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Stop the tinkering and bring on the ideas

[Editor’s Note: In late 2016, Dr Martin Fahy became the CEO of the Association of Superannuation Funds of Australia (ASFA), the peak body representing institutional super funds. Despite the growth of SMSFs, institutions manage two-thirds of the assets in superannuation.

Dr Fahy spoke at the Pritchitt Partners Annual Reception on 31 January 2017, on ‘2017 super outlook: what would good look like?’ His wide-ranging speech suggests ASFA will become more active in publicly advocating for big funds and their role in superannuation.

He made many insightful comments which other leaders should consider in the policy debate. This version, approved by Dr Fahy, paraphrases his talk in the interest of brevity, and the headings are mine].

We need a market for ideas

There is a market for ideas where we have a large community of people who are selling ideas and a community of people who are buying ideas. At heart, I’m a markets person. If the market is to work then we need purveyors of ideas and we need consuming critics. In a world where superficial thinking often masquerades as policy, we need an alert and engaged community of consumer critics and the media is an important part of that. For me, industry bodies and associations play an important part including as critics of public policy.

Superannuation is working in an aspirational society

I fundamentally believe superannuation is working. As a piece of public policy, it works because it provides dignity in retirement. Despite the claims of the Grattan Institute, Australians have aspirations beyond the age pension. Australians are in the business of lifting not leaning, and superannuation speaks to the culture of self-reliance which has defined this country. Superannuation supports fiscal sustainability and reducing the unfunded pension liability, it drives the financial system in infrastructure and nation building, it underpins the stability of the banking system with banking deposits, it’s recognised worldwide and in terms of adequacy, it punches above its weight. If you sit like me with parents who are on an age pension in Ireland, where in 2010 and 2011, government spending contracted from 105 billion pounds to 76 billion pounds in a year, that’s what austerity looks like and it really hurts people.

It’s important for these reasons that we commit to the important and aspirational goal that we have for superannuation. I’d like to state clearly that an adequate and dignified retirement is not a wishy-washy, shapeless, vague idea. Constructs that underpin the western liberal democracy and the common law system such as the rule of law, the reasonable man, best endeavours, negligence, even indecency – all of these exhibit a level of constructive ambiguity that allows them to speak to context. Embracing constructive ambiguity is a key part of good public policy and the way we engage with each other. To insist on clarity is to oversimplify. On the ASFA standards, we should be prepared to push back when people say ‘adequate’ and ‘dignified’ are not terms that can be precise.

Public policy tinkering and freakonomics erodes confidence

In the market for ideas, it’s easy to become complacent. The danger comes from two main sources: first is the tsunami of public policy tinkering that has characterised public policy thinking over the last five years. It causes uncertainties, it erodes public confidence in super and it erodes engagement. It drives up systems costs because we are constantly updating systems to take account of regulations. It also drives out the space and opportunity for real value-added innovation.

If you look at the development road maps across super funds in this country, there’s an agenda which runs out for years and the burn rates run into millions of dollars every month, purely taking account of regulation changes. They impinge on the amount of capital that can be invested and they leave no space, time or appetite for genuine innovation.

The second thing that creates a danger for super in the midst of the skirmish about fees and costs or objectives or RG97 is that we are losing the battle for the hearts and minds of Australians. The compelling narrative that sits at the heart of super needs advocates and defenders. As an unqualified good, it needs to be defended from those people who would sell it out for short-term fiscal imperatives, political expediency, the Grattan-inspired chattering classes and dinner party freakonomics. It’s worthy of defence and our best unafraid thinking.

Super must recognise the changing reality of work

The first vision I have for super is the need to embrace the changing reality of work, jobs and the organisation of effort in the economy. Self employment and independent contracting may become the dominant vehicle for labour market transactions. Portfolios of careers could become part of the mainstream reality. The ‘gig economy’ is changing and super cannot be found wanting. Super must be personalised, on demand and ubiquitous.

Fintech is up to 15 years away from genuine disruption

The second need is to move beyond the superficial engagement which has defined fintech to date. We need to abandon the simplistic ‘there’s an app for that’ sort of garbage can of solutions looking for problems and really start to engage with what are the difficult challenges in super.

Instead, we need to deal with the messiness of the superannuation value chain. We need to nurture a system where markets trump hierarchy, open architecture trumps regulatory standards, where a smart teenager in a college dorm might disrupt super, hopefully from within.

The market for ideas around fintech deserves some scrutiny. You know something’s a fad by three characteristics: there’s more written about it than it actually known; there are more people selling it than buying it; and the money is in the seminars.

The challenge for fintech is to deliver on the promise by getting into the plumbing and making a difference and there’s a long way to go on this. I think for fintech to disrupt super, we’re looking at a 10-15 year period. It needs a lot of capital to change it.

Own the reinvention of yourself

We need unafraid, hard thinking about the interrelationship not only between the traditional pillars of retirement (superannuation, age pension and the family home), but also with health care, age care, and what I call ‘vitality’ or ‘transformation assets’. A large part of your success in post-retirement (putting aside money) is our ability to own the reinvention of ourselves that the shift in employment will mean as we get older.

We need someone to come forward with a higher purpose for our retirement. At the moment, we think about retirement as recreation, which means retirement is about consumption. It is essentially inwardly-focussed. In that setting, it is unfulfilling, it is very expensive, and it is economically-draining. Somewhere out there, and this is a challenge for baby boomers, we need some way of transforming our perception of retirement away from recreation and the associated consumptions and towards a higher purpose. That will sit uncomfortably with many people. It’s not about working until you fall over but it is about a higher purpose.

The key players are the baby boomers 

Much as we like to frown on their frivolous lives and what they’ve achieved, the reality is we’re just jealous. They reinvented relationships and sexual intimacy in the 1960s, they gave us the protest movement, drugs, sex, rock and roll, Bob Dylan, and now we need them to reconceptualise retirement away from a five-year period of recreation leading to your demise, into a 25 to 35 year engagement which is about you recreating who you are.

That means men becoming comfortable in jobs that involve caring, looking after elderly parents. It’s a huge challenge and where it will come from and what it is, is a mystery.

GFC killed financial innovation

My final point is we have become gun-shy about financial innovation since the GFC. Securitisation, credit default swaps and the alchemy of financial engineering have acquired a bad name. To some extent, we don’t want to engage with the science. We have to overcome these residual fears and embrace socially-useful financial innovation. The reality is such innovation gives us portfolio effects, it limits downside, it allows us to monetise things.

I see this innovation in retirement and CIPRs, particularly in the orderly monetisation of the family home to secure age care. Here, we need to address some of the conflicts of interest that children face, the lumpiness of the assets, the general market failure we have seen around reverse mortgages.

We also need innovation around insurance in super, member engagement (and the answer is not an app), and perhaps affordability. They would all benefit from product and technical innovation, process innovation.

Superannuation is a collection of paradoxes

The original idea of super was a collective group concept with pooling effects to give scale. The paradox is that we then want to personalise the offer. It is delivered through the employment channel but individuals want a tailored brand experience. We ask ourselves, if Apple were a superannuation fund, what would it look like?

The other challenge is super is fundamentally about delayed gratification but we need to build engagement in the here and now. I don’t know how to build this engagement but I do know there are ideas out there that can do it. It’s about a higher ideal and communities, not instant gratification.

Brands matter

I want to conclude on the falsehood that is dominating public policy with respect to super. The assumption is that superannuants are largely indifferent between two funds if they pay out the same amount. Fund A pays half a million dollars at age 65, Fund B does the same, they have the same risk, the same insurance products, and that’s it.

All of the empirical evidence says I am not indifferent between them. The reality is (and self managed super shows this) that people will pay a premium for control, to be associated with a brand, to be associated with a community, for ESG purposes, for ethical purposes. The myth that superannuants are indifferent between equal retirement amounts is doing enormous damage. It’s given us an objective function that says it’s about reducing fees and costs, and maximising net returns. Citizens in this country are not that stupid. They deserve public policy settings that take account of the multiple factors that they are trying to achieve. The things they want to do in terms of ESG and infrastructure are not about finance, they’re about values and belief systems and contributions to communities they wish to identify with.

The aspiration I have is that we should embrace the complexity of the policy setting environment and its messiness.

 

Dr Martin Fahy is the Chief Executive Officer at the Association of Superannuation Funds of Australia (ASFA).

 

7 Comments
Douglas Bucknell
March 05, 2017

Many good points raised, but remember also his comment 'super next on the menu' for Fintech disruption less than 6 months ago at ASFA conference! Yes 'would all benefit from product and technical innovation, process innovation', and redefining retirement (by tailoring) to what individuals can achieve - Smart MySuper Defaults and tailoring is on the way - that's bringing on the idea's!

Craig Keath
March 05, 2017

Good article. It's up to all of us to establish trusted relationships with our members to ensure our relevance and guide them on their journey. We've got to get past the regulatory hurdles excuse - that's just part of being in this game.

Wayne Bishop
March 02, 2017

Relevant article. Particularly the reference to the industry having to adjust to new ways of working.

John
February 23, 2017

"the Grattan-inspired chattering classes and dinner party freakonomics"??!!

When you throw dirt you always lose ground.

Lost me right there Martin.

Mark Hayden
February 23, 2017

That is a good thought provoking article/speech by Martin. I agree with the need for more engagement with super and the evolution of the concept of retirement. However I disagree with the inference that fintechs can be ignored and disagree with the defense of existing fees and costs (sections of our industry add costs but not benefits). My thoughts are that one or more fintechs may soon reduce the number/size of clips-of-the-ticket.

Been There B4
February 23, 2017

As a stockbroker advising clients on Superannuation for some 20 years, I wrote to Kelly O'Dwyer, a few days after last May's fateful Budget.

I informed her that my clients placed funds in Super with the purpose of funding their retirement. These people also subscribe to being responsible for for their retirement income, and NOT claim an AGE PENSION from the public purse. The "quid per quo" was the Commonwealth taxes fund income at the concessional 15% rate and Pension payments are tax exempt.

Well thank goodness the $500,000 lifetime Cap on NCCs did not come to fruition. But we now have a convoluted system that is challenging to explain to interested and intelligent people, and is a "trust me" for many others.

Graham Hand
February 23, 2017

Hi Been There B4, agree on your point of 'trust me', because it is so complicated that advisers can barely have a meaningful conversation with many clients. The client will either need to trust the adviser to implement or put it all in the too hard basket.

 

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