Superannuation funds look to technology for back-office efficiencies

As superannuation funds have sought to cope with the global financial crisis they have looked to their technology and their administrators to deliver the efficiencies necessary to keep members from panicking, reports Damon Taylor.

For months now Australia’s super industry has faced an environment that has affected much more than investment returns. The stakes have been high for fund trustees and they have been faced with some tricky decisions.

But in difficult circumstances the hope is that they have been well supported.

The hope is that trustees have had the administration and technology behind them to make the tricky decisions easier and enable them to better navigate this financial crisis.

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Reflecting on the last 12 months, Phillip Campbell, group general manager of administration and technology provider Financial Synergy, said his business’ focus had been firmly fixed on efficiency, cost savings and best practice.

“In relation to our clients, it has been about helping them become more efficient, lower costs and adopt best-practice procedures,” he said.

“Savings in administration costs can be gained by improving how transactions run — less errors, less risk and greater member satisfaction leading to lower churn and so on.”

Yet Campbell said reduced revenues had also been a reality.

“We’ve had slightly reduced revenues from our administration business due to reductions in asset values,” he said.

“But software revenues have continued to grow in line with our business plans. Maintaining profitability has been about vigilance with respect to costs, as it has for everybody in this business.

“Certainly trustees have been more cautious about seeking proposals for new software, but we have had record numbers of enquiries for administration services — many from non-traditional sources.”

Finding focus

From a technology standpoint, Ian Mathieson, chief executive of the newly renamed DST Global Solutions for Australia and New Zealand, said the super industry now had a particular focus on the role technology could play within its day-to-day operations.

“And that has been particularly true in the last 12 months,” he said. “When things are going well, people tend to forget about those aspects of their business that would be termed housekeeping.

“But when the going gets a bit tougher and things aren’t going so well, they’ll look at where they should be spending money when they come out of this,” Mathieson continued.

“And if we’re talking about efficiency and cost reduction, technology is where that spend will go.”

Mathieson flagged that the super industry was entering a time of change and said he saw a large number of technology systems struggling to keep up.

“Most aren’t capable of straight-through-processing and a lot of them are past their use by dates,” he continued. “They don’t embrace web access, workflow and the list goes on.

“But people within this industry are coming to that realisation quickly, so I’m expecting significant positive change in the next few years.”

Commenting on whether the circumstances of an unsettled environment had forced a change in focus, Peter Beck, chief executive officer of large administration provider Pillar, said the priority continued to be driving efficiencies into superannuation administration.

“The global financial crisis has highlighted the need to drive efficiency,” he said.

“As an administrator, we’re on a journey towards improving the efficiency of what we do, and the circumstances of this crisis have restated the importance of that fact.”

Echoing Beck’s view, Iain Dunstan, chief executive officer of technology provider Bravura, said the financial crisis had done little to change his business’ priorities.

“At Bravura, we work to a three to five-year plan in what we do and how we service the market,” he said. “And we certainly haven’t seen a need to change that.”

“In fact, we’ve spent more on research and development this year than we did last year,” continued Dunstan. “And we’ve done that when a lot of our competitors have pulled back.

“Put simply, we have a much longer-term view than 12 months.”

Yet despite Dunstan’s indication that some of the technology players within the super industry had pulled back their spending on research and development, the indications are that business and operation enhancement are top of mind and, according to Mathieson, it means busy times ahead.

“DST Global Solutions acquired Bluedoor last November at the height of the financial crisis,” he said. “And since then we’ve grown the business from 35 people to 55 people based solely on industry demand.

“Clients like LUCRF Super have come on board and turned this into a busy time for us,” Mathieson continued.

“The major thing holding people back now is the cost of ongoing ownership and the need to contemplate the conversion costs of an upgrade.

“But it’s a marketplace that’s been neglected for a long time, so interest in those upgrades is set to continue.”

Administration

Within administration, Campbell said Financial Synergy had recently taken on two new clients and that he expected at least another two by the end of December.

“The focus within administration has been on automating transactions and quality of outcome for the end user,” he said.

“But we’ve also taken the last 12 months to craft a long-range view of the software business in partnership with our key clients and drafted a 10-year vision for where we want to be.

“The priority for our client’s customers is quality of outcome, and delivery of that will rely on virtual administration. That means it’s there but you don’t notice it’s there,” Campbell continued.

“It’s not about the technology — that will change over time — it’s about methodology.”

However, it is arguable that the preparation and development being undertaken by service providers to the super industry has been a necessary response to the changing face of that industry.

After all, efficiency and cost reduction have long been common terms in superannuation administration and technology, yet transparency, data integrity and risk management are becoming just as commonplace.

But whether funds are looking to their administrators and technology providers to do more than just the basics or whether there is simply more associated with those basics, Dunstan said he could see the systems behind super becoming more complex.

“The systems behind superannuation are more complex today than ever,” he said. “System integration, increasing transparency, client interactions — funds require them all and the challenge is providing them at a low cost.

“For me, the thing that has become absolutely clear with respect to this downturn is that the focus has gone from being purely on revenue and margin to being on cost,” Dunstan continued.

“It’s exposed those super funds that still have manual processes, those funds that haven’t spent as much as they should have on technology.

“More than ever before, this business is about providing more for less.”

According to Campbell, getting the basics right as a superannuation administrator or technology provider had to be the building blocks of the service being offered.

“Getting the basics right is breathing-in, breathing-out stuff. If you can’t do that automatically you die,” he said.

“We are starting to see the industrialisation of processes in the financial services market. Transactions need to follow the workflow path, errors need to be rejected early, remedial action needs to be taken and so on.

“Greater functionality (transparency, accuracy and certainty) is being requested,” Campbell added. “Greater, more meaningful and more useful timely reporting to trustees will be a way of life.

“And the first order issue is quality of outcome. Speed of transaction is a second order issue, as all transactions can be made to run fast.”

Yet asked whether the financial crisis had shaped aspects of both superannuation technology and administration beyond the short term, Campbell’s response was firmly negative.

“The global financial crisis (GFC) should not have affected anything except the amounts of money available to support superannuation funds, and that due to reductions in asset values, obtaining greater data quality has always been a worthwhile issue, as the cost of getting it right could be 1 per cent or 5 per cent of the cost of leaving data incorrect.

“There will always be something worthwhile to do to improve the operations of superannuation and similar funds,” Campbell continued. “We need to continue to meet the aspirations of our clients and prospects and better help them achieve their objectives.

“Helping our clients industrialise the delivery of their services will help in achieving our clients’ objectives.”

Also seeing aspects of administration and technology highlighted rather than directly affected by the financial crisis, Beck pointed to efficiency as taking centre stage.

“Where the value of investments has changed, the GFC has highlighted how important it is for administrators to be efficient and to process efficiently,” he said.

“In the past, if there was a delay in making a payment, it didn’t make such a difference.

“But when the market is in a nose dive, a couple of days’ worth of delays can have a significant impact,” Beck continued. “The onus is on administrators to get things right.

“They have to set service standards and then they have to meet them.”

For his part, Mathieson had no doubts that the GFC would have a long-term legacy.

“It happens every time,” he said. “Things are rosy when people are getting good returns but processes get sloppy.

“Any market correction brings with it the realisation that you have to rid yourself of that sloppiness,” Mathieson continued. “And the resolution must be to be stronger and more efficient going forward.”

The challenge of scale

Moving past the financial crisis and, as Mathieson recommends, past the impact it has had upon superannuation, the reality is that industry change is as much related to progression as it is to any external influence.

Consolidation underlines all activity in superannuation service provision and, in line with that, Dunstan’s belief is that scale continues to be the key ingredient.

“For years we’ve been saying that this is a scale game,” he said. “As a technology provider, you have to stay ahead of the technology, you have to stay ahead of the products and you have to stay ahead of legislation.

“And you can’t just do two out of three,” added Dunstan. “It has to be the lot and it just isn’t possible to do that as a smaller boutique.”

Adding weight to his argument, Dunstan pointed out that over the course of a year, Bravura would spend more on research and development than a lot of the smaller technology players turned over.

“From time to time, there will be some ‘whiz-bang’ new widget that comes on to the marketplace from one of those smaller players, but eventually the bigger players come in with the same stuff,” he said.

“And the difference is that the bigger players have the same stuff with better backing, better scale and a larger client base already behind them.

“That small player might be able to stay on top for a short window of time, but this is a long-term game.”

Of course, it isn’t just the smaller boutique providers of technology offering new products and solutions and battling with established players for market share.

Already enjoying a large international presence, SimCorp is offering super funds its Dimension platform as a technology solution focused specifically on investment management in response to trends it sees developing within the industry.

Talking to what Dimension could offer super fund trustees, Rod Dew, sales executive for SimCorp, said for some time his company had witnessed Australian super funds gaining scale and becoming more concerned about their underlying investments.

“Trustees are starting to do more investigation into how their investments are managed,” he said.

“And while this is an area of business in which funds are reliant upon their custodians, the information they’re receiving isn’t necessarily timely.

“The Australian Prudential Regulation Authority (APRA) has brought in regulatory changes asking funds to provide more information on their underlying investments, and there has obviously been a lot of rejigging of investments lately,” continued Dew.

“So if a fund has a chief investment officer or an investment management team, we feel there’s the potential for them to invest directly at a lower cost to their membership.”

Dew said Dimension offered super funds a system that would aggregate data, enhance its access and transparency and enable funds to undertake direct investment in their own right.

“Dimension lets funds take data from various sources and then slice it and dice it into meaningful business reporting,” he said. “It helps funds look at performance, asset allocation structures, hedging and so on.

“Fundamentally, it gives them a lot more power in managing investments.”

Yet SimCorp’s recent entry into the superannuation marketplace seems to b the exception rather than the rule when it comes to the shape of administration and technology.

Overall, trends remain towards consolidation, though SunSuper’s acquisition of Precision Administration Services earlier this year provides proof that it can happen in more than one direction.

Campbell suggested that such a move might have been about SunSuper protecting its position.

“However, even a large superannuation fund cannot achieve the economies of scale needed to deliver superannuation and similar software economically by writing it themselves,” he said.

“And similar comments apply to other funds that write their own software — it can be a risky and dangerous path.

“I bet APRA is looking at them carefully, as will auditors and trustees,” Campbell continued.

“Apart from the reduced economies of scale, self-writers also miss out on the benefits of across industry learnings imbedded in our systems, innovations supplied by other clients and the power of many clients banding together to write specific code to benefit them all.

“We are entering an era which will witness the industrialisation of service delivery in this industry, and it will be hard to do that on your own unless you have very deep pockets.”

Interestingly, Mathieson said super funds would always have viable pathways in both inhouse solutions and the use of third party service providers.

“It’s a decision driven by the organisation,” he said. “Some have a viable inhouse infrastructure that makes self-administration and inhouse technology viable.

“But with scale, day-in day-out expertise and technology that can be taken across many types of accounts, there is obviously a good case for third parties as well,” Mathieson continued.

“There’s no right or wrong answer here.”

Also pointing out the strong case that could be built for self-administration and how technology could enable it, Campbell listed numerous benefits.

“We surveyed our key clients and found almost all of them see great benefits to self administration,” he said.

“Self-administered funds have more staff commitment, higher morale, more care, less mistakes, lower costs and better member engagement.

“The receptionist regards you as a friend (who pays her salary), rather than member number X from fund K,” added Campbell.

“We’ve done studies to show that even where funds purchase our software (which they don’t have to do when they are administered), their total costs are invariably lower than when they are fully outsourced.

“We see savings of 20 to 30 per cent, if not more, and there’s the freedom element as well.”

For Beck, technology and administration consolidation has to be a balancing act.

“There have been views in the past that having larger numbers of players drives competition and then efficiency,” he said.

“But efficiency really does come with scale and we fundamentally believe that outsourcing can provide administration 10 to 15 per cent cheaper than the cost of inhouse solutions.

“Administration is a low margin business,” Beck continued. “If it wasn’t, if it was high profit, then that’s when we would see more players.

“So whether there’s too many players now or too few, I don’t think we’ll ever reach the point where there is one large player. At some point, a balance will be found.”

Super clearing house

Providing yet another yardstick for super industry progress may be the Federal Government’s proposed superannuation clearinghouse.

And despite the fact that it is a proposal that has been sitting in the wings for some time now, Mathieson said it was a solution that the Government had to get right.

“From an industry standpoint, we had six million accounts with approximately $6 billion in the lost accounts category as of late last year,” he said. “So it is vital that the clearinghouse has a significant impact.

“At the moment, clearinghouse services exist, but they are all small businesses and they don’t cover the whole marketplace,” Mathieson continued. “So the superannuation clearinghouse takes that next step.

“But I still don’t think this is the silver bullet.”

Mathieson said the superannuation clearinghouse would have a part to play but that more significant gains would come from the superannuation review conducted by Jeremy Cooper, deputy chair of the Australian Securities and Investments Commission (ASIC).

“So while it’s important to get the clearinghouse right, I think that an industry focus on the Cooper Review, on efficiency and fee structure, is far more important.”

According to Dunstan, the Government’s superannuation clearinghouse is something the entire industry has a watching brief on.

“And my view is that it can only be done successfully via an evolution and not a revolution,” he said. “This is something that is costing the industry a great deal before participants ever see its benefits and it requires that people re-engineer a number of their existing business processes.

“It has to come, and it will certainly happen one day, but I think the current proposal is set to undergo a number of changes before it reaches that point.”

Co-ordination and co-operation

Yet solutions to the challenge of lost superannuation accounts and transaction efficiency go beyond the superannuation clearinghouse.

Already being embraced by the Association of Superannuation Funds of Australia (ASFA), a co-operative approach to superannuation transactions between Payment Adviser and Cuscal is already gaining traction.

Outlining the partnership’s premise, Brad Rosenthal, head of sales and marketing for Payment Adviser, said it had been the result of more than four years’ hard work in the e-commerce arena.

“Broadly speaking, the take-up of electronic payments has been fairly significant, but that take-up has reached a wall of late,” he said.

“When a payment is made, it will arrive in a bank account, yet the account’s owner won’t know what it is — they have to wait for some sort of notification, paper-based or otherwise, before its origin becomes apparent.

“The Payment Adviser IP (intellectual property) enhances payment references and makes them more useful.”

On the super side of the equation, Rosenthal said as things stood, it took an average of 21 days for a member’s contribution to hit their chosen investment and then their superannuation account.

“It’s somewhat dependent on the individual fund, but under Payment Adviser that 21-day lag goes down to 72 hours at the very latest,” he said.

“And while the challenge for us is interfacing with existing legacy systems, the service has clear efficiency benefits.

“With contributions reaching them quicker, super funds can invest that much sooner.”

Unfortunately, not all recent developments in the super industry’s technology and administration space have been positive.

The latest bulletin from the Superannuation Complaints Tribunal reported a rising number of administration complaints and, according to Beck, that increase is something no one within the industry can afford to ignore.

“Whenever complaints go up, it has to be a cause for concern,” he said. “But with respect to administration complaints, my understanding is that they are related to the delays I referred to before.

“Where a one or two-day delay made little difference previously, it has become a much bigger deal,” Beck continued.

“So while some of those complaints can be put down to our current environment, they are also evidence that there are things that we, as an industry, need to do better.”

Campbell also attributed the majority of administration complaints to the circumstances of a financial crisis, but he admitted that, in some cases, there were other reasons for member complaints.

“Predominantly, the aspects of administration that these complaints relate to are delays in administrators making an investment switch or transferring a benefit to another fund,” he said.

“And in many cases that’s been due to frozen underlying investments attributable to the global financial crisis.

“However, as members get better informed, we’re also sure they’ll complain more,” Campbell continued. “And there is a lot of improvement that can still be made to superannuation administration and the effective delivery of online services to members, financial planners, etcetera.

“It could even be that Product Disclosure Statements are too complex to read, but with intra-fund advice funds have greater scope to better help members and avoid such misunderstandings.”

Self-managed superannuation

Offering a sideline to development in technology and administration is the expansion and increasing popularity of superannuation’s self-managed sector.

Related to the financial crisis or otherwise, recent history has proven that it is an area of growth, but according to Beck, the differences between mainstream super and do-it-yourself funds may be too large a gap to bridge.

“Self-managed super is a very specialised and very complex sector,” he said. “And for that reason it isn’t really an area of interest for Pillar.

“SMSFs [self-managed super funds] have the ability to buy and sell shares directly and to invest in a wide range of vehicles that are either not common or not possible within industry and retail funds,” Beck continued.

“To provide administration appropriately you need to be much closer to the funds management business, and we don’t have the machinery for that.

“We’re much better positioned for the day-to-day administration of larger super funds.”

Beck added that Pillar’s administration services would only move closer to funds management and the requirements of a SMSF if current clients started to offer their members similar investment opportunities.

“But the basis of our clients’ success has been low fees, so I think these sorts of complex products will remain in the self-managed fund and retail space.”

Perhaps not surprisingly, Graeme Colley, technical manager of SMSF administrator Super Concepts, predicted that administration of the self-managed sector would continue to be a specialist service.

“From an administration point of view, we have a continuum of services, from the basics to a Rolls Royce-type service,” he said.

“And rather than putting pressure upon our business, the global financial crisis served to increase the number of funds on our books.

“But it’s a good question,” Colley continued. “Asking whether the larger administrators are likely to take an interest in SMSFs is natural because we have a situation where 30 per cent of all super monies resides in SMSFs.”

However, Colley said it was the custodial arrangements in place for larger super funds that make their operations fundamentally different.

“SMSFs operate almost like an investment business,” he said. “Their requirements are unique.

“So providers of that kind of specialist administration, those already linked in with accountants, should continue to take market share.”

Yet not all large technology and administration service providers are prepared to dismiss the opportunity represented by self-managed super out of hand. According to Mathieson, SMSFs have been and will continue to be a point of interest for DST Global Solutions.

“The challenge lies in getting sufficient volume and then generating sufficient income for it to be sustainable,” he said.

“We could provide a SMSF with a whole range of technology and service, but the question is whether they need it and whether they can afford it.

“The question lies in how we populate the marketplace and still make a profit.”

Like his industry peers, Mathieson said the range of investment options available to SMSFs, from basic direct investment to more exotic investment options, made administration and technology services from a non-specialist provider problematic.

“SMSFs are probably the most complex investment vehicle you can have,” he said. “They embrace everything, and that means that the challenge for their administration is very broad.

“So if a larger service provider were to step in and offer that service, it would have to come at a cost.”

For Campbell, dealing with a multitude of small clients rather than very large superannuation funds is a very different concept for larger administrators and technology providers.

“There are already existing players in this market that are doing very well,” he said. “But it is also a different concept to deal with a multitude of small clients as compared to very large superannuation funds.

“SMSFs are more about investment than compliance,” Campbell continued.

“Hence the software needs to deal well with the full range of possible investments and corporate actions — something which most of our competitors cannot offer.”

Campbell said Financial Synergy did not offer software directly to self-managed super, instead offering a badged service to various groups.

“We do ‘the hard bits’ offline and in the background,” he said. “It’s compliance without fuss, together with online reporting and showing statistics such as ‘rates of return’ over the last year for each investment.”

And Campbell added that the statistical functionality of Financial Synergy software was likely to be extended in the future.

“SMSFs are certainly different to larger superannuation funds,” he said. “In fact, SMSFs experience the pain of governance before the larger funds as SMSF activity is far more intense from a member perspective.

“Overall, our SMSF technology is the same as our existing technology,” added Campbell. “It just has different rules.”

Yet regardless of what may be happening outside of superannuation’s prime focus, whether it is the global financial crisis, growth of the SMSF sector or increases in competition, technology and administration is being forced to change.

On the technology side alone there have been a spate of recent announcements on new software and new solutions, and for Mathieson, the developments have member engagement as their driver.

“Some of this development would have come from changing legislation, some on the basis of competition and some for transparency reasons,” he said.

“But they are also being driven by changes within the marketplace — how people pay for things and how advisers are remunerated.

“The expectations of the end consumer are constantly changing as well,” continued Mathieson.

“Five years ago people were happy with annual statements, they’re now looking for quarterly and even monthly updates.

“There’s an appetite for a more hands-on approach and a greater level of knowledge that simply wasn’t there before.”

Asked whether recent technology and platform developments were evidence that the super industry was moving further towards the catchcries of service-oriented architecture (SOA) and straight-through-processing (STP), Mathieson said both were certainly available.

“And its provision isn’t a technology challenge.

“SOA has been around for a while, but it’s the adoption level that differs,” Mathieson continued.

“Some organisations are very focused on STP, but because they aren’t appropriately connected to other parties (custodians for example), their STP becomes an island.

“The challenge isn’t in the technology — it’s in bringing that change.”

According to Campbell, STP is but one element of what is required for the appropriate integration of technology into the superannuation service model.

“STP is only one element of what is required to industrialise the service delivery model,” he said. “And those who don’t get that tend to focus on one or two obvious elements.”

“But STP isn’t the silver bullet,” Campbell continued. “The method by which the administration processes will be industrialised is more important than the latest technology fad.

“Can technology prevent errors and fix mistakes? No, it just helps you do a bad job faster and more predictably.”

Campbell said technology, as it related to administration, was largely dependent on methodology.

“The whole process by which virtual administration will be delivered — that is, administration that is there but you don’t really notice it happening — will be dependent on methodology,” he said.

“It will be dependent on the methodology adopted to prevent errors, fix mistakes quickly, automate unit pricing, perform bank and investment reconciliations, inform members of their benefits, educate members and allow all stakeholders to readily and easily interact with their fund.

“Their experience and the quality of the outcome will determine rates of exit or acquisition of members and thus the long-term success or otherwise of the fund.”

Also on the topic of technology progress, Dunstan said the super industry had seen a marked change from client server technology to SOA.

“I’ve even seen that change described as being as profound as the jump from DOS to Windows,” he said.

“And the main driver for those new products is undoubtedly a push towards driving down the cost of integration.

“At some point, the super industry will have to fully embrace STP and SOA, but it will again be more of an evolution than a revolution,” Dunstan continued.

“Some funds still aren’t spending enough to make STP deliver sufficient benefit, and because it can mean the loss of client contact and that personal approach, it won’t suit everyone.

“It’s not as simple as saying ‘that’s the Holy Grail’ and doing it. It has to be done cheaply, and it has to be what you’re looking for.”

Road ahead

Drawing out his crystal ball and reflecting upon what shape the technology and administration sectors of superannuation might take amid challenging circumstances, Dunstan predicted that providers would focus on their core strengths.

“In Australian superannuation everyone has a clear picture of where we’re at and how things stand,” he said.

“ASFA [the Association of Superannuation Funds of Australia] is a strong industry body and the industry benefits from that strength.”

Dunstan said with the constant workshops, feedback and clear view that ASFA gives the super industry, there was no need to gamble on what might lie on the path ahead.

“This is a great market to work in because, in many ways, it’s an informed and mature industry,” he said. “But looking ahead, my view is that we’ll see increased consolidation across the spectrum.

“When people know that they’re through the worst of this financial crisis, the focus will turn to cost and scale,” predicted Dunstan. “The next step is consolidation and it will leave those providers that are sub-scale exposed.”

Sharing a similar view for the future, Mathieson said to survive in this world, administrators and technology providers needed a number of key ingredients.

“In the first place you need a base of business that is broad enough to sustain you when one segment turns sour,” he said. “Because being a specialist can be both positive and negative.

“Scale is also key because it is certain that the larger organisations are going to get larger,” Mathieson continued. “And finally, all providers need to understand their clients’ needs and their clients’ clients’ needs better.

“For far too long that understanding has been missing and the providers that have it are the ones in a prime position.”

Commenting specifically on how Financial Synergy was positioning itself for the future, Campbell said every industry needed a provocateur.

“Experience shows that we have successfully predicted market developments in the past,” he said. “And as we are intimately engaged with the industry, our clients, the regulators and our administration clients, we expect we’ll be able to continue to do so.”

Campbell said industry pundits should be on the lookout for a brave new world in superannuation administration and technology.

“A brave new world where members regard superannuation funds as their ‘meal ticket for life’ and where the word ‘lean’ is not just applied to manufacturing processes, but to superannuation administration processes as well.”