Retirement savings and wealth management

Creating growth through changePreparing for the era of the mega-fund

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Contents

Growing strong through change and adversity 4

The imperatives to change 6Funds under management are growing but the number of 6 funds and accounts are consolidatingThe population is moving from accumulation to retirement 6The government is reshaping the sector 6Competition is growing between funds 6

Consumers are becoming more demanding and need advice 6

Towards a new industry structure 8Embracing the change challenge 8Getting started while managing risk 8

Addressing the change imperative 10

Determining your proposition, model and role 10Providing a next-generation value proposition and superior 10 member experience Reforming operating models to reduce costs 10Making the most of data 10Increasing connectivity and openness 11

Outcomes of change 12

The emergence of the mega-fund 14

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Executive summary

The Australian superannuation system is facing an unprecedented period of change that is raising fundamental strategic issues. The decisions funds make over the next three to five years will play a crucial role in determining whether they survive the growth, consolidation and changes set to transform the industry.

For the foreseeable future, total funds under management will continue to surge. However, the number of funds is expected to decline and members will pull fees from the system by consolidating their accounts. Further, it is anticipated more assets will be held by retired individuals demanding a broader relationship with their fund.

At the same time, the industry is being re-shaped by government reforms and other proposals for change are being debated concerning governance, and the status of industry funds as the default for industry awards. These trends require the superannuation industry to re-assess the way it does business, develop new value propositions, and reconsider the appropriateness of historical business models.

For the industry, this represents a perfect storm of consolidation, cost pressures and the need to commit time and capital to re-engineer operating models in preparation for the new competitive environment.

To remain successful, funds must change from providing members with a simple accumulation service to offering tailored and comprehensive member experiences. We believe it is important for super funds to develop new, customer-centric value propositions that bring together the best of what current retail and industry funds offer, to achieve new economies of scale as the strongest funds grow beyond 750,000 members.

Put simply, the superannuation model created in the 1990s, still widely used today, must be transformed in three inter-related areas:

1. The simple accumulation function needs to be transformed into a comprehensive financial services business, offering tailored services suitable for retirement.

2. In the middle office, traditional registry functions will no longer suffice. Instead, funds need to embrace customer-oriented capabilities which make the relationship with members more personal and precise.

3. The industry as a whole needs to simplify, automate and integrate the work involved in managing contributions, rollovers and other service demands.

The funds that address these issues will emerge as the “mega-funds” that lead tomorrow’s industry. However, they will need to move quickly and make use of technology to realise their ambitions.

Growing strong through change and adversity

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The imperatives to change

Funds under management are growing but the number of funds and accounts are consolidatingBy 2026, the Australian superannuation industry will look very different with total funds under management forecast to rise from $1.3 trillion to $3.3 trillion.1

There will also be account consolidation as government policy drives change and individuals make rational decisions to combine their super holdings into single funds, especially as they near retirement. This will remove revenue from the system as fees fall in line with the number of accounts. It also appears that raising fees to offset falls won’t suffice. Instead, funds will need to identify cost savings in other areas.

The by-product of this growth and consolidation will be the emergence of “mega-funds”. The Cooper Review forecasts that by 2035 the industry will be comprised of 74 major funds. The largest fund is expected to grow from $40 billion today to more than $350 billion.2 By 2035, total funds under management in super is forecast to be $6.1 trillion3, helped in part by the expected shift from nine per cent to 12 per cent contributions.

The population is moving from accumulation to retirementAs the population ages, members are moving from contributing to funds, to seeking full or progressive payouts.

This shift will make it necessary for funds to manage a wider range of more complex transactions. It will also increase the onus on funds to provide more sophisticated services, including advice directly to members. This will become an added burden for funds, but will also present an opportunity for establishing deeper relationships with members.

The government is reshaping the sector The government’s reform programs are aimed at changing how super is managed and how consumers receive financial advice.

The reforms include new models designed to make super simpler and cheaper, including the creation of MySuper as a low-cost, commission-free default product. They also include SuperStream, which aims to make processing common transactions easier, cheaper and faster. Much of this will be achieved by improving data exchange standards.

In addition, the Future of Financial Advice (FoFA) program will change how financial advice is provided and how super products are distributed. This will, for example, abolish super-related commissions.

Together, these reforms will force radical changes to the industry’s structure and will impact fund business models.

Competition is growing between fundsThe Australian superannuation market may be among the largest in the world, but in this competitive landscape, the savings of 10 million Australians is not a large number to share.

In this context, the funds that attract the largest number of members to join their funds will be successful. This will be an expensive, tough and unavoidable battle, as the emerging mega-funds start to flex their power, through their abilities to invest in technology, marketing and purchasing power in areas such as investment management.

And while the contest for member acquisition will be fierce, it is likely to be overshadowed by the pressure on member retention. To date, the inertia of members around default funds has meant little churn. However, with the emergence of choice, increased awareness and the promotion of account consolidation, funds can no longer assume that a member will automatically stay with them for the duration of their employed life.

More important however, is the issue of retention at the point of retirement. As more Australians retire, the competition to retain members will intensify.

This battle for members will shape the way funds compete in the coming years.

The reform agenda, and its spur to competition make it essential for funds to develop compelling propositions for their members. To be successful, it will be critical for funds to engage members and offer low cost accounts and superior returns.

We will also see new areas of competition, such as the current race to provide central clearing houses for handling high-volume, commoditised transactions.

Consumers are becoming more demanding and need adviceWhen it comes to managing their money and day-to-day transactions, Australians have come to expect accessible, immediate and personalised attention through self-service Internet channels, 24 hour call centres and other service innovations.

As members retire and their super becomes their sole income source, they will expect their super fund to offer the same kind of functionality they currently enjoy from their banking relationship.

They will also seek more advice from funds as the advisory industry changes as a result of the FoFA reforms.

Funds that can cost effectively provide quality advice will reinforce their position as organisations that can provide comprehensive value. A key challenge is how to achieve this in the context of a “scalable advice” model.

The ability of funds to meet consumers’ increased service expectations will be particularly important as members move from simple, one-way transactions to the more complex, and frequent process of accessing funds after retirement.

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The trends mentioned in the previous section will lead to consolidation of funds in the Australian superannuation industry. In addition, products and services offered by funds will become more tailored and personalised.

Today, the largest proportion of retirement savings is held in self managed super funds (SMSFs), followed closely by retail super funds. In descending order, the rest of the industry comprises industry funds, public sector funds, corporate funds and small funds as outlined in Figure 1.

To date, the industry super funds’ primary value proposition has been to offer members a way to accumulate retirement savings within the lower tax super environment. For retail funds, this proposition has been supported by offers of advice and choice. Among industry funds, this base proposition has been supported by the promise of lower costs and superior returns.

Both these propositions will come under pressure over the next five years. Going forward, all funds will need to demonstrate they can offer attractive returns, low-cost transactions and high service levels in an increasingly competitive superannuation market.

As a result, the future composition of the industry is expected to change. A new segment will emerge taking strengths from both retail and industry offerings. This “next generation” product will promise low costs, high returns and increased levels of advice.

Embracing the change challengeThe challenge for super funds today is to begin making changes to their propositions, operating models and industry systems before the emerging trends discussed previously begin to impact, and before the ink is dry on the government’s reforms.

We have already seen mergers and acquisitions as funds position themselves for this new environment, but many organisations appear to be waiting for certainty before making significant changes. This is

understandable, but it will be too late. The mega-funds of the future will be those that invest early.

The proposed changes will require organisations to complete far-reaching transformations that will be expensive, complex and time consuming. For example, most funds rely on old registry systems that are ill-equipped to offer more comprehensive financial services and advice to members.

The investments required to upgrade these registry systems alone will run into millions of dollars and involve years of effort. There will also be significant competition for the expert resources required to complete these programs once funds are clear about their needs.

Getting started while managing risk

Many of the trends that will force funds to change are already well advanced. These include the continued growth in funds under management, demographic shifts, technological changes and new consumer demands.

However, all change comes with risk. The risk for most super funds is that the changes required to remain competitive will take too long to complete or prove more expensive than expected.

Creating new offers and operating models will place heavy demands on organisations to transform. In super, any failure to execute these programs will be borne by members via higher administration costs and otherwise lower returns on their funds.

Accenture believes it is important to start transformation projects as soon as possible and to go beyond simply reacting to external requirements. Instead, transformation projects should lay the foundations for success over the next five years and beyond.

Towards a new industry structure

Funds Under Administration $ Billion

31%

28%

19%

15%

4% 3%

SMSF Retail Super Industry Funds Public Corporate Small

397.2

351.8

241.9

195.2

54.6 36.8

Figure 1. Composition of the Australian superannuation market at June 2011

Source: APRA Annual Superannuation Bulletin, June 2011

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Figure 1. Composition of the Australian superannuation market at June 2011

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Addressing the change imperative

Determining your proposition, model and roleTo decide how – and how much – to change their operations, superannuation funds should start by addressing the following key questions:

• What is our next-generation value proposition?

• What operating model do we need?

• What role will we play in the new industry infrastructure?

The answers to these questions will be central to funds’ future competitiveness, and ultimately determine whether they are survivors or casualties as the industry consolidates.

Providing a next-generation value proposition and superior member experienceIndustry funds need to consider how to create new low-cost, advice-rich member value propositions without raising costs prohibitively. Retail funds face the same cost dilemma, but must also consider how they will continue to support their network of financial advisors. For both segments, and other fund types, technology and the ability to offer a strong, multi-channel experience to members, will be key.

Funds need to develop sophisticated online transaction systems that enable members to interact with their superannuation in more complex ways, without substantially increasing costs. This will allow funds to provide the depth of transactional and educational information demanded by members, and to support members as they move from the accumulation phase to the post-retirement phase.

These enhanced change to channels should:

• make it easier for funds to connect directly with members and for retail players to streamline their interactions with their advisory networks.

• attract greater business through referrals and word of mouth in a social-media-driven marketplace.

• improve sales while reducing marketing costs.

At the same time, funds should seek to charge for these innovations. While acknowledging the requirement to offer low-cost, competitive solutions, funds should explore avenues for recouping costs through pricing structures that reflect the level of service and advice each member regards as optimal for their situation.

A key consideration in the new environment will be to deliver these models while limiting fees.

Reforming operating models to reduce costsGovernment reforms, the need to market more effectively and a greater focus on superannuation costs will all make pricing a key consideration in the future.

The mega-funds of the future will need to build scale so as to reduce fixed costs, but also to deliver low and variable transaction costs. This will require a significant change in operating models. Dramatically lowering costs won’t be easy, but options to consider include:

• outsourcing non-core activities

• moving low-value administrative tasks to offshore locations

• streamlining other processes

While these will be challenging decisions, it is incumbent upon funds to continuously drive to the lowest cost operating model. The ability to outsource and partner with others will be critical for funds to adopt industry-wide technology standards and business processes.

Funds should consider forming partnerships with experienced and best-practice providers of services and tools. The pace of industry and technological change is too rapid for most super funds to consider transforming their businesses without leveraging third-party input.

Making the most of dataFunds should look further into mining their member data by making more active use of data analysis tools (analytics). The industry needs to move from focusing on accounts to focusing on individuals and their life stages and mindsets. They should also use this analysis to better segment their members and to offer tailored and enhanced communications.

The ultimate goal is to better understand members’ needs and intentions. In the same way credit card companies use data to increase value for customers, pre-empt queries or capitalise on sales opportunities, super funds need to become more sophisticated in leveraging member information and other data, to lower costs and increase value to members.

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By combining in-depth knowledge of members, with strong advisory experience, funds can move towards providing a highly personalised, relevant and high-value service to members, at little additional cost. The key to delivering superior service lies in achieving a balance between reaching members, understanding member needs and providing an exceptional experience as outlined in Figure 2.

Increasing connectivity and openness One of the main thrusts of the Stronger Super reforms is a desire to modernise, streamline and standardise the administration of superannuation in Australia. Most market participants welcome this change. Super funds still complete too many processes on paper, which is slow, prone to errors, and unnecessarily duplicated by separate funds.

One way the industry will solve this challenge is by creating centralised clearing houses for superannuation transactions, akin to the electronic payments system used in banking. Building a centralised system could be compared to the formation of the Visa credit card processing network. This network was initially owned by banks, each of which decided how much to invest and what relationship they wanted to have with the new system.

There are numerous other areas where super funds will be able to streamline or automate processes. As funds consider their options, they must decide where they believe completing a process internally adds genuine and sustainable value to members. If a process can be done more efficiently by a third-party organisation, funds will be obliged to consider that option.

If funds retain uncompetitive internal structures, they can expect to fall behind industry benchmarks and fail to meet member expectations. This will eventually undermine their capacity to deliver a compelling cost and service proposition to customers.

These factors will become even more relevant as the industry standardises technical protocols and as central solution providers such as clearing houses come to dominate high-volume transaction processing in areas where funds can achieve little differentiation.

Optimise the channelsand processes by which the member can interact

Recognise and understandthe member’s needs and intentions

Effectively deliver content,solutions and pricing basedon knowledge of the member

Capabilities required to enable the member experienceMindset

Analytics

Process

Technology

Governance

Innovation

Know the Member

Reach the Member Deliver the Experience

Figure 2. Delivering a superior member experience

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Outcomes of change

Case StudiesThe following global pension fund leaders are putting in place new operating models and approaches that could prove highly relevant as Australian superannuation funds reinvent their businesses for the new environment.

Cometa transforms cost base and accelerates operations through outsourcingCometa is Italy’s largest pension fund and one of the most important in Europe. It has achieved dramatic cost savings and performance improvements and gained access to the latest online capabilities by outsourcing its fund administration activities to the Fondi Pensione platform created by Accenture Insurance BPO Services.

Accenture Insurance BPO Services is Italy’s leading pension fund administrator, servicing approximately 20 funds for more than one million members and more than 20,000 employers within a single, shared facility. Cometa was founded in 1999 after a series of local regulatory reforms. It made sense for it to leverage Accenture’s capabilities and scale quickly rather than attempting to create a similar infrastructure internally.

Cometa uses Fondi Pensione for contributions management, member relationship management, benefits management, asset management, general ledger

and reporting, call centre and consultancy services. By migrating to the Fondi Pensione platform, Cometa has gained a world-class administration processing capability and a web interface for all stakeholders. This capability is shared, scalable, priced on a per-member basis and requires minimal upfront capital investment.

The result has been faster, more accurate processing and greater efficiency. Cometa has also been able to improve communications with members and offer consulting facilities through its website. The results have been significant, with the fund achieving:

• a 20 per cent reduction in acquisition time for new enrolments

• a 75 per cent reduction in the volume of hard copy data inputs from employers

• an 80 per cent reduction in the time it takes to invest in superannuation, resulting in higher interest accumulations for members

• a 30 per cent reduction in pension payment time

Cometa’s move to the web-enabled Accenture platform has also reduced the time required to secure loans, the cost of answering member complaints and the number of enquiries handled by the call centre. Most importantly, it has improved customer satisfaction.

Singapore’s CPF Board reaps savings and lifts service by moving customers online Singapore’s Central Provident Fund Board (CPF Board) helps Singaporeans save for a secure retirement, as well as offering savings plans for home ownership, healthcare and more. It serves around 3.2 million members. This creates the challenge of differentiating its services to meet the varied needs of all its membership, while remaining as cost-effective as possible.

To achieve these goals, CPF Board has worked with Accenture to move the vast majority of its member transactions to online channels. This has enabled it to streamline delivery and increase convenience and accessibility at the same time. To ensure all members can access its services, CPF Board provides kiosks within government offices and mobile customer service officers to reach those without Internet access or who are housebound.

CPF Board has discontinued more than half of its face-to-face service counters and, by 2009, was already completing 39 million of 41 million member transactions per year through online channels. It has also seen rapid growth in the adoption of its mobile services.

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From 2003 to 2008, CPF Board was able to reduce the average cost of e-transactions from US$0.56 to $0.11. Both these figures are a fraction of the US$15 cost per transaction conducted over the counter. These savings have been re-invested into improving the quality of online customer experiences, further driving up satisfaction rates.

By combining these channel improvements with a comprehensive customer relationship management (CRM) system, the fund now has a more holistic view of each member. It also has the data required to increase customer convenience through personalisation, and to drive business improvements.

For instance, members are less likely to have to re-key data and CPF Board can package ‘concierge’ services built around a customer’s profile.

CPF Board is also able to better share information with other Singapore government agencies. This prevents customers from having to provide duplicate information, while enhancing its ability to proactively offer tailored services to each customer.

As a result of these and other integrations, members enjoy a high level of transparency and can easily track transactions. The new online channel is also proving very useful in enabling CBF Board to provide financial education to citizens.

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The emergence of the mega-fund

ConclusionIn recent years, the Australian superannuation industry has been heavily focused on the regulatory and distribution changes proposed in Stronger Super, FoFA and other programs.

In addition to these important changes however, there are further environmental shifts underway:

• the continued growth of assets under management, combined with the consolidation of funds and accounts within funds

• the demographic movement from accumulation to post-retirement, which is changing the services and level of advice sought by members

• the rise of the Internet and mobile technologies, and with it empowered, better informed and more demanding consumers

• the emergence of powerful, centralised and increasingly standardised industry-wide platforms and processing capabilities such as clearing houses.

These trends are driving historic changes to the super industry. In turn, funds will need to determine and implement next-generation value propositions and operating models to deliver highly customer-centric, advice-rich and convenient services at a sustainable cost.

To compete with, or overtake the competition, funds need to embrace innovation. They should see the need to make these changes as an opportunity to transform their businesses for the future. Making significant changes will be vital to ensure funds can achieve the cost and service levels that will be required of them to remain competitive in coming years.

At Accenture, we firmly believe the era of the mega-funds is emerging. The funds that will lead Australia’s superannuation sector will be focused on providing value to members, and will be the most progressive in the re-invention of their operating models to focus on needs of their customer.

References1 APRA Annual Superannuation Bulletin June 2011 (issued 29 Feb 2012).

2 Super System Review Final Report, Part One, 2010. Commonwealth of Australia.

3 Super System Review Final Report, Part One, 2010. Commonwealth of Australia.

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About the Authors

D. Glenn SedgwickD. Glenn Sedgwick is Managing Director of Accenture’s Insurance Practice in the Asia-Pacific region. Glenn has held a number of roles at Accenture, working with leading insurance firms in Europe and Asia-Pacific. He has broad experience with large and complex business and IT transformation projects, as well as wealth management operations, life insurance process re-engineering and systems implementation, post-merger integration, and P&C system implementations.

Phone: +61 3 9838 7187 Email: d.glenn.sedgwick@accenture.com

Leanne SeetoLeanne Seeto is a Senior Manager in Accenture’s Financial Services Strategy Practice specialising in wealth management across asset management, super, retirement, insurance and advice. Leanne’s focus at Accenture is to work with clients to help them understand the strategic direction of industry changes and shape innovative solutions.

Phone: +61 (0)408 870 169 Email: leanne.seeto@accenture.com

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 246,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

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