Your Future, Your Super reforms are a far-reaching package, and the impact will play out over 2022 and beyond, says WTW's retirement specialist Nick Callil.
What will the superannuation landscape look like in 2022?
This has been the biggest year of change in our industry for a long time. Your Future, Your Super, particularly the performance test and stapling, is a far-reaching package, and the impact will play out over 2022 and beyond.
For instance, funds are still refining investment approaches in light of the performance test, and next year funds will need to contend with its extension to choice products.
I expect a much wider set of products to fail the test, including some ESG options. This will create some challenges in how funds communicate their investment approach to members and the return outcomes they achieve.
But the most visible change we saw in 2021 was the acceleration in mergers. After so many years of inactivity, it seemed like there was an announcement every couple of weeks. That is very likely to continue next year, although at some point it will start to slow down.
Funds will focus on mergers that have already been announced, and as a cluster of 'mega funds' emerges, we'll see the marginal benefit of joining with smaller funds recede.
What are the main challenges?
They're pretty much the same as we've seen over the last few years - coping with ongoing regulatory change, greater regulator and media scrutiny, and heightened member expectations.
But I think a rising challenge is managing organisational complexity. As the leading funds become much larger, they will inevitably become more complex.
They will have staff drawn from a much wider set of disciplines, doing quite different things and potentially not physically working together.
Boards and management teams must create and maintain a strong and uniform culture. An ongoing challenge for them will be to remove any barriers that may creep in that would distract their employees from focusing on their remit of delivering great member outcomes.
It will be interesting to see the impact of the new best financial interests duty.
On the one hand, Trustee boards have generally interpreted their role as acting in members' best financial interests. On the other, there are suggestions that the hurdle for approving a major expenditure program - say, a technology upgrade - has been lifted.
I anticipate that the new duty rule will lead funds to quantify the benefits of their expenditure programs more thoroughly and so 'prove' that they improve member outcomes.
For some funds, this might mean expanding the modelling capability to measure a benefit that is likely to be transferred to members over time.
Simply stating, for instance, that a merger will increase scale and reduce the unit cost of doing business won't be enough on its own - there will be a greater focus on the tangible financial benefits to members.
This, can be challenging - for example, how do they quantify the financial benefit to members of an advertising campaign?
I know the advertising industry has developing tools to measure return on spending over time, and I think it is something the superannuation industry may need to develop also.
Funds in the retirement phase have the Retirement Income Covenant attached to them. What are the biggest obstacles?
The RIC is undoubtedly a big focus for funds during 2022. Most funds I've spoken with have started working on this already despite the legislation not having passed parliament this year.
Of course, funds are not starting from scratch - generally, they have been working on their strategy, and some have produced retirement income products for several years now.
However, the anticipated legislated requirement for a documented strategy that needs to be approved by the Board and published in summary form to members will sharpen funds' thinking.
In many cases, it's already accelerating their plans, and that's a good thing in my view, given the long delay we've seen in building out the retirement phase of superannuation.
But there are many challenges with meeting the 1 July 2022 deadline. One is data - that is, getting hold of good data on the fund's retiring members, both from within the fund and externally, that can be used to build up classes of retiring members, or 'cohorts'.
Funds do hold some useful data but there is much that is not readily available. For example, knowing the level of debt that retirees carry into retirement would be very helpful. They'll have to do conduct some research to source good external data.
The other challenge is how funds steer their members towards the retirement income strategies they devise while remaining within the regulatory framework for providing financial advice. Treasury's Quality of Advice Review will not be completed for some time after the covenant commences, so funds will need to navigate their way through this carefully.
Will third-party providers get a win from the RIC?
Longer term, there are opportunities for well-designed product offerings from third-party providers to play an increased role in the retirement strategies offered by funds. The key point for providers in designing such products is to consider what features they can provide that add value to what funds can do themselves, and make sure that's what they focus on.
For example, funds can do pure investment management very well - they have spent a long time building up this expertise - so a product by a third party focusing on that is unlikely to gain much traction. However, products that harness the risk management features needed by retirees - whether it's longevity risk management or managing the drawdown risk early in the post-retirement phase, which typically requires a balance sheet - would be of interest to funds.
This opportunity won't expire on 1 July 2022. The retirement strategy signed off by funds ahead of that deadline will, in many cases, contain only a higher level product strategy, given there is much prior work to be done in understanding the funds' membership and developing cohorts. So, the detailed product and technology development phase may be a subsequent step taking place only after next year's deadline has passed.