The changing superannuation landscape and what it means for service delivery
What does good look like for superannuation funds and what will it look like in four years time?
At Iress’ Super Efficient Conference in Melbourne, Dr Martin Fahy, CEO of the Association of Super Funds of Australia (ASFA), shared insights on where the superannuation industry is heading, what it means to have operational excellence, and the challenges facing the future operating models of super funds. Here are the key takeaways.
A challenging environment
Change in the superannuation regulatory landscape is constant. Obligations such as those under the CPS 234 tripartite reviews around information security and CPS 230 requirements around operational risk management, require an enormous amount of resources and capability. The performance test is here to stay and is driving consolidation of super funds across the market. At the same time, super funds and businesses across the board are having to incorporate increased cyber and data related considerations into their operating processes. Dr Fahy believes the purpose of super will be legislated and a priority. Choice will also be interesting - against a context of choice heatmaps, performance tests, and disclosure of fees - choice will be a focus of attention for many in the super sector as a way of differentiating themselves.
Survival of the fittest
According to Dr Fahy, the aggregates of the super sector are secure because we have compulsion, universality, and preservation. The super system will reach AU$5 trillion by 2030 and will continue to grow and become systemically important as a feature in Australia’s GDP. But ultimately, not everyone will get the same outcome - the outcomes for individual super funds, service providers and members will be very different. We’re seeing this happen already, with large megafunds such as Australian Super emerging alongside occupational affinity funds like UniSuper. These large players will dominate the landscape and account for a large percentage of the FUM, in addition to benefiting from internationalisation, internalisation of investment teams, and private capital markets.
More importantly, these dominant players will have the capability to cope with the increase in regulatory burden. The challenge is that the regulatory environment doesn’t encourage differentiation, with the product features, communication methods, pricing and fees that funds can charge all being heavily prescribed. So how can super funds compete in this environment? It’s going to be very difficult to exist in superannuation without some sense of operational excellence, and this will be a key competitive metric that funds will need to focus on.
What is operational excellence?
At the moment, the superannuation system rewards stability rather than innovation, so your focus needs to be on your ability to be highly efficient. Superannuation is by-and-large, still a craft industry - we’re still operating like customised Italian shoe businesses, but we should really be focused on driving processes that can eliminate friction and drive down costs. Operational excellence is about industrialising your processes in the same way that a South Korean car manufacturer does. Think: straight through processing, automation, standardisation and simplification.
Operational excellence is driven through a relentless obsession around efficiency, where you’ve taken the number of possibilities for errors down as far as you can and you’re hitting six sigma levels. You should be thinking about initiatives like visual dashboards, visual management, and statistical quality control, which can industrialise and atomise processes to bring about scale effects.
It’s also important to remember that automation is a bit like vaccination - the real benefits aren’t seen until you get well past 60-70% adoption. If you automate 10% of a process you won’t actually get any benefits because the non-standardised processes risk contaminating and outweighing the benefits. So be patient, and think like a process engineer. Above all, think about this in terms of your target operating model - this is your architecture in terms of the what, how, where, when, who of your business, and how you construct that in response to your strategy.
What does success look like?
It’s important to have real clarity around what success looks like. One of the things we know from successful software deployments is that cloud native, public cloud is the only way to go. You cannot stay on prem - you have to harden your infrastructure and the only way you can do that is by reducing your number of third party providers and simplifying your architecture so you can run it hard.
In order to get industrial strength infrastructure, you need to be with industrial strength global providers. If you want the fall-over capability, you need to operate at scale. It will be very hard to survive unless you are plugged into the economies of scale that you get with the likes of Microsoft, Amazon Web Services (AWS) and other large providers. Ultimately, you’ll also need to harden that infrastructure under cyber. The challenge with cyber is that it’s a question of ‘when’ not ‘if’. Cyber is the number one threat to our industry at the moment, and we have to get smarter, understand more, and learn from the best.
Getting to world-class
While we’ll face challenges in deploying process and transformation improvement in super, we have a big opportunity to do it well and get to world-class. It’s not going to be a simple or cheap journey, but the other thing we know is that customisation is enormously challenging, as every single piece you add on makes the puzzle more complex. The challenges to get to world-class will be in terms of the skill set required to achieve this. You’ll need to think through what you’re going to do, what your partners are going to do and what offerings you’re going to take as a service. This can include infrastructure, apps, cloud, cloud-opps, parameterisation, cyber, and more. Increasingly, most of us will have to take cyber as a service because we simply won’t be able to get the skill sets that are out there.
If you want to be successful in your role of delivering world-class platforms with at-scale partners, you need to be a zealot of standardisation, simplification and automation, which also means driving out the ‘nice to haves’ from your business. Importantly, you’ll need to get your Management, Board, and Trustees on board to make this happen. What’s important is finding a small number of key people in the business who really understand process excellence and the support you’ll require from them to turn this opportunity into reality.
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