Disruption in Australian Super: Only skin deep?

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Disruption in Australian Super: Only skin deep?

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Disruption in Australian Super: Only skin deep?
Disruption in Australian Super: Only skin deep?

Australia’s superannuation system is broadly admired.

Disruptive entrants have thus far focused on user experience, ethical alignment and branding rather than fees or performance.

However, regulatory change will drive significant shifts in the industry in the coming years.

Key Takeaways

  • Globally, disruptors in retirement income have focused on leveraging improved digital-first customer experience, low-cost personalisation and emerging consumer preferences like ethical investing
  • Media coverage of disruptors in the Australian superannuation market so far exceeds their real traction. On publicly reported figures, disruptors like Spaceship, Future Super and GROW have captured <0.2% share of accounts and <0.1% share of AUM
  • The Royal Commission and the Productivity Commission’s reviews are likely to represent bigger disruptions. Stricter rules around default funds and consolidation of accounts will cut into incumbents’ fees and drive money away from underperforming funds
  • Underperforming funds, which are concentrated in the retail fund segment, have already felt some effects. While less than $1 billion has been invested in disruptors over 5 years, $41 billion has moved into industry funds over the last year alone - and AUM in industry funds has exceeded that in retail funds for the first time

Overview of the Australian superannuation system

From strained public option to a leading public-private retirement system

Between 1908 and the 1990s, most Australians relied on the taxpayer-provided Age Pension or voluntary private savings for their retirement income. However, in a matter of decades, Australia transitioned from a strained public age pension system to what is widely considered one of the best retirement savings systems in the world.

The Australian superannuation system is a mixed public-private system, with three pillars, which balance the government’s need to manage public pension obligations and the goal for most Australians to retire comfortably (on a higher overall retirement income than the Age Pension alone can provide):

  •  The means-tested and publicly funded Age Pension;
  •  Compulsory private savings through the Superannuation Guarantee arrangements; and
  •  Voluntary private savings supported by taxation concessions and direct government payments for low income earners.

Saving through the superannuation system is effectively compulsory (though self-employed people sometimes fall through the cracks) and is further encouraged by tax benefits and means testing on the Age Pension. It is compulsory for employers to make superannuation contributions for their employees on top of the employees' wages and salaries. The employer contribution rate has been 9.5% since 1st July 2014, and as of 2018, was planned to increase gradually from 2021 to 12% in 2025. People are also encouraged to supplement compulsory superannuation contributions with voluntary contributions, including diverting their wages or salary income into superannuation contributions under salary sacrifice arrangements. Superannuation also interacts with the Age Pension through the operation of the income and assets tests (collectively known as the means test). The means test contributes to the affordability and sustainability of the Age Pension. Once a person’s income and assets exceed certain levels (known as the free areas), Age Pension is withdrawn at specified rates.

Timeline of superannuation in Australia

  • Pre-1900: Isolated employer-based pensions schemes
    • Private superannuation first emerged for a small group of salaried employees in the 19th century and applied primarily to white-collar employees. Superannuation only covered a minority of Australians, being concentrated among professionals, managers and administrators, public sector employees, and the financial sector.
  • 1900-1950: Consolidation of the aged pension, without superannuation scheme
    • 1900: Federation of the Australian colonies
    • 1900-1908: Introduction of the Aged Pension- the Aged Pension was introduced at the start of this century, though it was staggered across a few years.
      • New South Wales introduces first Aged Pension in 1900, and in 1908, the Invalid and Old Age Pensions Act 1908 was passed, which officially commenced a year later, introducing a nationwide pension.
      • Before the Age Pension, anyone not working would need to self-fund their retirement, assuming that they were not one of the lucky few who had a pension provided by their employer.
    •  1928: Failure to pass superannuation bill – in the form of the National Insurance.
    •  1938: Failure to pass superannuation bill - in form of National Health and Pensions Act.
  • 1950-1985: Continued extension of Aged Pension and some private superannuation schemes
    • 1950-85: Series of changes were made to the Aged Pension, but no introduction of private or guaranteed superannuation.
  • 1985-1991: The foundations of the modern superannuation system are laid
    • In response to unease about inflation and demands for wage increases in the early 1980s, Hawke Government led a compromise to restrain inflation but give employees a pay rise; the 3% pay rise was paid for by employers and channelled into superannuation, where employees could not spend it. This formed part of the 1985 Prices and Incomes Accord between the Hawke Federal Labor Government and the Australian Council of Trade Unions (ACTU).
      • The money was contributed to newly established ‘industry funds’, which were funds owned and controlled by a board comprising equal numbers of employer and employee or union representative.
      • The Accord represented an important first step, but not sufficient:
        • The 3% contribution rate was not sufficient to provide a significant improvement in retirement incomes except for those on very high incomes.
        • While it was successful in expanding the coverage of superannuation (coverage of the private sector grew from 32% in 1987 to 68% in 1991), it was still not a comprehensive system of compulsory savings.
  • 1991-today: Creation and consolidation of a compulsory system
    • When 1991 rolled around, the Budget of that year introduced the Superannuation Guarantee (SG), a compulsory system of superannuation support for Australian employees, paid for by employers, which came into full effect a year later. The Australian Taxation Office states that the first year of this new Act boosted coverage to 80%.
    • Over the next decade, coverage rose to 91%, and the SG rate itself increased from 3% to 9% and rising more recently to 9.5%.
    • 2005: two other systems were put in place that we still see today - the ability to choose your own retirement fund and the ability to ‘transition to retirement’, where a person can contribute a larger portion of their salary to super and replace their salary income with a drawdown from the pension scheme.

Figure 1. Australian superannuation assets, absolute and as % of GDP, 1988-2016

SOURCE: Australian Parliament House

Types of super fund

Australia’s superannuation funds are divided into several segments, which have evolved over time to meet the needs of the system; these include large for-profit funds (retail funds), employer-run non-profit funds (public sector, industry funds and some corporate funds), employer-run for profit funds (some corporate funds) and small self-administered funds (Self-Managed Super Funds, or SMSFs).

Figure 2. Australian Superannuation System snapshot, September 2018

SOURCE: APRA Statistics – June quarter 2018 and APRA annual statistics for no. of accounts

More detail is given below on each type of fund.

  • Industry Super Funds
    • Originally developed by trade unions and industry bodies to provide specific superannuation products to members of those industries.
    • Nowadays, many of them are now open to the public, but they have retained their non-profit, member first ownership models.
    • Often contrasted with retail funds (below) as offering lower fees and higher performance, though this is not uncontested.
  •  Retail Super Funds
    • For-profit funds run by financial institutions or investment companies.
    • Open to anyone, with a large number of investment options.
  • Corporate Funds
    • Corporate or employer super funds are arranged by employers for their employees and dominated as the default fund for new employees.
    • Some larger corporate funds are ’employer-sponsored’ funds where the employer also operates the fund under a board of trustees appointed by the employer and employees.
    • Mixture of profit-returning and for-profit funds in the category.
    • Offer a wide range of investment options.
    • Low to mid-cost funds if the business is large.
  • Public Sector Funds
    • Public sector funds were created for employees of Federal and State government departments.
    • They commonly have limited investment options, lower fees or MySuper options, and a member-first profit model.
    • Many long-term members have defined benefits, while newer members are usually in an accumulation fund.
  • Self-Managed Super Funds (SMSFs)
    • Managed by the trustees or their representative, but operating under strict rules regulated by the Australian Taxation Office.
    • 1-4 members, each acting as a trustee.
    • Suitable for wealthier individuals with more experience in finance and investing.
  • MySuper funds
    • Government scheme, intended to eventually replace existing default accounts offered by super funds, where employees who do not select a fund are given effective, low-fee super funds as their default option.
    • Launched in 2013 as the result of a government review into the superannuation system; from 2014, employers were required to choose a MySuper product as their default super fund. Eligible Australian workers who receive Superannuation Guarantee (SG) contributions from their employer but do not nominate a preferred superannuation fund for contributions to be directed into, will have the payments made into a default MySuper fund chosen by their employer.
      • Fees on MySuper funds are often restricted to covering the cost of producing their service only, which includes administration fees and investment fees.
      • Basic levels of (income and life) insurance are included, with the ability to opt-out easily
      • Only one investment option (balanced) or life-stage investment strategies

Putting the Australian super industry in global context

Assets

As of September 2018, Australians have $2.7 trillion in superannuation assets. Australia’s retirement savings system is widely considered to be among the best in the world. In terms of pension assets: GDP ratios, Australia is among the top 5 countries in the world, according to the OECD[1] :

“The size of pension funds compared to GDP varies widely across jurisdictions, ranging from 0.1% of GDP in Albania to 182.5% in the Netherlands. Assets in pension funds exceeded the size of the domestic economy in five countries: Australia (120.4% of GDP), Iceland (151.9%), the Netherlands (182.5%), Switzerland (147.8%) and the United Kingdom (105.5%).”

SOURCE:OECD

Figure 3. OECD and non-OECD countries, ranked by level of retirement savings, 2017

SOURCE: OECD

Note: ".." means not available. Investments are used as a proxy of assets.

Performance

Comparing performance across retirement savings systems across countries is notoriously difficult, as the Productivity Commission pointed out in its recent report on the efficiency and competitiveness of the Australian superannuation system. That said, Australia’s real investment returns appear reasonably competitive when compared with other OECD countries, at an average real investment return of ~7.3% as of 2017 (see Figure 4 below).

Figure 4. OECD and non-OECD countries, ranked by returns on investment in retirement savings, December 2016-17 (in %)

SOURCE: OECD Global Pension Statistics; Swiss Occupational Pension Supervisory Commission; AIOS (for El Salvador and Panama).

Disruption in the global retirement income industry

Retirement products have traditionally been seen as the realm of conservative, slow-changing companies, stewarding trusted brands and being careful about adopting new technologies. However, new entrants are gaining steam in the global retirement savings and income industry; they are facilitated by the spread of devices like smart phones and tablets, advancements in technology (such as automation and artificial intelligence) and changing consumer preferences (especially among younger workers) around choice and service.

Themes for disruption

These new offerings typically exploit one or more of the four disruptive themes discussed below:

  • Intuitive digital-first customer experience
    • Traditionally, retirement savings companies provided periodic, paper-based updates to their customers, supplemented by call centre support, retail outlets and in recent years, online support.
    • Today, leading companies are taking a digital-first approach to serving their customers - developing intuitive, visually appealing apps which work across all platforms and allow customers to check their portfolio, make changes and purchase new products easily and at no marginal cost.
    • While some remain committed to omni-channel approaches, continuing to maintain more expensive forms of contact and support, like call centres, retail locations and paper updates, many start-ups are betting on consumer willingness to use the digital channel alone.
    • Some firms have taken the approach of ‘gamifying’ the digital customer experience, echoing the experience of other consumer apps in less ‘serious’ products and services.
  • Stretching the cost-curation curve with technology
    • Traditionally, retirement income products could be plotted on a curve of cost vs. curation, where cost and curation rise in proportion with each other:
      • Low-fee investment products have tended to be standardised, no-frills options.
      • More personalised, actively managed portfolios have been significantly more expensive to administer and charged higher fees.
    • While this dynamic has not disappeared, the ability for technology to do the heavy lifting in identifying individual customer preferences, designing and re-balancing the portfolio, and personalising communications to fit the customer’s needs, has changed the game to some degree.
    • The rise of more personalised, well-serviced low-fee investment options has bent the curve, allowing more transparency, choice and control for a wider range of investors at a lower cost.
    • One likely consequence of this development is a clearer separation between the services offered by professional active wealth managers (handling large volumes of funds for HNW individuals and chasing market-beating returns), and the world of lower-cost, personalised but semi- or fully-automated investment products accessed by other customers.
  • Ethical investing
    • Younger consumers tend to express higher preferences for ‘ethical investing’ than previous generations
    • However, just as ‘ethics’ have no fixed definition, there are different practices which fall under the umbrella of ‘ethical investing’. Some key practices include:
      • Negative screening: refusing to invest in companies in certain industries (tobacco, gambling, weapons, etc) or which fail to meet certain criteria around business practices (supply chain management, board positions for women, etc), on an issue-by-issue basis
      • Triple Bottom Line Investing: making investments in companies that follow the reporting practice of TBL (an accounting framework that allows businesses to measure and report three dimensions of performance - social, environmental and financial)
      • Impact Investing: Seeking to generate both a financial profit and actively measured social impact, generally on a particular issue (such as tons of fossil fuel pollution prevented). Impact investments may generate financial returns that are market-rate or sub-market-rate.
      • Social Enterprise Investing: Social enterprise investing means providing capital to support the growth of businesses that have positive social or environmental effects, without necessarily seeking to generate a profit.
    • Critics question whether ethical investing always involves sacrificing returns; the evidence on this question is not yet settled, and tends to be highly dependent on the type of ‘ethical’ and ‘benchmark’ portfolios chosen for the comparison
  • The end of one-size-fits-all: demographic targeting
    • The ability to target consumers more precisely through digital marketing - and to craft more personalised communications and portfolios - is creating opportunities for companies to target smaller customer niches more directly, at lower cost.
    • The most obvious demographic being targeted by disruptors in the retirement income space is age-based and behavioural (millennials and technology early adopters), but other demographic groups are increasingly being targeted and offered niche products based around factors like gender and employment status.

Note: For case studies of global disruptors, see Appendix 1.

Potential for disruption in Australian super

Overview

THE SKIRMISH ON THE MARGINS: INCUMBENTS VERSUS NEW DISRUPTORS

The threat to incumbents from disruptive entrants to the Australian super industry appears limited at present; so far, the small number of new funds which have entered the market have achieved limited traction in terms of assets under management and accounts, and are not exhibiting substantial improvements in financial performance over the industry’s best performers.

Figure 5. Australian super industry’s vulnerability to disruption

SOURCE: Venture Insights interviews.

Consumer uptake so far represents little more than a drop in a bucket. Over the ~5 years in which most self-styled disruptor funds have been running, publicly reported uptake is limited to less than 50,000 accounts and $1 billion in AUM - while in comparison, $41 billion has moved into industry funds over the last year alone. The disruptor segment represents only 0.17% of accounts and 0.04% of AUM (as of September 2018, the Australian superannuation system included 28.6 million accounts and $2,709 billion in AUM). If we assume that uptake of disruptive super companies will be concentrated among millennial consumers, and will rise slowly unless they improve their value proposition to compete on fees or performance as well as user experience, a generous estimate of their future market share of accounts would be less than 1% (at 5% penetration of super users, aged 20-35, in 5 years’ time, they would have a total of 250,000 accounts, which is equivalent to a market share of ~0.8%), and an even lower share of balances.

This may be for good reason - as the Productivity Commission pointed out this year, for-profit funds (which describes many of the new entrants) tend to charge higher fees and deliver lower net returns. With disruptors’ fees beginning at around ~1% of assets managed, compared to industry leaders like AustralianSuper with consistent high returns charging 0.6-0.7% of assets and similar administration fees, there is little evidence to suggest new entrants are achieving higher performance yet.

Given that sub scale funds also struggle to defray the costs of administration across a smaller pool of investors, the competition provided by start-ups may not necessarily mean better financial outcomes for consumers:

“There is much rivalry between funds in the choice [i.e. non-default] segment, but it does not always deliver the best outcomes to members.. It appears that funds are competing to provide increasingly tailored products and administrative services (such as smartphone apps), but putting less effort into delivering the highest net returns to members. [2]” “If the 50 smallest high-cost super funds were forced to merge into the top 10 biggest low-cost funds, there would be an average boost to the retirement nest eggs of Australia's 14.8 million super account holders of $22,000 each, if cost savings from high-cost economies of scale were passed on as fee reductions.”[3]

Unless there is a step-change in performance or consumer uptake, the likely path forward for disruptors is being copied by incumbents and driven out of business, or limited to consumer groups whom criteria like ethical alignment and hip branding are more important. For millennial- and tech-focused disruptive entrants, there may be opportunities to partner with or be acquired by incumbents (an early example being GROW Super’s partnership with IOOF), marrying their customer expertise, fresher brands and technology advantage to larger operations and member bases to benefit from economies of scale. There also remains an opening for no-frills, ultra-low-fee super in Australia, like that offered by Simplicity in New Zealand. The hard-core ethical investing niche will likely continue to be filled by funds like Future Super, with weaker preferences for ethical tilts increasingly serviced by ethical or socially responsible fund or allocation options being introduced by many incumbents

See section on ‘Disruptive entrants in Australia’ and ‘case studies of Australian disruptors’ for more details on the new super funds.

The real battle: underperforming incumbents versus regulators

However, increasing attention to the lifetime costs of underperforming funds (by both regulators and consumers) is contributing to consumer switching and building pressure for more regulatory intervention. In this sense, the greatest disruption on the horizon is a regulatory one, which will likely lower average fees and raise average performance across the industry; key winners in this are likely to be high-performing funds (which are concentrated in the non-profit industry funds), while losers are likely to include underperforming and sub scale funds (currently concentrated among for-profit retail funds).

Note: See section on ‘Regulatory issues and outlook’ for more details on issues in the regulatory system and reforms being contemplated.

Partly as a result of the Hayne Royal Commission into Financial Services, and partly as a result of coverage of the Productivity Commission’s initial findings in its review of the industry, consumers are showing a new level of attention to their super funds - and a willingness to switch out of retail funds for industry funds. Over the year to September 2018, AUM in retail funds rose from $591 billion to $632 billion, while AUM in industry funds rose from $560 billion to $622 billion - eclipsing total assets held in retail funds for the first time [4](see Figures 6 and 7 below).

Figure 6. AUM (AUD, billion) by fund type, September 2018

SOURCE: APRA

Figure 7. % change in AUM, by fund type, September 2017 to September 2018

SOURCE: APRA

Anecdotally, large industry funds have clearly benefited, and consumers are more open to switching [5], as reported by The Guardian in October:

“Over the last 6 months, Australian Super has received $6.8bn from new customers, compared with $4.6bn over the same period in 2017… Hostplus, another industry fund, has also seen large inflows of members and funds under management from the big four banks, AMP and IOOF. Between March and August, it registered an extra 20,000 members and $640m directly from retail funds, when compared with the same six-month period last year… A private survey conducted for Industry Super Australia by UMR Research in September found one in three retail fund members (34%) have considered switching funds in the past six months, and nearly half of retail fund members (49%) believe industry super funds offer better returns than retail funds (only 7% disagreed).”

Disruptive entrants in Australia

Who are the disruptors in Australian superannuation?

Disruption in the superannuation industry itself is concentrated in a few new funds, which incorporating some of the consumer and technology trends occurring in personal finance & wealth management to create differentiated offerings. Their pitches to Australian consumers highlight their differentiating points as:

  • Achieving higher performance through innovative investing strategies;
  • Allowing greater control over portfolio composition, both around ‘hot’ investing themes (e.g. emerging tech) and ethical investing themes (e.g. gender, environment);
  • Better, digital-first customer experience across all platforms;
  • Transparency and ease of use - ‘investing simplified’;
  • Demographic targeting (e.g. women, self-employed workers, millennials, etc)

Most new funds are currently sub-scale and charge higher funds than the most affordable Australian equivalents; many have expressed intentions to lower fees as they scale.

Figure 8. Disruptors in the Australian superannuation industry (For case studies of Australian disruptors, see Appendix 2)

SOURCE: Company reports, industry reports

While the compulsory system of superannuation is designed more as a ‘set and forget’ system for retirement income and has achieved near-total coverage in Australia, many Australians still supplement their superannuation with other investments designed to generate retirement income - from property and share portfolios to managed funds and annuities.

Though it is not the subject of this report, it is worth nothing that the broader personal finance & wealth management markets are both receiving significant attention from fintechs, especially in the areas of:

  • Business management and investing tools for financial advisers (e.g. NetWealth, Praemium, InvestFit)
  • Micro-investing apps, especially targeting millennials (e.g. Raiz, Carrott, FirstStep)
  • Robo-advisers, typically paired with an investing function (e.g. Stockspot, Clover, QuietGrowth)
  • Digital investing platforms (e.g. Sharesight, StockLight, SelfWealth)
  • Budgeting and personal finance planning tools (e.g. MapMyPlan, Squirrel, MoneyBrilliant)

Regulatory issues & outlook

While the Australian superannuation system is highly rated, there are a set of problems which are systematically undermining retirement incomes for some Australians under the current system, which regulators are focussing heavily on at present. The most pressing of these are detailed below.

Room to improve on performance and fees for some funds

This is the greatest chink in the super funds’ armour; their profitability. If consumers respond by shopping around, or regulators respond by introducing stricter regulation of the industry, we can expect to see fees, and profit margins, heading downwards. The Grattan Institute points out that Australian superannuation fees are still high by global standards [6]:

“Past reforms, such as MySuper, have been timid. They’ve helped bring down total super fees from 1.3% of total super assets in 2010 to 1.1% in 2016, but total fees still are well above the OECD average”.

This is seconded by the Productivity Commission [7]:

“Reported fees in Australia are higher than in many other OECD countries. International comparisons are fraught, mainly due to large differences in asset allocation and tax… nevertheless, asset-class data from other countries suggest fees are significantly higher in Australia. Applying data on international costs to the aggregate asset allocation in Australia suggests total investment fees should be about 0.4 per cent of assets, substantially less than the observed 0.68 per cent.”

This is particularly true among for-profit and choice (i.e. non-MySuper) funds (see Figure 9 below):

Figure 9. Productivity Commission modelling of fees by super fund type, 2005-2016

SOURCE: Productivity Commission Draft Report 2018

The Productivity Commission’s 2018 Inquiry found that underperformance among some funds, particularly retail funds, and materially higher fees in for-profit funds, were having significant negative effects on many Australians’ retirement incomes (see Figure 10 below).

“While some funds consistently achieve high net returns, a significant number of products (including some defaults) underperform markedly, even after adjusting for differences in investment strategy. Most (but not all) underperforming products are in the retail segment”.[8]

Figure 10. Productivity Commission modelling of net returns of super funds by fund type, 2005-2016

SOURCE: Productivity Commission Draft Report 2018

The report compared funds to benchmarks portfolios based on comparable asset allocation to determine net returns over the 2005-2016 period (Figure 11 below).

Figure 11. Productivity Commission modelling of fund performance against benchmark portfolios, by fund type, 2005-2016

SOURCE: Productivity Commission Draft Report 2018

On average, not-for-profit funds have achieved net returns (adjusted for asset allocation) of 6.8% over 2005-2016, compared to 4.9% for retail funds. As a group, not-for-profit funds delivered returns above the benchmark tailored to their average asset allocation, but retail funds as a group fell below theirs.

“Performance also varies across individual funds and products, again after adjusting for differences in asset allocation… Of the 14.6 million accounts in the dataset, about two-thirds are in the funds that performed above their benchmark. However, almost all of the remaining member accounts are in funds that fell short of their fund-specific benchmark portfolio (by at least 0.25 percentage points). Nearly half of these underperformers are retail funds, and about a third are industry funds.”

The Productivity Commission also found that it is substantially easier for members in non-profit funds to access information about fees and returns, as well as to switch funds, across a full range of customer service channels (see Figure 12 and 13 below).

Figure 12. Productivity Commission 2018 report survey results - ease of switching funds, by fund type

SOURCE: Productivity Commission Draft Report into Superannuation, 2018

Note: Results are from survey question, which asks responding funds how prospective members who wish to move their accumulated balance to that fund may do so.

Figure 13. Productivity Commission 2018 report findings on availability of key customer information across channels, by fund type

SOURCE: Productivity Commission Draft Report into Superannuation, 2018

Note: Results are derived from survey questions, which asks funds if they believe members with average financial and superannuation literacy can easily obtain different types of information from different sources

Unnecessary account duplication and product bundling eroding balances

Australia’s system of allocating a new default super accounts to workers when they start each new job has led to many workers accumulating multiple accounts. One-third of all super fund accounts (~10 million) are unintended multiple accounts, eroding members’ balances by $2.6bn a year in unnecessary fees (which constitutes almost 10% of the industry’s fee revenue) [9]. The Productivity Commission plans to release recommendations to address this issue soon, after releasing a preliminary document earlier this year.

“Under the commission’s recommended reforms, Australians would be allocated a default super fund only once, when they first started working. Unless they actively chose another fund, new workers would be defaulted into one of a shortlist of “best-in-show” funds selected by independent experts. They would stay in this fund even if they changed jobs. Financial planners also would be encouraged to recommend funds from the top 10 list or to show reasons why they hadn’t, under a rule known as “if not, why not?"”[10]

The likely effect of this change would be to push more employees and assets towards large industry funds (which tend to outperform for-profit funds), shifting revenues away from both small industry funds and for-profit retail funds.

The automatic bundling of superannuation with disability and life insurance by many funds, combined with the public’s lack of knowledge about superannuation, also contributes to an issue of poorly targeted life and income insurance. Many young people are signed up unnecessarily for products like life insurance (given just 6% of under-25s are likely to have dependants and be in employment). As the Grattan Institute writes:

“Of the 12 million Australians with life, total and permanent disability or income pro¬tection insurance through their super, about a quarter are unaware… Almost 20 per cent of members have duplicate insurance policies across multiple super accounts. Some members may not even be eligible to claim on these “zombie” policies."[11]

Legislation proposed by the Federal Government in 2018 has aimed to remedy this issue; the legislation would stop super funds defaulting customers into life insurance if they are under 25, have a balance of <$6,000, or have not actively contributed to their balance in 13 months.

Debate over the correct level of compulsory contributions

The Superannuation Guarantee is currently planned to increase gradually from its current level in 2021 to 12% in 2025. However, a recent report by the Grattan Institute[12] has kicked off a debate about whether this level is too high, and whether it may depress workers’ quality of life during their working lives with little benefit to retirement income.

“Grattan Institute modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income – well above the 70 per cent benchmark endorsed by the OECD, and more than enough to maintain pre-retirement living standards. And many low-income Australians will get a pay rise when they retire, through a combination of the Age Pension and their compulsory superannuation savings… But because most Australians will be comfortable in retirement, there is no need to boost retirement incomes across the board. The legislated plan to increase compulsory superannuation contributions from 9.5 per cent to 12 per cent should be scrapped, saving the Budget about $2 billion a year.”

Former Prime Minister Paul Keating has weighed in strongly on the side of increasing the level of compulsory contributions, arguing[13] :

"When I introduced super 32 years ago, people retired at about 65 and they died about 83 or 85… In the 30 years since, people are living three to five years longer, so people now live into their late 80s and the superannuation pool isn't large enough to maintain the sort of standard of living we wish for them… Work till 70, eat your house, and then basically find yourself at a certain point in your life where you just don't have financial assets."

As yet, the plans to raise the Superannuation Guarantee level remain unchanged.

The gender gap in superannuation balances

“Australia has a persistent gender gap in retirement savings and incomes. Men's superannuation balances at retirement are on average twice as large as women's. Men also have much larger non-superannuation savings. This means that women, particularly single women, are at greater risk of poverty, housing stress and homelessness in retirement .”[14]

SOURCE: Grattan Institute, 2018

Figure 14. Mean balance and coverage by age and gender, 2015-16

SOURCE: ASFA

Women currently retire with an average of 47% less super than men in Australia [15], which translates to an average difference of ~$85,000 in the size of women’s nest eggs when they retire. A number of factors contribute to this gap [16], including:

  • Women are more likely to pause their careers to become the primary carers for their family.
  • A majority of part-time and casual workers are women, leaving them with less hours to earn money and build super.
  • Administrative, community services and sales roles are disproportionally filled by women, which tend to pay less than male-dominated occupations.
  • Fewer women occupy senior executive and board level positions, which tend to be better paid.
  • Women typically retire earlier than men, on average, yet live longer than men (for a female born today, that’s up to 4.4 years longer).

The current policy proposals from the major parties are unlikely to make more than a small dent in the problem. The Federal Liberal-National Government offering a ~$110mn package on economic equality and security for women [17], which includes:

  • Extending early access to superannuation to victims of family and domestic violence, while also allowing family law courts to access Australian Taxation Office information over superannuation assets, in a bid to curb parties from hiding information during separation proceedings
  • $54.8mn on measures to increase women’s workforce participation
  • $35.6mn aimed at bettering economic independence
  • $18.6mn on improving women’s earning potential

The Federal Labor Party is offering a ~$400mn package of reforms targeting superannuation [18]:

  • Phase out the $450 per month minimum income threshold for eligibility for the superannuation guarantee from 1 July 2020, with the threshold to be reduced to zero from 1 July 2024.
  • Pay superannuation on parental, paternal and partner leave.
  • Amend the Sex Discrimination Act 1984 to ensure that businesses are able to make higher superannuation payments for female employees when they wish to do so.
  • Ask the Australian Human Rights Commission to advise on the most appropriate legislative approach and to update guidelines and advice for any organisation contemplating providing additional superannuation payments for women.

While the Grattan Institute has released recommendations which are based on equalising gap in retirement incomes, not just superannuation [19]:

  • Better targeting of tax concessions for super
  • A targeted boost to the Age Pension for retirees who do not own their own home, delivered as higher Commonwealth Rent Assistance, would do the most to reduce the risk of women experiencing poverty in retirement, while also reducing the gender gap in retirement incomes.

Appendix 1: Case studies of global disruptors

Digital & ethical

  • Digital-first retirement product with strong ethical focus
  • Founded: 2015
  • Key features:
    • Swell practises impact investing i.e. invests in companies which derive revenue from products with positive impact, rather than just constructing portfolios using negative screening (against certain types of company)
    • Choice of 6 impact portfolios under such themes as Green Tech, Clean Water, Zero Waste, Renewable Energy, Disease Eradication and Healthy Living
    • 2 of the 6 portfolios have outperformed the market (with the biggest gap being approximately +3% over 2 years), while 4 of the 6 portfolios have underperformed the market (with the biggest gap being approximately -5.5% over 2 years)
  • Market: North America
  • Funds raised: $30mn USD, over 1 round, from Pacific Life Corporation (investment products including life insurance and mutual funds) - Swell is operating as an ‘in-house start-up’
  • Fees: 0.75% of assets p.a.
  • AUM: $23mn (August 2018)
  • Accounts: 20,000 (August 2018)

Digital & curated thematic investing at low cost

  • Digital platform allowing customers to exercise more control and choice over their investment portfolio, at a low cost compared to traditional active managers
    • Users can choose from a catalogue of curated thematic "Motifs" that include up to 30 stocks and ETFs (e.g. focussed on cancer research, robotics, clean energy, and eliminating income inequality), or build their own Motifs quickly and easily
    •  There are also a range of lower-cost, automated ‘Impact’ portfolios - based on a short questionnaire about customer preferences, built to reflect investment goals and values
    • Users can also gain exposure to more exotic asset classes than most low-cost platforms offer e.g. IPOs, secondary offerings, new Crypto portfolio
    • Finally, users can make stock trades through the platform
  • Founded: 2010
  • Market: North America
  • Funding raised: $126.5mn USD over 6 rounds, from investors including JP Morgan & Goldman Sachs
  • Fees:
    • More complicated fee structure than many disruptors, with different prices for curated and non-curated portfolios, different types of stock trades, a stock trading subscription and a range of other products
      • Motif portfolios (curated around themes by Motif or by user): 0.5% of assets p.a.
      • Impact portfolios (fully-automated, based on customer preferences): 0.25% of assets p.a.
      • Cost of trades varies by whether trades are based on Motif-built or user-built portfolios, whether trades are in ETFs, IPOs or stocks, and timing (real-time or ‘next market open’)
      • $20/month Blue subscription entitles subscribers to 3 free real-time trades

 

Digital & low-cost

  • One of the largest and earliest movers in the robo-advising space
  • Founded: 2008
  • Market: North America
  • Funds raised: $275mn USD over 6 rounds, from Menlo Ventures, Citi Ventures & others
  • AUM: $15.5bn USD (2018)
  • Users: 400,000+ (2018) - average age of 37 and balance of $40,000 USD
  • Key features:
    • Robo-adviser and automated goal-based online investment platform
      • Personalises portfolio, manages investments and plans tax strategy based on user characteristics
    • Invests in a portfolio of passive index-tracking equity and fixed income ETFs
    • Offers both taxable and tax-advantaged investment accounts, including traditional and Roth individual retirement accounts (IRAs)
    • Set, low annual fee of 0.25% of assets under management
    • Claims to achieve above-market returns through ‘smart rebalancing’ (market plus 0.4% p.a.)
    • Also provides retirement advice and cash management products
    • Recently added human financial advisors and introduced higher-cost, more flexible portfolio curation options for wealthier client

Digital & focussed on the millennial demographic

  • Founded: 2012 (Acorns), 2018 (Acorns Later)
  • A popular micro-investing mobile app (the average of their users is 32), Acorns has had great success with millennials through its gamified ‘invest your spare change’ approach.
  • It has recently moved into the retirement account space in the US market through its acquisition of Vault (a fintech which developed retirement products) and launch of Acorns Later
    • Later receives the same tax advantages as investments through products like IRAs (Individual Retirement Accounts)
    • Acorns Later will automatically recommend one of three retirement accounts to customers (a traditional account, a Roth account which charges upfront taxes but does not tax withdrawals, or a simplified employee pension plan), and recommend a portfolio using age, income and other factors
    • Customers set regular contributions
  • Market: Primarily based in the US, but has made entries into other countries, including Australia; the micro-investing app is marketed as Raiz in Australia, and Acorns Super will launch soon.
  • AUM: $1bn USD (as of July 2018)
  • Fees:
    • Currently a flat fee - $1 USD per month for micro-investing app, $2 USD per month for retirement product
  • Users [20]:
    • 3.5mn members of micro-investing app
    • 100,000 sign-ups for retirement product in first month (more recent figures not available)
  • Funding raised: $152mn USD over 8 rounds, raised from investors including BlackRock, PayPal and Bain Capital
  • Relatively low average account balances among micro-investors have been a difficult problem for Acorns (well under $1,000 USD) to overcome in monetising their user base, and the push into retirement savings is designed partly to grow their AUM

Appendix 2: Case studies of Australian disruptors

Something hilarious has been appearing in the Facebook feeds of thousands of millennial-aged Australians lately. In a video, "Clancy Overall" and "Errol Parker", two characters from "Australia's oldest newspaper" the satirical site The Betoota Advocate, talk up "some financial start-up from down south" that allows you to "grab your superannuation by the balls" and invest in things such as "greenie bullsh-t". The company they were plugging, Grow Super, is the latest participant in the most fascinating battle unfolding in Australia's $2.3 trillion retirement industry: the fight for control of the Millennial generation's wealth. Its rivals include Spaceship, the tech-focused super product backed by a string of start-up luminaries including Atlassian's Mike-Cannon Brookes and billionaire Trump ally Peter Thiel; and Zuper, a product yet to launch being developed by a former executive from payments company Tyro…

SOURCE: Australian Financial Review, June 2017[21]

  • Australian millennial-first super fund (now marketing to all age groups) with strong technology offering - “the easy-to-use super fund that’s designed for smartphones”
  • Fees are not particularly low (0.95% of assets and ~$602 flat fee per year), despite the use of automation - this is especially so given that GROW is a middleman to DFA (investing) and Hannover Re (insurance)
  • February 2018 strategic partnership formed with IOOF (provider of superannuation, financial advice and other financial services); IOOF will take a minority stake and use partnership to improve the digital experience on its wealth management business
  • Key features:
    • UX: High quality UX across all devices, including up to the minute balance
    • Portfolio control: Tinder-style swiping function for investment selection, customising up to 15% of portfolio around investment preferences like start-ups and tech, property, green energy or sustainability
    • Extras:
      • Default life, TPD and income insurance - sourced through Hannover Re
      • Acorns-style ‘spare change’ micro-investing app
      • ‘One Account for Life’: personalised infographic showing users the possible future of their retirement based on their current salary, super contributions and target retirement date
  • Marketing strategy:
    • ‘Free advertising’ through high-impact promotions, e.g. fee free super for new parents (in acknowledgement of gender gap in super - waiving the 0.95% annual fee and $1.65 / week for administration)
    • Using millennial influencers to promote the product e.g. the satirical media company The Betoota Advocate, fitness coach Ashy Bines
  • Created by founder of the progressive activist group, GetUp! And marketed as ‘the super fund for climate-conscious Aussies’
  • One of ~53 Australian super funds practising a form of ‘responsible investment’ (see Figure 9 below for range of possible approaches) - Future Super’s portfolios are focussed on a combination of negative screening, positive screening and impact investing
  • Key features:
    • Ethical investment across 3 funds (see Figure 10 below)
      • Balanced Index: 100% divestment option. Fossil fuel free, screens negatively against a range of ethical criteria.
      • Balanced Impact: Negative screening plus active investment in positive ethical outcomes.
      • Renewables Plus: Negative screening, growth focus, 20% investment in renewable energy projects.
    • Not competing to same degree as other disruptors on omnichannel access and CX (for example, no app - just online access)

Figure 15. Responsible investment approaches adopted by Australian super funds (N = 53)

SOURCE: Responsible Investment Association Australasia, 2018

Figure 16. Future Super’s negative and positive screening criteria

SOURCE: Future Super, 2018

  • CEO and Co-Founder, Christina Hobbs, is an economist who previously worked for the UN as a financial inclusion expert setting up emergency banking systems and for Deloitte as a management consultant.
    • Hobbs is also on the board of Future Super Fund, which was founded by Simon Sheikh (Getup! founder).
  • Built out of Melbourne’s female-focussed cowering space, OneRoof Women
  • Backed by Future Super (the climate change focussed ethical investment fund)
  • Aiming to hit 10,000 members within 4 years
  • Key features:
    • Comprehensive focus on women’s financial empowerment
      • Corporate lobbying strategy for gender balance on boards.
      • Donation program to financial wellbeing programs for women in developing countries.
      • Gender as a screening criterion in investment.
      • Financial literacy coaching for members through Verve Academy, led by financial coach Zoe Lamont.
      • No membership fees for balances below $1,000 (to aid those in hardship or entering workforce for first time).
      • BabyBump fee rebate for Verve Super members of any gender who have recently become new parents, whether by birth or adoption - waiving membership fee for period of parental leave.
      • No fee for contribution splitting (i.e. couples splitting superannuation over both accounts while one partner is taking parental leave or working part-time while raising children).
    • Ethical investing strategy combining negative screening and positive screening (see Figure 11 below)
      • “We don’t invest our money in things that pollute, addict, or kill. Verve avoids companies involved in activities causing social or environmental harm, including detention centres, live animals exports, tobacco, armaments and more. Instead, we seek out positive investments in industries like healthcare, education and renewable energy.”

Figure 17. Verve Super ethical criteria

SOURCE: Verve Super, 2018

A start-up super fund that is aggressively targeting millennials via social media has investment advisers alarmed that it is more expensive than most super funds and is taking significant risk without promising higher returns. But Spaceship, which has the backing of venture capital and tech luminaries such as Atlassian co-founder Mike Cannon-Brookes, says strict rules mean it can't gamble customers' super, while the fees are a small price to pay for the superior returns that will come from investing in technology.

SOURCE: Australian Financial Review [22], March 2017

  • Australia-based, globally-invested, millennial-focussed super fund focussed on increasing exposure to high-growth tech stocks
  • Differentiating factors:
    • Marketed as doing intelligent stock-picking around high-risk, high-growth technology companies
  • Key Features:
    • Default GrowthX fund - focussed on investing in shares, with a core based on technology companies (see Figure 12 below)
    • ‘Spare change’ micro investing tool, Spaceship Voyager, offering an ETF and a curated portfolio

Figure 18. $100,000 investment in Spaceship’s GrowthX fund, visualised

SOURCE: Spaceship

  • Has faced criticism around charging high fees for relatively undifferentiated services:
    • Best available figures suggest performance of around CPI + 2.5% after fees and taxes for its high-growth default, GrowthX, compared to industry leaders like AustralianSuper’s High Growth fund at CPI + 4.5%.
    • "… vociferously criticised by industry incumbents, competitors and sections of the media for its relatively high fees and low return targets, and for using index funds (rather than individual shares) to build exposure to tech stocks in its portfolios”
    • Fined by ASIC in 2018 for misleading marketing around its GrowthX portfolio:
      • Claims said: "We will fight to get you the very best assets in your portfolio … We will measure companies in our portfolio based on their ability to provide defensibility of profits and high levels of product differentiation."
      • However, ASIC said 79% of the fund was invested in index-tracking funds at the time, involving no qualitative analysis of underlying companies.
      • Spaceship and its trustee, Tidswell Financial Services, were each fined $12,600 over the claims.
  • Drama surrounding some of its high profile investors has overshadowed its growth
    • Mike Cannon-Brookes (Atlassian founder) was reported to be ‘emotionally exhausted’ by involvement with Spaceship and his likeness has been removed from its website, though he remains involved
    • Erroneous reports of investments by other high-profile figures have also undermined its credibility
      • Sydney Morning Herald, 2018: “Late last year reports surfaced that Spaceship had raised $50 million from investors including Amplo VC, a US venture capital firm which counts former Prime Minister Julia Gillard as a board member. Contacted for comment this week, Sheel Tyle, the founder of Amplo said the reports were "erroneous" and that "Amplo has no investment in Spaceship". He added that it has "no plans in the foreseeable future" to invest in Spaceship.”
“History teaches us that rent-seeking industries get disrupted…It’s going to happen to [Australia] super”

SOURCE: Sam Stubbs, Simplicity MD, 2018

  • New Zealand-based, non-profit charity-run online low-cost no-frills super fund
  • Currently not targeting the Australian market explicitly, though Australians can transfer their super through a labour-intensive process.
    • However, Simplicity has been highly engaged with debates about Australian super industry & contemplating an entry, pending reforms to super industry
  • Key features:
    • Invests in a limited selection of passive instruments
    • Extremely low fees - the lowest cost Australian fund’s fees are 2X higher than its 0.3%, and many are 6-7X higher
    • Donates 15% of its fees to NZ charities
    • Recently began negative screening against certain industries: fossil fuels, pornography, alcohol, weapons and gambling
  • Advocates the adoption of a centralised clearing house in the Australian super annexation system [23]
    • [Simplicity’s MD said] the need for Australian super funds to run their own back office operation to process contributions and administer accounts kept low-cost foreign competitors out of the market and allowed the incumbents to keep their costs high.
    • "It's massively more expensive and globally worst practice," Mr Stubbs said.
    • The KiwiSaver retirement system uses a centralised clearing house run by New Zealand's Inland Revenue. It deducts super contributions, aggregates them and sends them to KiwiSaver providers, and is one of the systems looked at closely by the commission in its study of default fund options.
“Student Super and Professional Super all started nearly three years ago when Mike Casey and Andrew Purchas from GradConnection had a coffee with Andrew Maloney and Jenny Luu from Student Services Australia. We thought we would sit down and discuss how Australia’s most popular graduate jobs site and Australia’s most popular website for university students (studentvip.com.au) could work together to create great a service for students.”

SOURCE:Mike Casey, Director

  • Founded: 2015
  • Funds raised:
  • Designed to avoid the ‘super zig zag’ which occurs when low balances are eroded between sporadic periods of partial employment
  • Key features:
    • No fees for balances <$1,000, 50% fee discount for balances from $1,000-5,000
    • For balances over $5,000, fees are $78 and 0.99% p.a.
    • Designed for early super i.e. students and young people
    • Mobile app
    • Rebrands as ‘Professional Super’ after graduation
    • 5% p.a. return

[1] OECD

[2] Federal Government

[3] Sydney Morning Herald

[4] Note that higher returns in industry funds were also a factor in this growth.

[5] The Guardian

[6] Grattan Institute (26 July 2018), We need to switch off these superannuation rorts

[7] Productivity Commission: Superannuation: Assessing Efficiency and Competitiveness

[8] Productivity Commission: Superannuation: Assessing Efficiency and Competitiveness

[9] 2018 Productivity Commission Report

[10] Grattan Institute (26 July 2018), We need to switch off these superannuation rorts

[11] Grattan Institute (26 July 2018), We need to switch off these superannuation rorts

[12] Grattan Institute (6 Nov 2018), Money in retirement: more than enough

[13] ABC

[14] Grattan Institute, What’s the best way to close the gender gap in

[15] IndustrySuperFunds: The gender super gap

[16] IndustrySuperFunds: The gender super gap

[17] The Guardian

[18] The Guardian

[19] Grattan Institute, What’s the best way to close the gender gap in

[20] TechCrunch

[21] Australian Financial Review

[22] Australian Financial Review

[23] Australian Financial Review