This is the third in a series of articles highlighting the leadership attributes that can help superannuation industry executives move from their historical focus on accumulation to a whole of life view and particularly the provision of retirement income.
For executives in the super industry, driving change from an accumulation to a whole of life focus is a major change management exercise. How do you drive change management? Leadership expert Harvard’s John Kotter identifies creating a sense of urgency as step 1 of the 8-step programme he prescribes in Leading Change.
Where is the sense of urgency?
It’s often said that we need a ‘burning platform’ to create the sense of urgency to drive change. While APRA statistics suggest we should have that urgency due to poor member retention, rarely do we hear the word ‘fire’ from our executives.
According to the 2015 APRA report, over 50% of funds are losing more accounts than are coming in and, likewise, over 50% have higher outflows than inflows when benefits payments are included. And most funds are doing a poor job in retaining members into pension phase, with the number of lump sum payments dominating pension account openings by a factor of four to one.
The retention problems can be devastating for fund economics and, like demographic changes, can manifest themselves slowly at first and be overlooked. But continued gradual losses of members or outflows erode a fund’s economic competitiveness. The industry would appear to have an impending loyalty problem.
Fred Reichheld has been perhaps the most articulate advocate of ‘loyalty management’ as an imperative of business success. The author of The Ultimate Question and creator of the Net Promoter Score championed the idea that loyalty leadership was the key driver of success in many businesses.
Loyalty drives firm economics. Firms with better client loyalty enjoy both higher revenues and lower costs. Higher revenues come from more sales to existing clients, the additional revenues from not losing clients or holding onto them longer, and from referrals from satisfied clients. Lower costs come from satisfied clients having a lower cost to serve for many reasons (eg acquisition costs are defrayed over a longer tenured relationship). And lower marketing costs accrue from referral.
Driving client loyalty
Even before I joined Vanguard in 1980, the redemption ratio (the inverse of retention) was a key driving variable. We drove redemption rates to less than half the industry average. That meant Vanguard each year had to sell billions less, later tens of billions less, and today hundreds of billions less than competitors to exceed them on cash flows. That fact, certainly more than large or clever marketing spend, was the driver in making Vanguard the top US mutual funds manager by cashflow for nearly every one of the last 20 years.
Client loyalty is something you have to earn and can’t buy or take for granted. It’s multi-dimensional as clients appraise your features and services against competing offers. It’s built on trust over time, is hard won and easily lost. It’s often built on a relationship - personal or brand-related - and a sense of engagement. The heart of a firm’s strategy and execution should be beating to earning client loyalty.
But it’s also obvious that there are certain critical points in customers’ lives when client loss is more likely. The two most important for our industry are job change and approaching retirement. We’ll focus on retention at retirement here. People over 50 control more than 60% of assets in the super system and balances are, on average, much larger for pre-retirees and retirees than for younger members.
Member retention in retirement
It should be an urgent and galvanising problem that many superannuation funds are losing more than 90% of their members going into retirement phase. Ironic indeed that a fund should nurture its members throughout their working careers and then lose them when the fund should be helping them with the ultimate mission of the super industry: assistance through retirement years.
Talking to fund executives, few have really taken the retirement phase loyalty challenge to be a matter of urgency, and there are even some executives who think the fund is only about accumulation. Some funds don’t even offer a pension choice.
It’s a loyalty leadership challenge. A multi-year and multi-dimensional approach to increasing the organisational focus on retirement is needed. The fund needs to demonstrate its credentials and interest in helping members with their journey to and through retirement. Raising awareness that the fund is there for the member in retirement is a key element.
Providing retirement income forecasts is an obvious and effective way to start members thinking about retirement with the fund, supplemented by coaching and advice solutions. Advice is probably the best way to help members with retirement. And as traditional advice won’t reach the vast majority of members, digital advice has to come to the forefront, with the option of triaging to traditional telephone based or face to face advice when needed.
Simplifying the transition to retirement is also critical. A complex transition is the enemy of member loyalty. Behavioural finance research shows how making something easy is a winning strategy for serving members. A default solution, like the government’s mooted Comprehensive Income Product for Retirement, may well be part of the answer.
It's critical to the member that they make the right choice and get the help they need to do so. The right decisions at retirement are challenging and highly personal. Default MySuper may get many members through their accumulation phase but in retirement members will need a personalised solution.
To focus on maintaining loyalty, the right metrics are critical. As Peter Drucker argued, “what gets measured gets improved.” Funds should establish their loyalty metrics around retirement and then work relentlessly to improve them.
Fund executives have a burning platform to move fast on client retention around the retirement phase. They must develop the sense of mission that can motivate their teams around highly measureable goals. Funds that lead and win in maintaining client loyalty through retirement will grow and prosper.
Jeremy Duffield is Co-Founder of SuperEd. See www.supered.com.au. He was the Managing Director and Founder of Vanguard Investments Australia, and he retired as Chairman in 2010.