Swimming ahead of the SuperStream changes

The Federal Government has yet to give formal shape to the Cooper Review’s SuperStream recommendation but, as Damon Taylor reports, the major administrators are moving to get ahead of the game.

In recent years, change has become a constant for Australia’s superannuation industry.

And the reality for industry participants is that if that change isn’t already being implemented, it is almost certainly mere months from being so.

For administrators, the focus of that change continues to be SuperStream and according to chief executive officer of SuperPartners Greg Camm, there are signs that it is already starting to take shape.

“The fact that we’ve got draft legislation around the tax file number (TFN) tells us that there’s now a bit of certainty arriving,” he said.

“But there’s still a lot of water to go under the bridge and this is just one example because, as always, the devil is in the detail.

“It’s really important for us to make sure that tax file number usage actually serves the original objective, but there is another issue here,” Camm continued.

“It doesn’t solve the legacy problem of all of those accounts that are either lost or duplicated.

“So, what’s still needed is a little more engagement and assistance from the tax office so that we could verify tax file numbers against their database in some way or another.”

Harbouring similar concerns around the use of TFNs, Russell Investments director of administration and consulting services Siva Sivakumaran said that there were still a number of unknowns when it came to final implementation.

“Clearly, if it works that way it’s meant to work; it should result in a better outcome for members from the perspective of consolidating superannuation accounts,” he said.

“But I think we’re all waiting for a bit more clarity around exactly how this is going to work.

“An example of this is if someone provides a TFN to us, we can check whether it’s a valid TFN but what we can’t check is whether it’s the right TFN for the individual who just provided it to us,” Sivakumaran outlined.

“So the question I have in mind is: how will that actually work?

“Will we actually send the ATO [Australian Taxation Office] a list of peoples’ names and TFNs and would they confirm that the TFN provided to us is, in fact, the right one?”

Camm said that it all came down to the difference between a valid tax file number and a validated tax file number.

“The language that we’re using here is around there being two types of tax file number,” he said.

“There’s the valid tax file number which a lot of the discussion has been around and that’s one that meets the algorithm that the tax office uses to confirm that a tax file number is a tax file number.

“But what we really want is a validated tax file number which tells you that the valid tax file number you have has been validated for Greg Camm, or whoever the individual may be,” Camm continued.

“And that’s the one that we’re not making a lot of progress on at the moment.

“We really need some ability to ping the ATO, their database, or perhaps some form of positive validation against a name and a date of birth and a real person.”

Yet, while the use of tax file numbers to uniquely identify superannuants can already boast draft legislation, the flagged change likely to have much broader efficiency implications relates to the standardisation of the industry’s electronic commerce.

Going to work

However, according to Pillar head of corporate and quality Jane Byrne, this is an area of change in which administrators have not been idle.

“As a background to SuperStream, Pillar, AAS and SuperPartners and now Colonial First State, BT, MLC and AMP have come together to collaborate in developing a rollover gateway so that members can roll from one fund to another in a more efficient way,” she said.

“Throughout this process, the Government has tried to say to the industry that you need to do some of this yourself and we’re not going to legislate for everything.

“So this collaboration is an example of us taking the initiative there and running with it.”

Adding further detail, Camm said that the rollover hub had been exchanging money and data between the three administrators since February and, as alluded to by Byrne, had already attracted interest from a number of retail super funds.

“To start with, we had a little organisation called SEA (Superannuation Exchange Affiliation) which was the three administrators. But the retail funds have come over and said that they’d like to be part of it because it’s something that just makes sense,” he said.

“So there’s been a new organisation born called ASP (Association of Superannuation Practitioners) which is really the SEA organisation expanded by the arrival of several of the large retail players like Colonial, AMP, BT and so on.

“The idea is simply to expand these electronic commerce protocols so that rollovers can be all paperless and electronic in the future.”

Clearly, as SuperStream’s implementation draws closer, administration efficiency is top of mind. The use of tax file numbers, data standardisation, even the consolidation of lost member accounts is all aimed at streamlining interactions between funds and their members.

But exactly what sort of traction are these initiatives likely to gain?

How much quicker and easier will day-to-day superannuation transactions become?

Those are the key questions, but for Sivakumaran, they are questions that cannot yet be answered.

“We do think about these things periodically and try to quantify exactly what is the dollar saving or what is the process saving that we’re going to achieve as a result of these changes but I simply don’t think it’s possible,” he said.

“Sure, I see some obvious things, like if we do have a rollover hub happening, then you’re not going to have as many cheques being posted around and that’s going to achieve some savings in processing and risk management and all of that kind of stuff.

“But at this stage, before we see the final legislation and have these initiatives in place, it’s very hard to quantify what the dollar saving will be.”

Echoing Sivakumaran, Camm said that while establishing a quantifiable efficiency gain was not possible, it was a given that the SuperStream initiatives were significant steps in the right direction.

“It’s truly impossible to say because until you’ve got certain legislation and certain protocols and all of that, you can’t predict it,” he said.

“I think we’re all operating in good faith at the moment; we’re saying that it’s absolutely certain that electronic exchange of data and money has to be cheaper than mailing cheques and paper around the country.

“And most of us are operating on that basis and under that assumption,” Camm added.

“But is there a pot of gold? Probably not. Is there waste today? The answer is: absolutely — yes.

“So why wouldn’t you do something about it?”

Consolidation

The backdrop to SuperStream’s implementation is a broader super industry trend towards consolidation.

Merger activity has increased markedly in the last several years and, not surprisingly, that activity’s impact on administrators is significant.

The challenge, according to Sivakumaran, is focusing less on a diminishing number of clients and more on how an administrator could best compete in such circumstances.

“It’s interesting isn’t it? At the high level, if you say that if the number of funds is going to reduce by 30 per cent, then you would expect that there will be less business for administrators,” he said.

“So in the extreme case, you would have fewer administrators around.

“That said, where we’re focusing is not so much on the fact that there may be fewer administrators around but more in terms of how we should be competing in that environment,” Sivakumaran continued.

“And the way I look at it is that there are two areas in which we need to be competing or be effective.”

Sivakumaran said that the first area was simply around providing services cost-effectively.

“And that’s because in a consolidation-type environment, costs are going to be a major issue,” he said.

“Clients are going to be interested in cost; they want to keep their costs down, so, clearly we need to be in a position to provide these services in a cost-effective way.

“Now, there are a number of ways of achieving that and one of the things that we’ve done is we’ve taken our back office processing and we’re doing it out of a low-cost location,” Sivakumaran continued.

“That’s clearly one way of doing that and I’m sure there’ll be a number of other things that people will be doing around process improvements and technology improvements and so on.”

Sivakumaran’s second area of administrator focus was assisting super fund clients with actually retaining and increasing their members and employers.

“So this is all about the member services and employer services component,” he detailed.

“And that’s the other area where we’ll be focusing on — trying to achieve savings in the back office processing but also using some of those savings to invest in working with our superannuation funds to retain and increase their membership and employers.”

Winners and losers

Yet for Byrne, there would always be winners and losers when it came to the administration of a newly merged super fund.

“It can be akin to winning new business or, alternatively, losing existing business,” she said.

“From Pillar’s point of view, we strive to ensure we are offering value for money for our business partners and, through the merger process, we aim to provide the best services to support the newly merged group and thereby position Pillar as the desired administrator.

“However, for various reasons, the outcome may not be clear-cut,” Byrne continued.

“One party might have a better case for staying with their existing administrator rather than going to a new one and that comes down to their existing systems and their ability to continue to grow.”

Asked whether a reduced number of super funds could in turn lead to a reduced number of administrators, Byrne said that though the market remained dominated by three major players, smaller players remained active.

“I think the market will probably take care of itself over the longer term,” she said.

“Obviously you have three large outsource providers in the case of AAS, Pillar and SuperPartners, and then there’s a whole lot of others.

“We’ve recently seen Mercer very active in the market, and Russell and now FuturePlus have decided that they’ll go out to market and try to win business outside of the two funds that they grew out of,” Byrne continued.

“But sometimes the thing that hurts the most is major legislative change.”

“And that’s simply because of the extra work that has to be done to make sure systems meet new requirements,” she said.

“It could be something like that, the extra non-value generating work required to ensure systems meet new requirements, which causes an administrator to decide that it’s not worth continuing because this is a low-margin business — and I can’t see that changing.”

In fact, consolidation appears to be a theme within the super industry at the moment. Fund mergers, a reduced number of funds and a potentially reduced number of service providers are all a part of that trend but what may yet cause further ripples within the industry is actually the consolidation of member accounts.

Of 33 million Australian superannuation accounts, 6 million are unlinked to any one individual but while the consolidation of those lost or inactive accounts is undoubtedly a desirable outcome, what happens when funds’ membership bases are similarly reduced?

What happens when costs, whether they are administration, group insurance, or any other super-provided service, have to be amortised over 20 per cent fewer members?

For Sivakumaran, though the economics of the problem were both clear and real, he felt that it was a challenge that the industry was very capable of meeting.

“It’s something we’re thinking about because if you work out the economics of all of this, there’s a certain cost of running a superannuation fund and if you have fewer members in the superannuation fund, clearly when you divide one by the other, the cost on a per member basis is going to increase,” he said.

“But I guess I see two other factors at play here.

“One, superannuation funds will be looking to make themselves more efficient and more cost-effective,” Sivakumaran continued.

“So the absolute cost of running the administration of the fund is going to come down because they’re going to look for more efficiencies around processes, where it actually gets done, technology improvements and so on; total costs are going to come down.”

Sivakumaran said that the second part was at the member level where people were already expecting to pay less for administration.

“And at the moment, if you have accounts in about seven different places, you’re getting slugged at each one of those seven different places for a sum of money which, if you consolidated, would massively reduce,” he said.

“From my perspective, this is very much a one-off situation.

“It also isn’t going to happen immediately,” Sivakumaran added.

“You’re not going to go from where we are now to a drop of 20 per cent happening overnight.

“It’s going to be over a period of time and that really allows superannuation funds to drive efficiencies over that time.”

Offering an entirely different perspective, Camm said that while lost superannuation accounts were certainly an issue, there was no guarantee that duplicate or even triplicate accounts were not deliberately maintained by Australian superannuants.

“I don’t think this is as big an issue as some are speculating and the reason I say that is that while it is true that we have three superannuation accounts on average per person, I think it’s fallacious to assume that that’s an unconscious mistake on the part of all of those consumers,” he said.

“In fact, I’ve got three superannuation accounts myself and the reason that I have is because there’s some fantastic life insurance that goes with those three individual superannuation arrangements.

“For example, I’ve got some really good income protection insurance from AustralianSuper and I’ve got some really good life insurance from a legacy retail fund that I keep a small balance with,” Camm continued.

“So as a consumer, I’ve actually made a conscious decision to have three funds.

“There’s no wholesale tsunami of consolidation here. There’s definitely noise and there’s definitely waste in the system because of lost super but I wouldn’t generalise and say that all of it is ‘lost’ lost.”

For her part, Byrne admitted that if the income of both fund trustees and administrators was reduced, there would almost certainly be a pull between keeping costs low and providing members with the services they had become accustomed to.