Greater public scrutiny of all aspects of superannuation – not just performance – is a stark reminder that funds must be vigilant when managing external service providers.
Both the Australian Prudential Regulation Authority and Australian Securities and Investments Commission have a consistent mantra. Super funds are entitled to outsource an activity itself, but not their responsibility for it. The failure of a service provider is – and must be – considered a failure of the hiring entity.
The greatest risk in any contravention of that principle lies in the harm caused to members. These risks can extend beyond monetary loss to an inability to manage day to day expenses or a profound emotional impact.
Today, such issues can also result in more than a stern reprimand from regulators. They may also generate negative headlines and lasting reputational damage.
On the surface, the decisions for super funds appear relatively simple: hire a provider and ensure they do their job. But trustees and fund executives sometimes miss a crucial point when assessing service provision – outsourcing and procurement are not interchangeable terms.
To conflate the two undermines the distinct expertise of procurement specialists and outsourcing strategists who work in this space – and also does a disservice to the members our industry serves.
So what is the difference? In reality, procurement is just one subcomponent of outsourcing. It relates to the initial appointment of providers, and the ongoing collection of documentation and regular reviews. It is largely a governance role that, while including consideration of services and service levels, is not as broad as outsourcing.
Effective outsourcing looks at a whole operating model to gauge its efficiency and efficacy, plus whether it’s best practice and can be future proofed.
Fund decision-makers considering using external providers should ask themselves:
- Is a proposed service model fit for purpose?
- Which entity is most appropriate to perform the role in the context of all our functions – now and in the future?
- How does the proposed service model fit with our strategic vision?
- Are all the components of this service relevant to our fund?
- Does it provide good value for money?
- Is the relationship effective at the strategic and operational levels?
- Are the service levels appropriate – and are they being met?
- Is the fund linking all the above to its risk management framework and risk appetite statement? How, and to whom, is this demonstrated?
Mistakes do happen
Even the best service providers will make mistakes. While frustrating, the primary focus should be on quickly rectifying the error, learning from it and implementing measures to prevent recurrence. Successful outsourcing relies on a collaborative partnership with the provider – trusting and working together to identify and deliver an efficient solution. When a partnership is ineffective, the opportunity to address and resolve future issues proactively can be missed.
The process for both outsourcing and procurement will be in the spotlight when CPS230, a new cross industry prudential standard governing operational risk management, becomes effective next July.
To ensure appropriate governance, Registrable Superannuation Entities must confidently and consistently apply their governance approach to CPS230. This approach should provide a solid foundation for achieving the best outcomes from outsourced relationships. A simple tick-a-box exercise is inadequate – reviewers must focus on quality assessments, peer comparisons and aligning long-term needs with values. These elements are integral to building a robust and effective relationship model.
The “Members Best Financial Interests” obligation requires funds to act in a way that prioritises members’ financial outcomes above all else. This means ensuring that services tendered for and documented in contracts are appropriate today and remain fit for purpose into the future. This requires stringent and regular reviews to ensure a service provider keeps pace with industry peers, enabling the fund to stay well-positioned for success.
The question is not “what does good look like now”, it’s also “what does it need to look like in two, three or five years?”, and “What do we need to do to get there with our providers and in our own operating model?”
An extrapolation of that discussion then leads to the following questions:
- How does a fund’s internal services best position itself to take advantage of this
environment? - How are its external providers enabling its business model?
- If a service provider does not meet standards, how will it be managed to improve service and determine if it's an episodic or systemic issue?
Keeping a sharp eye on these factors will ensure that members are not disadvantaged and that trustees can demonstrate accountability.
In Summary
Effectively managing procurement and outsourcing requires more than a transactional approach - it demands a strategic, future-focused partnership that prioritises members’ best financial interests. This means viewing service providers not just as vendors, but as integral contributors to the fund’s broader operational and strategic goals. By maintaining rigorous oversight, fostering collaborative relationships, and aligning governance frameworks with CPS230 standards, funds can navigate the complexities of outsourcing to deliver better outcomes for members.
The key takeaway is simple: success in outsourcing lies in asking the right questions, establishing robust partnerships, and continually aligning services with both current and future needs. When managed well, outsourcing not only safeguards member outcomes but enhances the fund’s ability to adapt, innovate, and thrive in an evolving industry landscape.
Jo Leaper, principal consultant and head of operational consulting, JANA Investment Advisers
