Do you view a super fund as a product provider or as a benevolent fiduciary? That was the question asked of financial services minister Stephen Jones at the recent Conexus Financial Political Series lunch. Jones’ response was well-measured, his initial reflection being that he hadn’t thought of super funds through this framing, before adding that they are clearly product providers.
We think about this issue a lot at The Conexus Institute. Here, benevolence relates to the extra levels and forms of assistance provided to members. More than an interesting thought exercise, we consider it fundamental to the architecture of how financial services, particularly retirement, will be delivered in an integrated way in the future.
Current state – how super funds are viewed
We can infer the current state from recent government policies. The Your Future, Your Super reforms mostly relate to product provision. The main areas of focus were product performance (the performance test), member account efficiency (stapling) and financial outcomes (members’ best financial interest duty).
In contrast the Retirement Income Covenant includes language which provides room for, but doesn’t direct, funds to provide assistance to members in areas such as budgeting tools, retirement forecasts, and factual information about key retirement topics. This lack of obligation leaves the degree of benevolence to trustee discretion, bounded by the need to meet the sole purpose test and be in beneficiaries’ best financial interests.
As it stands through the policy lens, super funds are viewed as product providers, and regulated accordingly, while the benevolent fiduciary element is less clear and left to trustee discretion.
In practice there is dispersion amongst funds relating to their degrees of benevolence. Some funds provide a range of services and support to their members which extends far beyond their product offering. A good example is assistance with age pension applications. Other funds are highly disciplined in focusing purely on product provision and services directly related to their product. The target market for a fund’s products (e.g. direct to member or via financial advisers) goes some way to explaining differences, but even within similar fund types there exists dispersion of services and culture.
Need for a central retirement coordinator
Retirement is a confronting challenge for Australia (and the rest of the world, although Australia’s means-tested age pension creates additional complexity): not only is it a highly complex financial problem, but for many it is immensely emotional. Add in low levels of financial literacy and the scale of the challenge starts to emerge.
A well-formulated holistic retirement plan encompassing all elements of the three pillars is a starting point. This needs to be undertaken in a personalised fashion at a household level and account for age pension, superannuation, home equity, and other investments. Unfortunately, through this lens the benefits of the covenant will be capped – it is difficult for super funds to account for the full household situation, while it is unlikely that they will account for home equity and other investments.
Further to this is the need for implementation assistance. Many retirees don’t transfer their savings from accumulation to a tax-free decumulation superannuation account. Many find the process of applying for the age pension difficult. Assistance would benefit many with these processes.
But all of this reflects a financial plan targeted at the point of retirement. It doesn’t incorporate aged care planning, a significant issue and one where implementation is confronting. Retirement planning and administration is not a one-off. Plans require updating as circumstances, including health, change.
The question is, who should be the central coordinator to guide consumers through all of these issues, from planning through to implementation? Given the complexity, we see a clear need.
Only two candidate providers
This is a large scale problem and shouldn’t be constrained by ability to pay. This rules out the traditional financial advice industry as a core provider – it does not have the scale and it cannot sustainably support lower wealth clients.
The Government is a potential solution, whereby a coordinated aggregate of select services provided by Centrelink, MoneySmart, the ATO, and My Aged Care, could underpin a holistic retirement service. Our research (with CoreData) has found that trust levels in these individual services are high.
Super funds are the other candidate solution. Their focus on retirement and their relationship with members has them well-placed to provide a more holistic service. Despite the product provider lens, funds are experienced in managing the types of cross-subsidisation decisions required to deliver services to a large range of members in different circumstances.
An argument could be made for banks, especially in combination with technology-based solutions. But the need for human touch points and the cultural challenges of cross-subsidisation represent significant hurdles.
The need for a holistic retirement support service will become increasingly clear. We believe Government and super funds are the two lead candidates. But for super funds to take the lead would necessitate the acknowledgement that they are more than simply product providers.
