The Productivity Commission’s review of efficiency and competitiveness in the superannuation industry has put the spotlight once again on scale and efficiency in the sector.
While the precise shape or form of that is debated, it’s clear that the superannuation environment is very different to that experienced 25 years ago when compulsory superannuation contributions came into effect.
Back then life was, in many ways, a lot simpler. The savings industry was in its infancy and roles and responsibilities were clear.
Asset consultants at that time were the gate-keepers to the hundreds of industry super funds available, investment was managed by asset managers and trustees put their faith in both to get the best outcomes for members.
Fast forward to today and the industry environment has changed wholesale.
Consolidation has reduced the number of industry funds, although superannuation assets have increased substantially to over $2 trillion. Self-managed super funds have exploded onto the scene capturing a huge share of the savings pool.
At the same time, industry super funds today are much larger as they have sought efficiencies through scale.
As super funds have grown the problems have changed, but they haven’t gone away – if anything, they have become more complex.
Mid- and large-sized super funds are under intense scrutiny to make returns in an unprecedented investment environment. Unconventional monetary policy has contributed to a low yield environment, markets have been volatile and Australian equities have underperformed.
The population is aging and we are heading into what could well be a low return environment.
A recent report by the Committee for Sustainable Retirement Incomes (CSRI) and Industry Super Australia found that even with a 12 per cent compulsory contribution, Australians will struggle to save enough for a comfortable retirement or to pay for their aged-care costs.
This has a number of implications for investing and around assessing and managing risk. Super funds need to balance the need for alpha with reducing costs.
The emergence of multi-asset investing and the need for increasingly sophisticated and global investment products in high yielding asset classes such as emerging market debt themselves present significant challenges.
At our 2016 buy-side forum in Sydney, 27 per cent of investors told us that multi-asset would be a key focus area in the coming year, more than any other category.
We found similar results from across the 540 investment management firms that attended our buy-side events around the Asia-Pacific region.
We also see superannuation and pension funds increasing direct exposure to assets and co-investing to gain exposure to higher yielding asset classes while sharing the risk.
At the same buy-side forum, 19 per cent raised investing in alternatives as more important. However, differentiating factors, such as ESG assessment and exposure, require additional capabilities and expertise.
Regulation, reporting and requirements for efficiency and best execution on the other hand have been a growth industry.
The super fund of today needs fast access and assessment of complex data from multiple sources across strategies on a scale unimaginable before the global financial crisis and the introduction of compulsory super.
Operationally, super funds need to be leaner than ever, hence the drive towards in-sourcing, first of passive equity strategies, then of active local and overseas equities and more complex asset classes.
The reality is that even a few basis points saved through in-sourcing some asset classes can lift performance and returns, but it needn’t stop there because every small increment in operational alpha will result in incrementally large savings that can be made across the front, middle and back office.
Today, a super fund seeking to risk exposures across a range of strategies can be faced with multiple sources of data and technology.
It may include seeking data from vendor partners and consultants in differing formats, and take time to collate and analyse.
In many ways the low-hanging fruit is to integrate all of these data solutions into one system to reduce friction and maximise returns.
There is, however, more to it than that.
As the industry has matured and funds have grown and developed their own in-house capabilities, the roles within the industry have become blurred.
Asset consultants, asset managers and custodians all play different roles to support their more sophisticated super fund clients.
Here too, data and technology can play a role as buy-side institutions seek comprehensive solutions to consolidate portfolio management, trading execution and reporting.
Smart use of technology can enable greater and deeper collaboration with partners to generate better outcomes for investors.
That can only benefit super funds as they enter unchartered waters amid an ever greater focus on efficiency and returns.
Emily Gordon is the head of Bloomberg Australia and New Zealand.
