Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 153

Large funds need to earn retirement loyalty

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.

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

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.