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Building a stronger superannuation fund after COVID-19

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Building a stronger superannuation fund after COVID-19

Superannuation is a long-term proposition. Contributions are made over decades and people hopefully enjoy the benefits of contributions over decades too.

Superannuation fund executives and trustees must therefore take a long-term perspective. When substantial dislocations occur – and there have been few more substantial than COVID-19 – the question arises: What structural changes must superannuation funds address in their long-term planning?

Drawing on our experience, we have sought to identify structural changes that will result from COVID-19. These changes cover four domains: presence and profile, investments, member experience, and people and culture. We have also sketched out the key questions superannuation funds must ask themselves.

Presence and profile

Superannuation funds are among the most influential and significant organisations in Australia. This is a product of their number of members and dominant role in certain industries, as well as their investment holdings in ASX-listed companies, major infrastructure and, increasingly, direct company ownership.

On the back of evidence presented to the recent Royal Commission into Financial Services, COVID-19 has emphasised the need for funds to carefully assess the presence and profile they need to best support the interests of members.

This is apparent in several examples:

  1. Now the door to early release of funds to members has been opened, and tens of billions of dollars have been paid out to millions of people, this will be a live policy option for future crises or market failures.
  2. There is growing doubt that the slated increase in the superannuation guarantee contribution – set to go from 9.5 per cent today to 12 per cent by 2025 – will proceed as scheduled. More radical suggestions have also arisen, such as this one from a government senator, for a substantial recasting of the superannuation industry.
  3. COVID-19 raises questions about the desirability of industry-specific funds. While COVID-19 may be a one-in-a-hundred-year event, executives and trustees must consider whether heavy concentration in particular industries remains in the best interests of members. It is something that the responsible government minister has also questioned.

Key questions for funds

What is our role, and the role of industry bodies, to shape the policy debate?

How do we build credibility with key stakeholders so we can best support our members?

What industry diversity best supports our members and what does this mean for our merger strategy?

Investments

The sudden need to access funds to cover member withdrawals has emphasised the importance of liquid assets in a fund’s portfolio. While most funds could reasonably easily cover early release, the potential for future release schemes leaves funds less able to invest in long-term projects, such as infrastructure, consistent with superannuation being a long-term proposition.

Where equities were sold to cover withdrawals, members have missed out on the recovery in markets since late March, noting there are also concerns the recovery overlooks fundamental weakness across many sectors.

COVID-19 has also served to exacerbate existing geopolitical tensions, with potentially significant implications for some major Australian multinationals and investments in key parts of the world.

Restrictions on travel have stopped international fund managers from their regular trips to Australia, which may harm performance oversight, ongoing relationships and manager selection.

Key questions for funds

How appropriate is our investment strategy in light of increased market, liquidity and geopolitical risk?

What is the appropriate mix of in-house and outsourced investment management for our fund?

What capabilities do we need to manage our international investments?

Member experience

The over four million applications to withdraw money from super early as of early August, and the massive increase in enquiries to fund contact centres, has put substantial strain on fund operations and administrators. The volume of accounts closed and reduced funds under administration also materially reduce the revenue available to some funds for their operations. This may continue if the economic downturn is prolonged and unemployment continues to rise.

While challenging, it provides some upsides that funds can potentially leverage. Many members are more engaged with their super than ever before, and uptake in use of digital channels is accelerating.

Outsourced member administration providers have also been put to the test in their shift to remote working and supporting increased volumes. In doing so, many of these partners have shown that they can move fast – and much faster than they have in the past.

Key questions for funds

How can we drive a permanent increase in our members’ interest in super?

How can we evolve our digital channels to best meet the needs of members?

How can we shape our operations and outsourcing arrangements to deliver better service at better value?

People and culture

Like most organisations, super funds have undergone a fundamental shift in working arrangements, with many people working from home, blending work and care responsibilities and making greater use of technology. This is likely to continue well after the pandemic subsides. Research from US fund Just Capital found that US companies that have been supporting workers during the crisis are outperforming their peers.

Leaders are being tested like never before. They need to be aware of broader social trends to complement deep expertise in superannuation. This broader knowledge will help them sustain their organisation through turmoil.

Key questions for funds

What shifts do our leaders need to make to support our staff in these new working arrangements?

Where should we invest in technology to support the productivity and wellbeing of our staff?

How do our trustees and executives build knowledge to govern and manage big organisations?

Do not lose sight of other challenges

Each of these questions will require a bespoke response that reflects the circumstances of each individual fund. And as the impact of COVID-19 evolves over months and perhaps years, funds will need their response to evolve with it.

Of course, we cannot allow this major threat to command all our attention. We should not lose sight of other threats, including climate change, which adds (potentially significant) risk to many investments and is being raised publicly as a fundamental issue by members of many funds. Determining the right response will remain a pressing issue for years to come.

No one knows what the future holds, but failure to think through and address the structural factors will expose funds to long-term pain, well beyond the short-term cyclical dislocations.

Get in touch to discuss how Nous can help your super fund to explore these key questions.

Prepared with input from Julia Gilmour and Monty Allen.

Connect with Simon Guttmann and Ed Hughes on LinkedIn.

Published on 12 August 2020.