MySuper Member Outcomes v Market Meltdown Outcry
This virus induced market turmoil has highlighted the inconsistencies of using a Fund’s net investment performance as the measuring yardstick for member life-long retirement outcomes.
The current messaging of don’t panic, don’t switch, you have time till retirement, as a member’s balance and a fund’s net returns are decimated, is appalling. However, it is all trustees can currently do because of the poor design of their default option and the method by which the industry has historically measured itself.
If trustees had implemented a well-designed tailored default, as found to be better by the Productivity Commission, they would instead be empowered to deal with this crisis. They would now be building trust, having managed sequencing risk and be in a position to take advantage of the dips and influence the ongoing individual consequences. Instead, by treating members as a homogeneous group, legitimate questions on investment strategy design are being raised, trust lost and opportunities foregone.
The messaging wouldn’t be “you’re all in this together, hold on tight as you ride the roller-coaster”. Rather messaging and investment options would be tailored by age and outcome cohort, using Human Capital design concepts.
For example, for the young (and the vast majority in MySuper are younger) and those with a projected retirement balance in the bottom quarter, the messaging could be:
“You currently have a relatively lower balance, however your remaining contribution capacity and time to retirement (Human Capital), is large. Your balance in percentage terms has been impacted by the market decline, however the amount involved in dollar terms is small compared to your projected retirement outcome. For these reasons, your trustee has a default design that has you invested in a high growth option. History has shown growth assets while more volatile, do rebound and outperform over time.”
Conversely, for the fewer older members, again with a projected retirement balance in the bottom quarter.
“You may be concerned about recent market declines and the impact on your balance as retirement approaches. We appreciate that with your lower than average projected retirement balance every dollar lost is of particular concern, although the impact may eventually be partly offset by age pension considerations. For these reasons, your trustee has a default design that has had you already invested in a more conservative investment option. History has shown these conservative assets are less volatile and as such the impact of the recent decline on your balance should be more moderate than would otherwise have been the case.”
In regards to influencing the ongoing consequences for all members, as time progresses, unemployment rises, contributions change and markets rebound, members projected outcomes will move between cohorts. That is then reflected in annual statement projected retirement balances, driving automatic changes to investment options and messaging.
In order for the industry to emerge from this corona crisis in a better shape, with a better default design and with a focus on higher member retirement outcomes, we have provided a range of resources online for use as you or your colleagues work at home or are in self-isolation.
Firstly, there has been a significant volume of academic and industry research papers and studies on better default design completed in the last ten years. We have created a library of the most insightful pieces.
Secondly, we are extending the free trial of the popular MySuper Outcomes Tool App, for a further month. This downloadable tool enables Member Outcome comparisons across all 96 MySuper funds. For those that missed the launch, there is an introductory Outcomes Tool video. This tool, which is based on the APRA Heat Map data, enables comparisons of Members Outcomes, as opposed to a Fund's Performance. You can assess the impact of potential mergers on the target funds membership profile using the acquirer funds five year net investment return or ten year target performance. It also indicates the impact on member outcomes of having a well-designed default instead or in addition to merging.
The MySuper Outcomes Tool does not yet include the impact of tailoring, which requires a customised report. We complete those reports remotely, requiring only provision of three columns of data from your funds 30 June 2019 de-identified member statement data – being age/balance/projected retirement balance. The auditable report uses the funds existing investment options (return and loss) ratios as already reported to APRA. This report then forms a fundamental part of your Member Outcomes Test (SPS 515/516), which all funds must now complete. It can lead to board reports, then consideration and preparation for implementation of a better tailored MySuper default as your fund emerges from this crisis.
Legislative change has occurred and industry enhancements are now occurring. The focus is on the member, their journey and retirement outcome. APRA has warned funds not to wait until they come knocking! Their Heat Map on fund performance metrics is just the start. Parliament has given them over $150M extra - in part to fix this issue, with the government’s 2019 capability review highlighting APRA’s past failings, including the need to build a MySuper Outcomes Tool. As outlined in their 6 March 2020 opening statement to the Senate Economics Legislation Committee, member outcomes and accountability are now effectively APRA's KPI's - however they have had to suspend their efforts till September. Further, MP’s and Senators are closely watching having already quizzed APRA on outcomes versus performance, with more clearly to follow, particularly once funds themselves report on their member outcome definition and strategy, by cohort as required by the new test. The oversight by parliament of laws passed maybe temporarily restricted by the virus, however it is in these periods that organisations like APRA and their executives take particular care to fulfil their newly funded commitments. Be under no doubt they will be watching which Super funds take the opportunity of this additional suspension period to improve, and who doesn't. Member and system retirement outcomes are and will remain a hot reputational issue and matter of national public importance as soon as this is over.
Fortunately, this default option improvement program is ideally suited to the new ‘at home’ self-paced work patterns we are all facing. It involves deep, quite thinking with consideration of the issues, by a funds administration, communications, investment, investment operations, legal, product and strategy team executives. The changes required are all extensions to current practices and hence initially are considered in isolation. A range of free material is available on our website to facilitate and explain exactly how to produce a well-designed tailored default. The strategy level video provides an overview.
We are offering an obligation free online step through of the material by phone or video, to Fund team members in the above functional areas and to executives and directors. This is a time to plan for the future, improve product efficiency and provide training by reaching out online, so that your fund emerges in better shape for future growth.