Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 333

Five innovation traps for super funds to avoid

Large superannuation funds are currently debating the merits of APRA’s imminent ‘heatmap’ system of grading MySuper funds under the colours of red (a flag for members), yellow (a further look required) or white (a relatively clean bill of health), with varying shades. Note there is no green because, to quote APRA Deputy Chair, Helen Rowell,

"This is not a traditional 'traffic light' system with three distinct and simple categories. This is intentional. The heatmap is designed to emphasise underperformance; it’s not meant to give a pat on the back to better performing MySuper products, or be seen as a peer ranking mechanism." 

This idea emanated from the Productivity Commission’s recommendation earlier this year that superannuation fund members be able to rely on a ‘best in show’ default fund shortlist.

Looking for more innovation from super funds

Behind the Productivity Commission’s original recommendation is one aspect that deserves more attention - that APRA-regulated funds be assessed on a “record of innovation, including in the use of member-related data, and in developing products over time (including retirement)”. This is a timely reminder that innovation is a thing of value; a cultural attribute that enhances a fund’s ability to deliver on its central mission to members.

The Productivity Commission’s exhortation sends a message that superannuation funds (and industry segments) who can genuinely innovate will have a competitive advantage over funds that don’t. More to the point, members of an innovative fund are more likely to be better off in retirement than members of a fund that does not innovate.

Our published research on ‘Status Quo Thinking’ notes that genuine innovation is surprisingly hard to master, whether in the corporate, superannuation or other sector, and questions whether superannuation funds could show a good track record on innovation. Scale, career risk management, peer sensitivity and cultural risk aversion are among the headwinds to effective innovation that funds face.

The architects of both the Cooper (2010) and Murray (2014) reports into superannuation have criticised the industry for its lack of innovation.

Regulators want innovation but make it difficult

The CEO of ASFA has pointed to the raft of regulations and reviews as ‘crowding out’ funds’ ability to innovate.

Regulators cannot have it both ways – they cannot both affirm the Productivity Commission’s views on innovation and also foster an environment that makes it hard for funds to innovate. 

Our own research suggests that while innovation is hard to do, funds can take two immediate steps to seize the innovation mantle. The prize – giving members confidence and dignity in retirement – is large and the risks are potentially existential for funds who attract a ‘red light’ grading from APRA.

First, initiate an explicit discussion within the fund about what innovation really is.

Does the superannuation fund speak innovation language? Is innovation defined too timidly. For example, is existing thinking 'tweaked' rather than challenging, or even (shock, horror) changing the paradigms themselves? For example, innovative retirement solution design surely needs to go beyond merely tweaking existing pre-retirement accumulation products and begin by redefining aims in terms of yield and longevity risk. What does an ‘innovation budget’ look like within a large superannuation fund and who sponsors it?

Second, we encourage funds to ‘take their innovation temperature’ by working through their ‘status quo thinking traps’.

We identify five traps to avoid to encourage better innovation.

1. Risk aversion or blame culture – how powerful is the fund’s member-centric culture in driving a good idea forward? Is there individual aversion to change, a lack of reward or a perceived penalty for sponsoring new ideas?

2. ‘Status quo’ roles, responsibilities and resourcing – every superannuation fund has built a ‘value chain’ designed to deliver retirement dollars to members’ accounts. Across this value chain, are the fund’s roles designed to simply ‘keep up with business’ or given the bandwidth to generate and test new ideas?

3. Functional silos – who in a fund is tasked with identifying opportunities to redesign, unbundle and reconfigure across the value chain? These should be people with industry-wide perspectives, not focused on deliverables within functional silos.

4. Fund size – corporate literature on change identifies size as an inhibitor of genuine innovation, not an enabler. Scale entrenches status quo thinking and new ideas are viewed more cautiously as ‘risking’ the existing business. Large superannuation funds have criticised disruptors like Spaceship and Zuper, but how open are large funds to the lessons these disruptors can teach them?

5. Industry groupthink – APRA-regulated funds can point to a healthy level of industry-wide dialogue and information-sharing, but does this really evidence a collegiate, ideas-generating culture and a commitment to continually evolve? One could argue that, instead, it engenders a collective status quo which is a safe space for large funds to occupy.

New ideas acted on can have an ‘annuity’ value delivering over and over again, and this value compounds over the long-term horizon in which superannuation funds operate. Given the high-stakes, long-term, society-wide mission of superannuation, the ‘cost’ of new ideas that disappoint must, surely, pale in comparison to the opportunity cost of genuine innovation that never sees the light of day.

The Productivity Commission, in airing (again) the need for the superannuation industry to be genuinely innovative, was onto something important. Funds should take their cue, and demand that regulators offer more than just lip service in helping funds rise to the innovation challenge.

 

Raewyn Williams is Managing Director of Research at Parametric Australia, a US-based investment advisor. This material is for general information only and does not consider the circumstances of any investor. Additional information is available at parametricportfolio.com.au.

 

RELATED ARTICLES

SMSF technology isn’t standing still

banner

Most viewed in recent weeks

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.