Superannuation administrators take on the Stronger Super puzzle

The Government’s Stronger Super changes have significantly increased the workload of Australia’s superannuation administrators and, as Damon Taylor reports, the challenge has proved to be linking the multiple interdependencies.

Of the numerous legislative changes set to take place within Australia’s superannuation industry, SuperStream's focus on efficiency seems the obvious focus for administrators.

From data standards to account consolidation to the use of tax file numbers as a unique identifier, these are measures that play to administrators’ strengths, and yet for Peter Beck, chief executive officer of Pillar Administration, a focus on MySuper, the Future of Financial Advice (FOFA) reforms and Stronger Super as a whole is just as vital.

From our clients’ perspective, in this environment their focus is survival and growth.
 

“SuperStream is one of the components but there is Stronger Super, which covers MySuper, SuperStream, FOFA and the regulatory changes as a whole; we have to be focused on all of those,” he said.

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“We’ve come to realise that there’s a number of interdependencies between these things and so a lot of our focus has really been trying to join the dots between them.

“For example, the MySuper initiative means that we’re going to have to unbundle product and advice,” Beck continued. “And that then leads to the question of where intra-fund advice fits and where single issue advice sits.”

For Beck, the link between MySuper and FOFA is plain but it also meant that he, as an administrator, had to give ample consideration to both pieces of legislation.

“Those are the sorts of linkages that we’re identifying, but the point here is that if you look at everything in isolation you might miss things,” he said.

“So the project we’ve been putting together is looking at Stronger Super in its entirety from an administration point of view.

“We’re trying to cover off all the requirements under MySuper, SuperStream and FOFA within that administration context.”

Espousing a similar view, John McMurtrie, chief executive officer of AAS, said that MySuper and SuperStream had to be examined in parallel.

“Both MySuper and SuperStream are putting quite substantial pressure on administration, whether that administration is done internally or outsourced to people like us,” he said.

“However, the challenge is the fact that the legislation that will actually underpin MySuper hasn’t yet fully passed through Parliament.

“SuperStream and Stronger Super are in the same boat and you will remember that the FOFA reforms, which were due to come in this July, have now been pushed back by one year,” McMurtrie added.

“And if that legislation isn’t fully passed or there isn’t sufficient clarity around what is required in the next few months, then I think there is a very real prospect of a similar delay.

“There will have to be a whole rethink of the timetable.”

The bottom line, according to Beck, is that the Government has provided very little in the way of specific legislative detail.

“There are things that we know reasonably well and then there are some things that are still very much unknown,” he said. “So for account consolidation, for example, we haven’t got clarity as to how exactly that is going to play out.

“We can, of course, do a certain amount of planning, but our ‘beef’ has always been that regulators and the Government and all the people involved in these changes always say ‘well, you’ve known about this for years, why is it going to take you so long to implement?’

“But the reality is that we can only start implementing once the rules are clear.”

In such circumstances, Siva Sivakumaran, director of administration and consulting services at Russell Investments, said that the best administrators could hope for was preparation that could be refined once the final legislation was in place.

“So rather than just wait for the final legislative piece to come out, we’ve been getting together with our clients and their service providers – payroll and clearinghouses – and our own service providers, like Bravura and Flick, as well,” he said.

“We’ve been trying to get some sort of common understanding in terms of what the requirements are likely to be.

“And if we can do that with some degree of accuracy, then we can start preparing based on that common understanding,” Sivakumaran added.

“So once the requirements come through and that finalisation happens, we can refine what we’re doing going forward.”

Yet while administrators may be lacking detail when it comes to the Government’s proposed legislative change, there are, of course, aspects of that change already in place.

As of January, funds and administrators have been able to make use of tax file numbers (TFNs) to search the Australian Taxation Office's (ATO’s) database for lost superannuation accounts. Requiring member consent, it is an ability that will extend further to funds’ responsibility to consolidate duplicate accounts come July and this, for Beck, is the cornerstone of the SuperStream reform.

“Tax file numbers and their use as a unique identifier is key in the SuperStream reforms,” he said.

“Sometimes members may actually have the same name within the same fund, but we’ll find that they’re different people, so this is vitally important simply from an identification standpoint.

“And from an administration point of view, the two big issues are identifying contributions so that they can be allocated to the right members, and account consolidation.”

For his part, Hans van Daatselaar, head of policy for Superpartners, said that while tax file numbers may well be the “silver bullet” solution that the super industry has been waiting for, there is still some distance to cover before that solution reaches maturity.

“This is the silver bullet solution, but what we don’t yet have are those enabling services that will be provided by the ATO to achieve the Government’s stated policy objectives,” he said.

“And by that, I obviously mean reducing the number of superannuation accounts in the system.

“So it really is too early to say how effective the use of tax file numbers for member identification will be,” van Daatselaar continued.

“And that’s simply because some of those services, like SuperSeeker and SuperMatch, are still in the process of being enhanced. Still others are yet even to be built by the ATO.”

Illustrating van Daatselaar’s point, McMurtrie predicted that the ability of funds to remove duplicate accounts within their own membership would have a limited impact.

“The impact will be negligible because our clients already get us to scroll through their databases using name, address, date of birth and so on,” he said.

“So this first step was designed to remove duplicate members within funds, but I would say that most funds have already done that whenever and wherever possible.

“So if you took CareSuper as an example, we can run a scroll through their membership and if we find duplicate TFNs, then the assumption would be that those people are the same,” McMurtrie continued.

“We could then write to them and say we’ve got four accounts under your name and TFN, do you want to roll them into one?

“That’s Phase 1, which is intra-fund consolidation.”

Yet van Daatselaar said that it was also important to note that such searches, using the ATO’s SuperMatch service, required members’ express consent.

“And for us, this seems strange,” he said.

“After all, these are often disengaged members from whom it is very difficult to get that consent either in writing or over the phone.”

Indeed the bigger challenge, according to McMurtrie, will come out of what is intended to take place from January 2014. That is, consolidation of duplicate superannuation accounts between funds.

“That’s the tricky bit here; inter-fund consolidation,” he said.

“Now, our understanding from dialogue with the ATO is that based on member information on 30 June 2013, all funds, through their administrators, will provide the ATO with a comprehensive list of members by TFN.

“The ATO will then take six months to come up with matching of the TFNs,” McMurtrie continued.

“So let’s say your TFN comes up four times. The information provided would have to include account balance, the time of the last contribution into that account, the ATO would then run their magic, which would take six months, and then go back on a fund-by-fund basis pointing out the most active, recent account.

“That particular person might have three other accounts, so that fund would then have the ATO’s authority to write to those people, as members of other funds, telling them that if they don’t object, they’re going to take the money and roll it up into that primary account.”

But for McMurtrie, the danger lies in what may come next.

“I can see great potential for a paper war from this, because funds aren’t going to like losing members, and some of them are going to start campaigns to try and nip this in bud,” he said.

“They’ll get in touch with members, asking them to make a contribution and become active again.

“There is the potential here for total confusion,” McMurtrie added. “And remember, these small balance members aren’t engaged anyway.

“If they get a whole lot of correspondence, it will get tossed into the waste paper basket like the rest of the mail-outs they receive.”

Not surprisingly, van Daatselaar said that it was these sorts of unintended consequences that made careful implementation of any and all legislative reforms so important.

“As a whole, I think the industry realises that when all of the pieces come together, not withstanding the fact that there is still a way to go, this reform will be to the benefit of efficiency and to the benefit of members,” he said.

“But we need to make sure that it works end-to-end and according to policy intent.”

Clearly, the consolidation of member accounts, whether automatic or on the back of a specific member request, is a key concern for administrators. There seems little argument that it is theoretically desirable, but according to McMurtrie, much depends on how far auto-consolidation efforts extend.

“As far as auto-consolidation is concerned, whilst in theory it seems to make sense, I find it interesting that Treasury has had various estimates of the number of accounts they think they want to take out of the system,” he said.

“For instance, we think the lion’s share of the accounts that will go out of the system currently sit in these eligible rollover funds or ERFs.

“So according to APRA [the Australian Prudential Regulation Authority], there are 4.7 million accounts in ERFs, but remember that these funds were established as halfway-type hospices, with low balances and where people have lost contact,” McMurtrie continued.

“That’s 4.7 million accounts in ERFs representing about $5 billion, and I would think that under the auto-consolidation outlined within SuperStream, those ERFs will be no more within two years.”

Yet while that much may be clear, McMurtrie’s point for reflection was: what would happen in a post-consolidation world?

“The good, honest citizen who has only one account, guess what? They’ll all of a sudden discover that their fees are going to go up,” he said.

“If you take away 4.7 million ERFs and let’s say a further 5 million accounts as part of that next step, that’s 10 million accounts on which there’s no administration fee.

“So the revenue falls,” McMurtrie continued. “And yet the only thing you ever save by not having a member is just the printout of the Annual Report.

“That’s all you save because the disengaged, low-balance members are not the people who call me, they’re not the ones imposing any cost burden.”

Offering a slightly different perspective, Beck said that if people were engaged with their super, if they wanted to consolidate their accounts, then they would be doing it themselves.

“So the whole purpose of this legislation is really for people who aren’t engaged,” he said.

“Now when you have a default system where you have compulsory super, where people are forced to put their money in, you will inevitably end up with disengaged people.

“Now, a lot of the hype on this has been that it’s to save money,” Beck continued.

“But what you’ve got to remember is that a lot of these inactive accounts are very inactive, and that means that we hardly ever hear from these people and there’s very little cost associated with looking after them.

“So the issue with auto-consolidation is more an equity issue, the fact that we’re charging everyone a certain membership fee where some people are making use of it and others aren’t.”

The reality, according to Beck, is that the total administration costs incurred by a fund won’t come down all that much where that fund’s membership may reduce a great deal.

“There will then have to be a re-spreading of those costs,” he said. “And the impact really depends on the level of consolidation that takes place; how many active members you have, how many inactive members you have and what sort of proportion that comes out as.”

And for McMurtrie, this is the great irony of consolidation.

“We estimate that funds will probably have to increase their fees by 20 per cent or more,” he said.

“So all of those honest, toiling people with one superannuation account are left saying ‘hang on, wasn’t this all being done in the interests of efficiency? And yet my fees are going up?’

“What then?”

So in the midst of legislative reform and the inevitable impacts thereof, the reality is that administrators must prepare as best they are able, and for Sivakumaran that comes down to having a solid foundation.

“The foundation for these reforms, for all administration, is having the technology, the processes, the risk management framework and so on to support it,” he said.

"It’s a case of dealing with the SuperStream requirements, the day-to-day requirements, the receipting of data, the receipting of rollovers, making sure we have the systems in place to underpin what changes these reforms may bring.

“From our clients’ perspective, in this environment their focus is survival and growth,” Sivakumaran continued. “And as an administrator, we need to constantly think about how we can assist them in doing exactly that.”

Similarly, van Daatselaar said that Superpartners was focused on ensuring that it had its SuperStream and MySuper solutions ready to go as and when required.

“But I think it’s important to realise that with all of these reforms, compliance isn’t the issue,” he said. “Compliance is a given.

“These reforms are about a new way of doing business within the super industry, and when you have these sorts of wholesale changes taking place, that’s where your focus needs to be,” van Daatselaar continued.

“These are goals that we’ve all been working towards for quite some time and they continue to be challenging, particularly given the regulatory and political environment the industry is operating in.

“But at the end of the day, we want to achieve them efficiently and we have to ensure that what we’re delivering is the best possible experience for both members and employers.”