Thought Magazine

Collaboration is Driving Australia’s Pension Sector Change

Australia's superannuation industry is undergoing a major overhaul that has set the world's fourth largest pension funds market on a journey to deliver one of the most transparent and progressive pension systems in the world. For the first time, custodians are sitting at the table with other partners to devise a plan to implement the new Stronger Super reporting and disclosure framework—a plan that will ultimately revolutionize the way Australians' engage with their retirement savings.

While the pressure on funds to change the way they interact with members is clear, what most don't see is the work going on behind the scenes to rethink and reconfigure the technology framework that underpins Australia's superannuation system.

Nearly 20 years after the introduction of compulsory superannuation—Australia's defined contribution retirement system—the country's increasingly mature pension structure has entered a substantial regulatory revamp that, while costly and complex to implement, will set the foundation for one of the most impressive and modern retirement systems seen anywhere.

The Stronger Super reforms present superannuation funds (or super funds) the opportunity to engage with their members via emerging technology and streamlined processes that may soon put superannuation on a usability par with online banking. This evolution is happening faster than many realize and will have radical implications for all industry participants.

The introduction of the SuperStream reforms, MySuper default accounts and the raft of new regulatory body reporting requirements from APRA, the Australian Prudential Regulatory Authority, have driven transparency, costs and efficiency to the forefront. While historically many super funds have competed on the number of products, their ability to maintain strong investment returns and an ever-growing array of ancillary member services, we are now entering a new era whereby super funds are compelled to compete for members more so than ever before. Fierce competition in the industry will be driven by new reporting and disclosure standards that allow members an unparalleled ability to compare and choose among fund offerings.

The first wave of new quarterly APRA reports was delivered in October 2013, resulting in custodians and other back office service providers rolling out a raft of new services to help funds comply with the new regime.

These new services are the culmination of months of consultation across funds and industry players to build a suite of solutions designed to help with both the immediate compliance needs of funds, as well as their longer term planning challenges: how to harness the power of new data resources to drive more tailored member insights and, ultimately, how to create even more compelling solutions for members.

Amid this sweeping regulatory change, serious thinking is also being given to how Australians—both pre- and post-retirement—will interact with their Super: how they can better understand their retirement savings options, how they can more directly manage their investments and understand the costs and risks associated with those investment choices, and how these choices impact them when they retire.

Collaboration is key: the new super ecosystem

While the pressure on funds to change the way they interact with members is clear, what most don't see is the work going on behind the scenes to rethink and reconfigure the technology framework that underpins Australia's superannuation system. The introduction of SuperStream, a series of government-introduced measures designed to enhance the member administration back office of the superannuation industry, including setting new data and ecommerce standards for superannuation transactions, has set off a chain reaction of changes that goes deep into the operational framework of the system—and it's this evolution that will underpin the delivery of a new wave of member engagement.

At the forefront of this change is the central role of custodians, which continues to expand and evolve. The aim is to foster a collaborative approach, consulting closely with super fund clients, fund managers, regulators and other third-party service providers to encourage a super ecosystem that will ultimately deliver streamlined, cost-effective and tailored outcomes for members.

One of the most far-reaching developments taking place in Australia is the shift from a vertically integrated environment to a more considered horizontal structure, whereby various service providers are becoming intrinsically linked in their interaction with both each other and the super fund they support. This means all parties are not only considering how new products and services will impact the end client but others in the super ecosystem as well, including member administrators (transfer agency providers), data aggregator vendors, asset consultants, regulators and other government agencies. Ultimately, the joint goal is to achieve positive and visible member outcomes while making sure the system is as transparent and robust as possible.

Overcoming legacy issues

The transition from legacy networks and fund structures to the new world order is not a simple path. Over the past 20 years, Australia has developed a large and sophisticated superannuation market. Funds have a wide array of valuation policies and tailored product return allocation structures, such as unit pricing and crediting rates regimes, coupled with an ever-changing universe of complex and new security types, asset classes and member option products.

The Stronger Super reporting and disclosure regime is now the impetus to streamline differing data and reporting into a consistent, easily understood, accessible and transportable method through the superannuation system—ultimately allowing the provision of this data back to members in the form of easy-to- understand information about their retirement savings.

However, what sounds simple—reporting at a super fund product level—can be a major challenge for some service providers and superannuation funds, as historically many funds' operating premise is based on a historical co-mingled asset structure, which means that a super fund's product assets are pooled or shared for investment purposes. The super fund's product returns are in many cases derived on the allocation of ownership of units of a whole the process used to attribute net assets to individual members. Therefore, the asset pool's total value must be broken into ownership portions (units) for members, similar to holding company shares.

Herein lies the complex challenge over the coming years as we embark on the journey to rethink how we look and report superannuation fund data. Consolidated views of a product's performance, cost, exposure, risk and underlying investment holdings, as well as liabilities, will become the new normal. Members and their financial advisers will have a much larger and more consistent data set to compare super funds' individual product performance and ensure that the product's risk profile suits the member's individual needs. For super funds and many service providers alike, playing a catch-up game is no longer going to be viable; the key is getting a good head start, setting in place a solid foundation to harness their new product data and reaching out to members.

New framework takes shape

One of the many challenges of the new regulatory framework is that it has meant a major rethink of how things will be done going forward in terms of both approach and technology. Service providers are looking closely at their role in the super ecosystem: what breadth of services they can offer funds in the Stronger Super world and how they can work with each other to deliver new, innovative solutions.

Technology remains a key differentiator for all players, with the competitive landscape changing rapidly. This substantial element will have major ramifications for all players in the ecosystem, as members become more empowered to take control of their superannuation savings within the defined contribution regime. Across industry, corporate, public sector and commercial funds alike, Australia's Superannuation industry faces an unprecedented opportunity to get the new foundation right for what we believe will be a three-year journey to create a new era of technology-driven, member-focused solutions in Australia's world-leading retirement savings sector.

On the custodians' side, work is underway with the Australian Custodial Services Association (ACSA), which established an ACSA Stronger Super Taskforce to coordinate the custody industry's consultative work with APRA and ultimately achieve a similar standardization of transfer protocols among custodians, as well as between custodians and administrators. This is also the case between asset managers and custodians, with the primary aim of driving out unnecessary cost and administrative complexity.

While challenging and expensive, the current regulatory overhaul has had the positive side effect of pushing natural competitors together to achieve a truly member–focused, end-to-end reporting and disclosure approach—possibly a world first for a developed defined contribution pension system.

Thought, 1Q 2014

Subject Expert

Marian Azer Marian Azer
Head of Global Funds Services Product, Australia and New Zealand
J.P. Morgan Investor Services

J.P. Morgan's Super Efforts

As a large and experienced global player, J.P. Morgan was an early mover in mobilizing a technology response to help clients comply with various Stronger Super requirements, using a combination of locally developed platforms and leveraging our global platforms as well to manage the evolving global regulatory environment. Rather than outsourcing the development of new technology, the firm is building and delivering new solutions through a collaborative effort with both clients and the industry. This involves spending time with clients and partners to ensure the solution built is one that meets their needs and can be responsive to the changing landscape.

For example, in June 2013, J.P. Morgan's technology team invited the Australian Taxation Office's senior solution architect for standard business reporting and some of Australia's largest super fund member administrators (transfer agency providers) to talk about the evolving challenges faced by the super administration community, as well as the pioneering work currently underway to develop new technical standards and rules to facilitate gateway interoperability. Under the new SuperStream reforms, work is progressing to select a single gateway service provider to be used by all administrators that will create a single, streamlined protocol by which super funds can transfer member balances and individual account details to each other, all within 24 hours.

J.P. Morgan also has developed a Stronger Super Toolkit, a suite of products that will be rolled out in line with the regulatory timetable. These include a due diligence service, known as the Custodial Oversight Library, which assists super funds with the provision of information in response to Superannuation Prudential Standard (SPS) 231 on Outsourcing. Another element is an Enhanced APRA Reporting Service to deal with the investment data aspects of the new APRA superannuation reporting regime which includes 'look-through' reporting, as well as a variety of enhanced performance measurement tools.


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