Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 333

Five innovation traps for super funds to avoid

Large superannuation funds are currently debating the merits of APRA’s imminent ‘heatmap’ system of grading MySuper funds under the colours of red (a flag for members), yellow (a further look required) or white (a relatively clean bill of health), with varying shades. Note there is no green because, to quote APRA Deputy Chair, Helen Rowell,

"This is not a traditional 'traffic light' system with three distinct and simple categories. This is intentional. The heatmap is designed to emphasise underperformance; it’s not meant to give a pat on the back to better performing MySuper products, or be seen as a peer ranking mechanism." 

This idea emanated from the Productivity Commission’s recommendation earlier this year that superannuation fund members be able to rely on a ‘best in show’ default fund shortlist.

Looking for more innovation from super funds

Behind the Productivity Commission’s original recommendation is one aspect that deserves more attention - that APRA-regulated funds be assessed on a “record of innovation, including in the use of member-related data, and in developing products over time (including retirement)”. This is a timely reminder that innovation is a thing of value; a cultural attribute that enhances a fund’s ability to deliver on its central mission to members.

The Productivity Commission’s exhortation sends a message that superannuation funds (and industry segments) who can genuinely innovate will have a competitive advantage over funds that don’t. More to the point, members of an innovative fund are more likely to be better off in retirement than members of a fund that does not innovate.

Our published research on ‘Status Quo Thinking’ notes that genuine innovation is surprisingly hard to master, whether in the corporate, superannuation or other sector, and questions whether superannuation funds could show a good track record on innovation. Scale, career risk management, peer sensitivity and cultural risk aversion are among the headwinds to effective innovation that funds face.

The architects of both the Cooper (2010) and Murray (2014) reports into superannuation have criticised the industry for its lack of innovation.

Regulators want innovation but make it difficult

The CEO of ASFA has pointed to the raft of regulations and reviews as ‘crowding out’ funds’ ability to innovate.

Regulators cannot have it both ways – they cannot both affirm the Productivity Commission’s views on innovation and also foster an environment that makes it hard for funds to innovate. 

Our own research suggests that while innovation is hard to do, funds can take two immediate steps to seize the innovation mantle. The prize – giving members confidence and dignity in retirement – is large and the risks are potentially existential for funds who attract a ‘red light’ grading from APRA.

First, initiate an explicit discussion within the fund about what innovation really is.

Does the superannuation fund speak innovation language? Is innovation defined too timidly. For example, is existing thinking 'tweaked' rather than challenging, or even (shock, horror) changing the paradigms themselves? For example, innovative retirement solution design surely needs to go beyond merely tweaking existing pre-retirement accumulation products and begin by redefining aims in terms of yield and longevity risk. What does an ‘innovation budget’ look like within a large superannuation fund and who sponsors it?

Second, we encourage funds to ‘take their innovation temperature’ by working through their ‘status quo thinking traps’.

We identify five traps to avoid to encourage better innovation.

1. Risk aversion or blame culture – how powerful is the fund’s member-centric culture in driving a good idea forward? Is there individual aversion to change, a lack of reward or a perceived penalty for sponsoring new ideas?

2. ‘Status quo’ roles, responsibilities and resourcing – every superannuation fund has built a ‘value chain’ designed to deliver retirement dollars to members’ accounts. Across this value chain, are the fund’s roles designed to simply ‘keep up with business’ or given the bandwidth to generate and test new ideas?

3. Functional silos – who in a fund is tasked with identifying opportunities to redesign, unbundle and reconfigure across the value chain? These should be people with industry-wide perspectives, not focused on deliverables within functional silos.

4. Fund size – corporate literature on change identifies size as an inhibitor of genuine innovation, not an enabler. Scale entrenches status quo thinking and new ideas are viewed more cautiously as ‘risking’ the existing business. Large superannuation funds have criticised disruptors like Spaceship and Zuper, but how open are large funds to the lessons these disruptors can teach them?

5. Industry groupthink – APRA-regulated funds can point to a healthy level of industry-wide dialogue and information-sharing, but does this really evidence a collegiate, ideas-generating culture and a commitment to continually evolve? One could argue that, instead, it engenders a collective status quo which is a safe space for large funds to occupy.

New ideas acted on can have an ‘annuity’ value delivering over and over again, and this value compounds over the long-term horizon in which superannuation funds operate. Given the high-stakes, long-term, society-wide mission of superannuation, the ‘cost’ of new ideas that disappoint must, surely, pale in comparison to the opportunity cost of genuine innovation that never sees the light of day.

The Productivity Commission, in airing (again) the need for the superannuation industry to be genuinely innovative, was onto something important. Funds should take their cue, and demand that regulators offer more than just lip service in helping funds rise to the innovation challenge.

 

Raewyn Williams is Managing Director of Research at Parametric Australia, a US-based investment advisor. This material is for general information only and does not consider the circumstances of any investor. Additional information is available at parametricportfolio.com.au.

 

RELATED ARTICLES

SMSF technology isn’t standing still

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require trustees - even SMSFs - to offer a retirement income product to protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.