Stronger Super challenge looms for superannuation industry

The Government's Stronger Super regime remains the greatest challenge confronting the superannuation industry in 2012 – and a roundtable conducted during CMSF reveals the devil is in the detail.

Mike Taylor, managing editor, Super Review: Okay, welcome everyone to the Super Review/CMSF roundtable.

I don’t know how many people here were at the sessions yesterday with the regulators, but Ross Jones, the deputy chair of Australian Prudential Regulation Authority, was essentially saying that the implementation timeframe for Stronger Super was very tight but immensely doable, or words to that effect – I might be misquoting him a little.

On that basis I thought I’d put that as the first question:  that is, whether in fact the timeframes of Stronger Super are doable. I thought I’d throw to Peter Beck, who has probably got more skin in the game than most as an administrator, so Peter?

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Related: Governance within superannuation funds

Peter Beck, CEO, Pillar Administration: Thanks Mike. I guess we as administrators, whatever the rules are, we have got to get them perfectly right and we have got to build them into computer systems, and everyone always underestimates how long that takes.

So we always ask to be given enough time between when the rules are actually finalised and when we have to implement them.

A lot of people think if they tell you it’s coming, that you can get yourself ready to implement, but in fact you can’t really do anything until you actually know what the rules are.

So there generally needs to be more time between when the rules are completed and when we have to implement.

I agree totally it’s very tight, whether it’s doable or not depends on whether APRA, and ASIC to a lesser extent, but mainly APRA, actually finalises the guidelines and the rules in sufficient time to give us a gap to be able to implement it.

David Haynes, consultant, Australian Institute of Superannuation Trustees: All of what you say is correct Peter, but it’s also in the nature of the superannuation industry to be preparing for superannuation change where we don’t know all of the information until the change is about to happen.

I recall with the implementation of tax file numbers in 1996, the requirement to notify members about the change actually came either at or before the time of the regulations about how you could contact members was advised, and there were a whole range of system changes that had to be made without knowledge of the regulations.

It’s a very unsatisfactory arrangement, it’s certainly not something we’d want.

The position Peter puts is entirely accurate, but the superannuation industry has a tradition of actually stepping up and getting things done on time and in a way that is compliant, albeit it is with a run to the winning post.

Fiona Reynolds, CEO, AIST: I think there’s no doubt that the timetables are very tight, and it’s a shame that so many things have been held up, but I don’t think we want to delay the reforms.

I think they’ve been going on long enough, but that’s not to say that there might not be elements in the overall packages of the reforms that, if things don’t happen in the right timeframe, that wouldn’t need to be pushed out.

But I don’t think we want to just say ‘let’s delay everything by 12 months’ or something like that. Just let’s get moving and if there are different parts that we need to have pushed back, let’s just push those parts back.

Frank Crapis, head of industry funds, wholesale life, CommInsure: The key message that I got was that really it was about the planning and getting ready and getting the resources ready before the key dates come into place.

I understand your point Peter, when the regs come out and the legislation comes out, it’s not really going to go into the detail that we expect it to go into to be able to help us run our business.

So we, as an industry, need to get together and really refine and understand the key risks that will come out of the legislation so that we are prepared, so that we can plan and have the resources available.

Russell Mason, partner, Deloitte: And yet it will be the administrator that gets the blame if things don’t go right. It’s really easy, it’s easy for trustees to make a decision in a simple meeting about what MySuper is like.

It’s relatively easy to change the insurances, but I have sympathy for Peter’s position because the administrator has a huge amount of back office work to do, and they will be the ones that get pinged if there’s some element that doesn’t comply.

So I think there’s two very distinct groups upfront for the trustees, for the executives.

I think MySuper for many funds, especially DC industry funds, will be reasonably straightforward, but I can certainly sympathise with Peter’s point of view as far as the back office compliance, which has the potential to be significant.

Peter Beck, Pillar Administration: I agree with you that we always step up to the plate and deliver, but sometimes it’s a very inefficient delivery. If we do it once and then we find it wasn’t quite right, we have to then refine, and it’s not exactly like the administrator has got big margins to actually be inefficient.

So the more time we get to prepare, the better, and we are at end of the chain, so whatever regs come up, the trustee office still has to decide how they are going to implement them.

Then, when they have made their decision and they tell us, then we’ve got to implement it.

So you know, the bigger the gap the better, the faster we can move, the faster we can at least nail the basics, and at least we can get on with the planning.

David Haynes, AIST: And I guess in this case Peter it’s also overlaid with some lack of certainty about what’s going to happen in relation to account consolidation, and what impact that is going to have on administrator revenues.

So you are planning for major changes in an environment where the number of total superannuation accounts might significantly decrease, perhaps by a factor of 10 million accounts.

John Quessy, trustee, NGS Super: I find myself in the rather, almost unique position, Mike, of agreeing with people.

I certainly agree with the position that Fiona put, and I have great sympathy for Peter’s concerns from the administrator’s point of view – being a trustee, what you want is your administrator to get it right.

We become very impatient when they don’t, and when there’s a need for tinkering after the event, and there will be because it’s going to add costs, there’s going to be mistakes, it’s going to be frustrating.

We just know all of those things and it’s doubly frustrating to be sitting here at this stage knowing that there is a huge likelihood that there’s going to be a bit of a mess.

It will be delivered, it will work, but it won’t be perfect first time.

Well, it would be great if it is, but I don’t have that sort of faith, and people will start getting very cross with each other because things are not quite the way they should be.

Then I think there’s another dimension from the administrator’s point of view.

The administrator is going to be dealing with X number of funds, all of whom want something slightly different, and they’ve got to get that into their platform. I don’t want to be an administrator.

Fiona Reynolds, AIST: And it may be the things around administration that need to be pushed out.

John Quessy, NGS Super: But I certainly agree, I think we’ve all had enough now, it’s pick a date and let’s just go.

David Haynes, AIST: But there is a third element to all of this, and that also adds to both the benefits and the challenges for administrators, and that’s the implementation of SuperStream, which will also be rolling out through 2013, 2014, 2015, and that will also involve major administration changes.

So just in the few minutes that we’ve been talking about it, we’ve been talking about three very significant, but very different changes, each of which is going to put significant pressure on administrators.

Peter Beck, Pillar Administration: I agree.

David Haynes, AIST: However, if we zoom out it’s not just a matter of the difficulties of change, it’s also a question of putting this in the context of the Government legislating to increase the amount of mandated contributions that come into the system, the government putting superannuation at the same level of prudential regulation as banking and insurance, and helping the industry to actually have administration platforms that will be world-class and will lead to savings of billions of dollars a year.

So it’s not all doom and gloom, in fact it’s the opposite, it’s an enormous opportunity for the superannuation industry as it matures.

Auto-consolidation – how hard will it be?

Mike Taylor, Super Review: Well, one for the insurers and I guess and the administrators again, is the question of auto-consolidation: and I say for the insurers on the basis that at a previous roundtable, I think last year, where we had the argument that said a lot of people had multiple accounts simply because they wanted to maintain some very seriously good insurance benefits.

So I just ask, have they got the framework right for auto-consolidation?  Or do you think there still needs to be some tinkering at the margin?

Frank Crapis, CommInsure: Right, I think going back to the point I raised earlier, there isn’t anything in the legislation that’s going to outline exactly how the auto-consolidation will occur from the insurance point of view. 

The two or three key risks in there are, once it moves to 1,000 [dollars] it’s generally fine, because I think that with the auto-consolidation of accounts less than 1,000 there won’t be too many accounts there anecdotally which will have the insurance impacts.

It’s once it moves to 10,000 that I can see that it will have a major impact on those accounts where members have multiple accounts.

The question really is around, ‘so what will be the process?’ What will be the process that will be followed when those auto-consolidations of those accounts occur from an insurance point of view?

If you look at the process today, you’ve got eight or nine insurers out there and they all offer this choice of where members can consolidate their insurance balances; but if you look at all the process it’s eight different processes and there’s no one uniform way of actually consolidating insurances today.

Behind those eight insurers there are about six or seven different reinsurers who have different practices again, and will influence the way auto-consolidation occurs today.

So for me, the first point is about the process. The processes aren’t uniform and that’s going to be one of the major hurdles that we will need to overcome as an industry in terms of getting all together and ensuring that we’ve got a uniform individual transfer process.

The second would be, yes, obviously through the administration, Peter. I mean the pressure will then come back through to yourselves as administrators in terms of what will happen when consolidation occurs, but the third biggest point would be more around [the question], “so when does insurer A go off risk when that member decides to make that choice and move to fund B under insurer B?”

So in terms of the benefits provided, if they can transfer the insurance across, when does it go off risk from insurer A to insurer B? 

That’s quite easy when we are just talking about death cover, but when we are talking about terminal illness and TPD and IP, that’s where the devil in the detail starts coming through.

It’s going to be a major challenge for the industry to outline when risk moves from insurer A in fund A, to insurer B in fund B.  So…

Peter Beck, Pillar Administration: Yes, so I will agree with Frank, auto-consolidation is probably going to start quite easily.

I’ve got to say I don’t like the word auto-consolidation because it leaves out the fact that the member, the client, has the option to opt out, so maybe it should be called “opt-out consolidation” or something to convey that it’s not just automatic, that the members do have a choice to opt out of consolidation.

I think that the first round will be reasonably easy because the insurance will just be cancelled as far as I can see. It’s when it starts getting to significant amounts that it becomes a member issue in terms of what we do.

I think perhaps the insurance industry has got to do some work to figure out how it can be transferred between insurers, you know?

David Haynes, AIST: I don’t think it’s too late for those discussions to take place. The mechanics of consolidation and auto-consolidation are not strongly developed beyond the framework of the different elements that are involved in it.

As you say, the consolidation of less-than-$1,000 accounts will be relatively straightforward, although I think they account for something like 16 or 17 per cent of all of the accounts in the industry, so again it will have a significant impact on administrators, but not so much on insurers.

One of the purposes of the first round is in fact to see what impact it has on a number of accounts, and for the Government and the industry to be able to review what the outcome of that exercise was.

Associated with that of course is the whole question of the treatment of insurance. I’m a member of the SuperStream working group and that was one of the most vexed discussions within that group.

Insurers weren’t represented significantly on that group, and I think there is a pressing need for the government to get together with the insurers to actually work out what the most appropriate way of consolidating larger accounts is in a way that doesn’t lead to distortion or misuse.

For example, one of the options with auto-consolidation of larger accounts is to flag accounts.

It sounds like a terrific idea, but if you have flagging operate at the time when a person joins the fund, people will have low balances and that account will be stuck there, so you will have the same situation.

Whereas if you have flagging which is introduced a few years down the track, well then don’t you have an additional administrative issue?

So there are very significant issues, but if anyone says, “this is what’s going to happen”, or “that’s going to happen in relation to insurance”, when you are talking about larger account balances, they are talking from a position of certainty or correctness, that will become clear.

Finally, the $10,000 limit that people are talking about, that too is not a fixed amount. 

The position of AIST in fact is that the final position with auto-consolidation of those accounts should be uncapped, because the aim of this exercise should be actually to facilitate the consolidation of all accounts, not just the minority of smaller accounts.

That is also consistent with the Government position, which says that the subsequent exercise will be the auto-consolidation of accounts with balances of at least $10,000.

Fiona Reynolds, AIST: And funds should be doing a lot of work on using the TFNs now, already. 

They should be doing a lot of work on matching up members within the fund. They should be trying to find tax file numbers for members that they don’t have tax file numbers for.

They should be doing a whole lot of pre-work now, because they actually want to keep those people in their fund, and we think at AIST that the funds aren’t doing enough pre-work on things like this and are underestimating what the potential downside can be from some of these reforms, and from losing so many members.

So when we talk to funds we are encouraging them to ‘don’t wait for later, be doing now. Get in ahead of the game’.

Peter Beck, Pillar Administration: This is a good example of administrators having to be the end of the line, because with auto-consolidation, we’ve been talking about it for two years and in principle no one can disagree with it.

But the devil is in the detail, we’ve actually got to figure out now how we are actually going to do it.

Consolidation within the funds is relatively easy.

I don’t have much concern about that, but the rule, and the simple rule, is that at less than 10,000 [dollars] the insurance is going to be cancelled, because I don’t think we’ve got any other choice. Again, we can deal with that so we sort of know where we are going.

But as soon as you get to more than that, we start running into this issue about insurance, and it’s going to be quite a lot of work for the insurers to come up with transfer terms, right?

And until we’ve got transfer terms we don’t know how that’s going to work, so we can’t actually build that transaction to do transfer terms until we know what the rules are going to be.

Fiona Reynolds, AIST: Well, I would suggest to the insurers that they should very quickly get together, because if they don’t the Government will come along, and having worked with the Government through MySuper, Stronger Super and SuperStream, you don’t want the Government coming anywhere near it, or three years later you will be sitting here having this conversation about this very complicated process that’s been designed for you.

Peter Beck, Pillar Administration: Let me make a final point there, which is the rub: there’s an assumption that if we auto-consolidate a million accounts, we are going to save a million times $50 in administration.

Well, that’s just not so. A lot of these are just passive accounts and no work, or hardly any work, is done on them, so the saving is not going to be anywhere near the amount.

John Quessy, NGS Super: The potential for complaints will just go through the roof.

Russell Mason, Deloitte: Yes and ...

John Quessy, NGS Super: I’m a huge sceptic.

Peter Beck, Pillar Administration: And complaints and more work for less money, that’s the bottom line. So the savings: there are going to be some savings, let’s not get too carried away, but the savings aren’t going to be anywhere near the size that’s been put out there.

David Haynes, AIST: Well, I would take issue with that in relation to the first round. I would suggest that accounts worth less than $1,000 generally derive fees for all concerned at a level that is significantly greater than the cost of maintaining those accounts.

Frank Crapis, CommInsure: I agree with that.

David Haynes, AIST: Because the level of transactions and activity that’s involved with holding an inactive account for which you don’t hold an address is actually very low.

The issue which you raise becomes relevant when you talk about accounts which actually involve the production of member statements, the posting of those member statements, talking to someone on the phone about those accounts.

Peter Beck, Pillar Administration: No, actually I’m saying the opposite. We are collecting $50 for all of these accounts, but we are not actually doing any work.

So the work is not going to change, but we still have to get the $50 from somebody, and so the $50 is going to be spread across the rest of the client base, that’s what I’m saying.

Frank Crapis, CommInsure: The other point on the costs as well, Peter, is that from an insurance point of view we talked about individual transfers at the individual level, and at the aggregate, at the fund level.

Once the membership profile changes for a particular fund, whether it’s down or up, or even if it stays neutral but the actual membership profile changes, that’s going to have an impact on the insurance risk.

Then from that comes: what will be the insurance premiums charged going forward?

A lot of that information again will require assistance from administrators to provide us with the data, and then the insurers to do the analysis going back to yourselves, to actually implement the new change.

With the auto-consolidation will come a change in product design, so it’s not just the premium that will be impacted, but a change in product design and a change in processes will also come forward as well.

Peter Beck, Pillar Administration: That’s true. I think we are definitely going to see a move to more asset-based fees because of this, the fixed dollar fee, and we are sort of going around in circles on this thing.

As administrators we are quite happy with the activity-based fees, we think that’s the right way to go and it’s the fairest way, but we can’t just absorb additional costs without actually getting additional revenue.

So I would suggest that a lot of funds will move more to asset-based fees, which to pick up Frank’s point is another product change that’s going to come.

Mike Taylor, Super Review: John, Russell?  You are very quiet there.

John Quessy, NGS Super: Well I’m on record, I’m a huge sceptic. I’ll just wait and see what happens, but I don’t think people are going to take very kindly to being forced all over the place, being pushed around in this way.

Russell Mason, Deloitte: We’ve got to get back to basics.

Why was auto-consolidation brought in?

Auto-consolidation is great for the 23-year-old who has worked at half a dozen different jobs, and has had a couple of thousand dollars here, there and everywhere.

He’s got different funds and forgotten or lost that money, that’s what it was all about – not for people with $100,000 in active balance to have that money moved or their insurance threatened. 

I think whatever regulations the Government brings in they’ve got to get back to the first principles, to why we all thought auto-consolidation was good in the first place.

And what I hear from Frank and Peter, we don’t want the complexities to overtake the practicalities of getting small account balances consolidated with the member’s current fund.

I think that’s what we should be focusing in on, and if someone’s got a $20,000 balance sitting there, we’ve got a valid address for them, they get a statement twice a year from Peter saying that this is the balance, these are the fees coming out, and if they are happy with that they should be left alone.

Fiona Reynolds, AIST: Well, a lot of it is about what is the definition of the person who is not active. So it’s going to be a key in identifying people.

But I’ve seen people with very high balances being in AusFund, from being on the Board, and it’s lost, you know? So it does happen, and I think in some ways the industry has a little bit brought this on itself.

There could have been a lot more done about people who were hanging on to balances that they shouldn’t have been hanging on to, about taking fees from [them].

I think there’s an expectation in the community that this is a compulsory system and it should be much easier for their money to move around: ‘The government is forcing me to put this money into a super account, my boss does it for me’ – that is about the level of interest until the account balance has built up considerably.

So all these things should just happen.

David Haynes, AIST: Well, let me just throw a few figures your way, Russell, to support what Fiona is saying. There are five million lost accounts, five million. There is $20 billion worth of lost superannuation money, $20 billion. I don’t know where you guys come from, but $20 billion is a lot of money for me.

There are 28 million superannuation accounts for a working population of 11 million, but probably the killer stat is that each year there are 1.3 million new superannuation accounts created for a net workforce increase of 200,000, what does that mean?

It means there’s probably something like a million unnecessary superannuation accounts, all of which have fees associated with them being created every year.

That situation cannot go on. There needs to be a mechanism to actually align the number of accounts that exist with the number of accounts that are needed, and in doing so we need to be cognisant of the financial and operational position of administrators.

We need to get the insurance arrangements correct, but fundamentally we need to get the operational and policy settings right, so that insurance maintains credibility with the people who say, ‘Oh Jeez, I’ve got seven or eight accounts out there and I’m paying $150 on each of them.’ 

That doesn’t help the credibility of…

John Quessy, NGS Super: Can I ask you then what you think is the number of accounts that is needed?

David Haynes, AIST: Well…

John Quessy, NGS Super: Is it one per person?  Two?

David Haynes, AIST: A number of people have done studies on the number of necessary accounts [Australia-wide], and they’ve come up with various conclusions of between 14 million and 18 million.

I thought the 18 million estimate was the most generous and overstated because there was quite a lot of double counting within it.

John Quessy, NGS Super: So that’s about 1.5 per person?

David Haynes, AIST: However, that’s still 18 million accounts and there are 28 million in existence, so even on that very generous assessment, there are probably 10 million accounts more than are necessary in the system.

Peter Beck, Pillar Administration: Can I just make a point that the solution for additional accounts is not just all about consolidations. It’s when people take up new employment, about what they should actually do, and at the risk of offending Fiona I think there was some ASFA research which actually says more and more people are actually keeping their existing account.

 I was quite astounded by that statement, but I think it was about 70 per cent. I don’t carry numbers in my head, but I think it was about 70 per cent of people are now actually keeping their existing account.

Fiona Reynolds, AIST: I just find as an employer myself – and yes, I employ people who work in super, but a lot of people I’ve employed have never worked in super before – I find that more and more, nearly everyone now brings their account with them, ‘this is my account’.

Peter Beck, Pillar Administration: I can look that up for you, but I’m pretty sure the latest ASFA research said something like 70 per cent of people actually are keeping their existing account, which actually astounded me. I thought it was much more heavily the other way.

John Quessy, NGS Super: I was always interested to watch, but I was never able to get any reliable figures when choice in super was first introduced, whether people would in fact choose, in terms of which fund – they have multiple funds – which one would they elect to make their principal fund?

Would it be the one that was just associated with their current industry, or was it the one that had the biggest balance?

And no one was ever able to tell me the answer to that. But I think that would have been particularly instructive to know, because what Fiona is saying I think is that, most likely, people are now bringing their favourite fund with the biggest balance and making that mobile.

Fiona Reynolds, AIST: Well I think a lot more people are, yes.

Peter Beck, Pillar Administration: I think the research says 70 per cent of people who change jobs are electing not the new super for that employer, but the one they’ve got.

David Haynes, AIST: Coming back to your point about addressing the situation at the point when people change jobs: that in fact is part of the consolidation package. At the point of enrolment, it is anticipated that there will be a process to facilitate consolidation, and it is quite likely that that process will be a combined TFN declaration form, choice-of-fund form and consolidation form.

So people at that time will not be forced, but will be encouraged, they will be given the opportunity to tick a box to commence a process, of consolidation of their existing accounts either into the employer-nominated fund, or their existing fund.

Fiona Reynolds, AIST: And that would have some sort of declaration about insurance too, that ‘you have acknowledged that there may be some changes in your benefits’, blah, blah and legal…

Peter Beck, Pillar Administration: The critical issue is, what’s the default for that? Because if the default is going to be the one that most people want when they don’t fill the form in, [the form] comes to us as administrators and we’ve actually got to have a default for that.

My understanding is that the default is actually going to be the new fund, new employer.

Frank Crapis, CommInsure: New employees fund.

David Haynes, AIST: Yes, it’s proposed to be. And in relation to your question John: sorry, I used to be chief executive of AusFund, which specialised in looking after small, mostly, and inactive accounts and so it’s my favourite subject…

Fiona Reynolds, AIST: And he can talk about it for hours and hours…

David Haynes, AIST: The answer – and when we did consolidation exercises, the rule of thumb that we used – was that the most recently active account was the one that was the default for consolidation.

After consolidating hundreds of thousands of accounts, we received basically I think no complaints about that from members.

Frank Crapis, CommInsure: John raised a good point earlier when he asked what is the ultimate number of superannuation accounts that we should have. I mean if you look at other financial services products, what’s the average number of mortgages someone has, or the average number of savings accounts someone has?  Is there..?

John Quessy, NGS Super: It seems there’s almost an ulterior motive, because we have – this is me taking off the trustee hat and putting the trade union hat on – we have a mechanism by which we can deny people a choice of fund, because you can do that through registering industrial instruments, by naming two funds and saying ‘and any other fund, any other complying fund that the employer offers’, and the employer doesn’t offer any other complying fund.

So people can have an argument with their employer, but there’s two funds here that are mentioned in the enterprise agreement and you get a choice of those two.

The employer just says “no” if you want to bring your fund in, “no, these two, you pick.” And it’s quite legal.

So this is a potential problem because you’ve got somebody who has already got perhaps two funds, one of which is their favourite fund, and they have come into an industry where they potentially are going to have to have a third one.

Now they might just let the balance rise for a year or two and then transfer the bulk of it, but most won’t, they’ll probably just end up with three funds, or four, depends on the nature of the industry.

Where there are several industries doing a similar thing, and people drift between them, auto-consolidation is never going to work for them.

Peter Beck, Pillar Administration: We definitely need, we’ve got to have clarity of rules, because otherwise if members die their spouses will be saying ‘where’s my money?’. If they survive they will say ‘why are you taking insurance from me?’. 

So we’ve got to have clear rules about this, that’s the most important thing, and we need legal protection for what default rules we implement.

John Quessy, NGS Super: Let’s not just have clear rules, let’s have a simple language where everybody calls the same thing by the same name and gets rid of some of the confusion.

I mean, I’ve harped on about this, but why can you call any particular investment option whatever you want to do? 

Now there’s rules, and you can’t use words like conservative unless it’s whatever, but you can still have, well, a diversified account and exactly the same accounting in a competing fund and it’s called a balanced account. It’s just there to confuse people.

Income protection insurance or salary continuance?

It’s the same thing, but people think they’ve got two different things because the industry does nothing to help, nothing. In fact it works almost as though it doesn’t want people to understand, let’s make it very, very complex.

So bite the bullet on all of this at once, and when you get all the insurers together to talk about auto-consolidation, talk about using the same names.

David Haynes, AIST: I reluctantly rise in defence of APRA here, in that I do recall that Ross Jones talked yesterday about a parallel process that is underway about labelling and statistical collection, which AIST is involved in with APRA, about addressing exactly that problem John, but as you say, it’s probably about 10 years too late.

John Quessy, NGS Super: Yes, very much.

Mike Taylor, Super Review: On that note, thank you ladies and gentlemen for participation in the roundtable – and we always end in furious agreement about something. So thank you very much.