Some members are excited for retirement, while others approach it with a “real sense of shame and fear”. Funds are going to have to figure out how to cater to both groups or risk failing them all.
If there’s one lesson for investors from the past five years, it’s that chopping and changing their strategy – even in the face of massive market turmoil – doesn’t always pay.
Why funds need to look at link between expenses and outcomes
by James Lindgren*
With the latest APRA fund data showing that average operating expenditure per member for all categories of superannuation fund (except corporate funds) has steadily increased since 2004, it is increasingly important that super funds ensure that increasing operational expenditure is helping to improve member outcomes.
The Royal Commission into Banking and Financial Services is likely to focus on expenditure by super funds on areas other than administration or investment management, nonetheless it is important that trustees remain vigilant in monitoring operational expenditure to ensure any increases are justifiable.
Data recently released by APRA provides a high-level picture of the trends in operational expenditure by most large superannuation funds in Australia.
Funds are required to report to APRA operational expenditure for each reporting period. This includes administration costs, commissions, advertising and promotional expenditure, and other such costs.
QMV’s analysis of the data shows that since 2004, average operating expenditure per member for all categories of superannuation fund except corporate funds has moderately increased.
Source: QMV Analysis of APRA Fund Level Superannuation Statistics at 30 June 2017. NB: A very small number of funds have been excluded where missing or incomplete data causes outlier and non-representative results.
In itself, increases in the absolute operational expenditure of superannuation funds aren’t necessarily a bad thing. In many cases, the expenditure has been directed towards measures which provide improved service and security to members.
Ignoring adjusting for inflation, the 14-year period between 2004 and 2018 has included the implementation of an eye-watering agenda of regulatory change, significant changes in technology and data security risks, and greater internalisation of some investment operating costs. It is therefore not surprising that it has become more expensive to operate the superannuation system.
Yet, much of the investment in technology intended to promote greater operational accuracy and efficiency should be seen to start to place some downward pressure on operational expenditure.
Similarly, the slow but steady consolidation of the number of superannuation funds is often justified on the basis that greater economies of scale will benefit members. While such scale efficiencies may also be reflected in investment related expenditure, consolidation should place some downward pressure of operating expenditure in the long run.
The growing scale of assets within the superannuation system means that when viewed relative to each dollar of member savings being managed, operational expenditure has steadily fallen since 2004 across all categories of fund.
Source: QMV Analysis of APRA Fund Level Superannuation Statistics at 30 June 2017. NB: A very small number of funds have been excluded where missing or incomplete data causes outlier and non-representative results.
With a continued regulatory focus on the quantitative monitoring of member outcomes, superannuation trustees must consider how operational expenditures directly relate to the member outcomes identified in the business strategy of each superannuation fund.
Superannuation trustees can actively promote a prudent focus on operational expenditure through:
- Regularly testing the market for services provided by third parties
- Ensuring that robust operational risk controls are in place, to protect against potentially expensive remediation projects
- Modelling the possible savings and costs to members of consolidation with other funds or promotion of organic growth in member numbers
- Investing in advancing technologies that enable efficient self-service and low-cost member services.
* James Lindgren is a consultant at QMV which provides independent consulting services and technology systems to super funds, trustees, administrators and wealth management organisations.
