Members' best financial interest - wellbeing banned?

Super fund member engagement and, in particular, anything tagged as being wellbeing-related appears to be in the legislative headlights. This is because as part of the ‘Your Future, Your Super’ reforms, super fund trustees must now act in their members’ best financial interests. This means that trustees are now banned from incurring expenditure that provides only non-financial benefits to their members. So what does this mean for member engagement?

No more ‘wellbeing’ initiatives?

Interestingly, two of the three case study examples provided in Treasury’s draft Explanatory Materials referred to super funds that provided wellbeing-related services.

In the first case study example, Yellow Super 'decided to spend an amount of beneficiaries’ funds in wellbeing and counselling services due to its preference for providing beneficiaries with a holistic retirement experience.’ The expenditure was not permitted under the new rules because ‘while beneficiaries derive some benefits from these services, they are not financial benefits and offering the services comes at financial cost to the fund.’

In the second example, Orange Super decides to invest in a health insurance company that ‘offers its members access to an online health and wellbeing information tool.’ In this case, the fund's investment was only justified by its returns, regardless of any value ascribed to the tool. This demonstrates that it’s OK for a fund to provide wellbeing-related services, so long as it comes at no cost.

Wellbeing has value, right?

One interpretation of these new rules is that they suggest that members’ wellbeing has no value. But even an economic rationalist would disagree with this proposition; economists seek to maximise ‘utility’, which is a concept that stretches beyond financial gain. Even to an economist, it’s not just about money.

In the context of super, are we suggesting that there is no value in the subjective sense of wellbeing that members gain from feeling that they have sufficient income to cover their retirement? Or in the comfort they gain from knowing that their family will be financially secure if they were they to die prematurely? These feelings are partly driven by the amount a member has invested and by the terms of their insurance cover, but they are mediated by how the member thinks about those things. In psychological terms, not all dollars are created equal.

An even more vigorous defence of the value of wellbeing would suggest that, in the end, money is merely a means to greater wellbeing. Money has no intrinsic value – it’s a stepping stone to lived experiences, and to the rich psycho-social benefits that those experiences entail. In this case, a super fund that focusses solely on financial benefits at the exclusion of wellbeing is akin to Kodak focussing solely on producing photos at the exclusion of capturing memories. Each is misaligned with its customers' underlying needs.

But theory diverges from practice

Despite these concerns, I have some sympathy for what the new regulations are trying to achieve. Too often ‘wellbeing’ (along with ‘member engagement’) is a woolly concept that is used to justify all manner of initiatives that have intuitive appeal but lack empirical rigour. In these cases it’s not that the idea of enhancing members’ wellbeing is wrong, it’s just that the approaches taken to do so are flawed.

Much members’ money has been wasted on creating ‘information tools’ that members don’t use, investment charts that members don’t view, financial products that members don’t select, financial education programs that members don’t enrol in, and explanatory brochures that members don’t read or understand.

It is therefore understandable that what legislators hear when they read the words ‘wellbeing’ is ‘a waste of members’ money’. Arguably, given the poor track record of these types of initiatives, requiring funds to quantify their benefits is appropriate.

So, what can funds do to better engage with members within the new rules?

1. Enhance core functions

The Explanatory Materials note that ‘so long as expenditure is essential to the prudent operation of a superannuation entity … then the expenditure decision would likely be regarded to be in the best financial interest of the beneficiaries.’ The types of expenditures that fall into this ‘essential’ category include ‘investments in systems, risk management, governance and the engagement of sufficient resources to operate the trustee’s business operations.’

Arguably, certain aspects of the way a fund engages with its members are essential to the fund’s business operations. For example, funds need to have a web site that is easy for their members to navigate and that helps them make financial choices that are in their best interests. Funds need to provide their members statements that communicate effectively and that nudge members towards the actions that will help them reach their retirement goals. And funds needs to have forms and processes that facilitate members taking actions and achieving associated financial outcomes. Expenditures related to each of these things could therefore be considered 'essential'.

Relatedly, so too would be expenditures on developing the skills within a super fund’s employees that help them to better understand, influence and engage with their members. Surely the new rules are not intended to require funds to employ poorly trained staff, to force them to follow labyrinthine processes and to give their members unwieldy forms for them to ignore.

2. No additional cost

As discussed above, client engagement that genuinely enhances members’ wellbeing (ie that provides a non-financial benefit) is OK, so long as it does so at no additional cost. Beware though: because ‘the best financial interest obligation is not subject to any materiality threshold’, not a single extra dollar can be spent. This rules out a lot of things, but not everything.

If an email campaign is already planned to go to members, then applying behavioural insights to tinker with the words on the page, or the order information is presented, or the scale on an investment chart, or the list of members who are going to receive the email can each increase the impact of that engagement without increasing the cost. You don’t necessarily need a big budget and a fancy marketing campaign to positively influence member behaviour. Rather, you just need employees with the necessary behavioural skills and frameworks.

3. No additional NET cost

Even if additional costs need to be borne, that could also be OK so long as there was an expectation that those costs would be offset. The Explanatory Materials provide an example in which expenditure on a marketing campaign to promote a fund is permitted where ‘the trustee believes that this will allow them to reduce their fees by 0.01 percentage points by spreading the fixed costs of the fund across more members’.

There are a number of real-world examples where this type of situation is possible: a campaign to encourage members to contribute more to super, or to consolidate their multiple super accounts, or to retain their existing account rather than establishing an SMSF, or to retain their money in a pension account at retirement rather than taking a lump sum, or to top up their life insurance, for example. These types of initiatives are potentially permissible even if the financial benefits to members are difficult to quantify.

4. Quantify the financial benefits

Of course, some of the financial benefits from the types of member engagement initiatives listed above are actually quantifiable. Every dollar contributed to super has an expected value at retirement, for example. Every dollar that qualifies for a government co-contribution has an even greater value. Every dollar retained in a pension account at retirement rather than being deposited into a low-interest savings account has an incremental value too.

Other engagement initiatives also have quantifiable financial benefits. A campaign to encourage younger members to invest in a relatively high-growth option can be expected to lead to them having substantially greater wealth at retirement. As would a campaign to encourage members to reconsider their investment choices after they switched their investments to a cash option in response to recent market volatility. Sure, there are risks involved, but for investors with a long-term investment horizon the benefits of higher growth are likely to justify taking those risks.

5. Employ empirical rigour

When assessing whether to incur expenditures on member engagement (or otherwise), ‘trustees will need to have robust quantitative and qualitative evidence to support their expenditures’ and use ‘a business case, supported by technical analysis … and quantifiable metrics to reflect expected financial outcomes.’ They need to articulate the risks associated with achieving the outcome along with any mitigation strategy.

This assessment requires a combination of financial information, member data and behavioural insights. It requires a willingness to experiment, to measure, to analyse and to be guided by the evidence. It requires being able to demonstrate that the fund ‘acted reasonably in forming the view that the expenditure was in the best financial interests of beneficiaries,’ based on the information that was available at the time. As discussed above, this does not mean that funds should now ignore their members’ wellbeing. But it does mean they need to make sure that woolly thinking doesn’t result in detrimental financial outcomes for members.

The good news for funds is given these are now legislative requirements, presumably any costs incurred in developing businesses cases and in gathering evidence is considered an essential function!