APRA might hold.

“My concern is to avoid alarmist media commentary,” he said. “Just because a fund is deemed poorly-performing in APRA’s eyes doesn’t necessarily mean that members’ money is at risk given the secure nature of our system.’

“We have got to make sure that members don’t become alarmed that their fund is just another pyramid building society losing money,” Mason said.
Protecting Your Super Package – lessons learned or ignored?

Ahead of the Government embarking on the next tranche of legislation impacting insurance inside superannuation, industry participants are concerned that lessons have not been learned or the future dangers recognised.

The consensus of the Super Review roundtable was that the implementation of the Protecting Your Super Package (PYSP) had been rushed and that both funds and insurers had been given insufficient time to ensure the best interests of members.

Reflecting this view, EISS Super chief executive, Alex Hutchison, said he hoped that the appropriate lessons had been learned.

“We were confronted with unrealistic time-frames which created unrealistic pressures on participants in the value-chain and created in unnecessary risks,” he said. “I don’t think anyone would have been able to implement PYSP as they would have liked to.”

“Our fund, because of how we run, was able to ring every single person affected. We were able to do that but in the end the numbers of people opting back in [to insurance inside superannuation] appears to have been same as elsewhere in the industry,” Hutchison said.

“So, my fear is that in the future the not having insurance effect will have an effect.”
Deloitte’s Russell Mason said that he believed there should be concern around the longer-run impacts of the Government’s changes.

“The real impact could be five or 10 years down the track when members start to die or become disabled and say ‘I did not understand and I was not properly informed. I now realise I do not have insurance cover which I wanted to maintain all along’,” he said.

Mason said such occurrences were not unusual when superannuation funds merged and members did not act to maintain cover through the process and the bottom line was that the many determinations handed down by the Superannuation Complaints Tribunal (SCT) had seen cover reinstated.

“People don’t appropriately understand the issue,” he said. “If you went out there in the community and asked people if they had any understanding you’d be impressed if 5% could give a vague explanation.

AustralianSuper’s Paul Schroder said that a binary debate had evolved with respect to the value of insurance inside superannuation – on the one side it was ‘insurance bad, get out’ while on the other side it was ‘insurance good, keep it’.

He said the bottom line was that what had occurred was a radical departure that would inevitably increase the price of insurance and make it less attractive to some people.

“So, we have this debate about is it good or bad? I think we are on the precipice of having to rethink the value of insurance inside superannuation,” he said.
While not disagreeing with Schroder, Rice Warner’s Andrew Boal said that the industry had made mistakes and would need to ensure these were not repeated.

“The industry has made some mistakes along the way which have made it easy to be criticised because we have over-charged some cohorts,” he said.

NESS Super’s Paul Cahill said that while the implementation of the PYSP had been challenging, superannuation fund contact centres had been the difference between success and failure in circumstances where there had been stories of some administrators giving up.

He said that from monitoring his own fund’s call centre, he had noted that the most frequent callers had been the mothers of young members who wanted to ensure their sons’ best interests were being protected.