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.