For a while now, Jeremy Cooper (Chair of the Super System Review and now at Challenger) has been trying to remain both positive and patient with the super industry as it faces up to the retirement outcome challenge and securing retirement income streams for members. Jeremy has lamented about the ‘CIO Problem’ and suggests that super funds should think about appointing a ‘CRIO’ (Chief Retirement Income Officer). These views were formalised in a recent thought piece produced by Challenger and KPMG (linked here).
Harry Mitchell is the recently appointed CEO at superannuation fund, Mine Wealth + Wellbeing, while David Bell is the Chief Investment Officer (CIO).
GH: Harry, do you have a ‘CIO Problem’ at your fund?
HM: Is there something you know about David that I don’t know, Graham?
GH: Well I've worked with David on and off for well over a decade. I can tell you a few stories …
HM: The ‘CIO Problem’ is based on the premise that CIOs have historically, due to their analytical skillset, been heavily involved in ‘version 1’ retirement solutions. I call these ‘version 1’ solutions because they have generally been investment-based solutions. This can only get you so far. Jeremy is referring to the need for what we call ‘version 2’ and ‘version 3’ solutions. ‘Version 2’ is product based but accounts for investment and mortality risks. ‘Version 3’ is holistic. It would have a greater degree of personalisation hence brings in all capabilities of a super fund – from digital and analytics to communications and advice, to governance and administration capabilities that act as enablers.
GH: So what is the role of your CIO then?
HM: In our case David has two responsibilities. First he leads our investment activities. Managing risk to achieve investment outcomes will always be a crucial function of any leading super fund. A small amount of extra annual return delivered over time can have a significant impact on the retirement outcomes of our members.
However, David is also responsible for our retirement outcomes modelling unit. We established this area nearly two years ago. You know that David went back to uni six years ago to gain the research skills to meet the retirement outcome challenge. I think he initially thought that he would be building all the complex models himself, however he has matured (a little!) and realises that his role is to oversee this function. He has hired some great academic talent in this area. We have an agreed IT modelling platform (MATLAB) and have fully built out our modelling and testing environment.
GH: This is all starting to sound complex.
DB: It is. The complexity of the retirement outcome challenge cannot be denied. At a minimum you need the following: a stochastic framework that accounts for variability in investment and mortality outcomes and integration with Age Pension, and a clear set of objectives. From there you can begin to innovate. If a super fund can’t meet the complexity of the problem then they are likely to fail to meet the retirement outcome challenge.
GH: Surely the objectives are not that hard to land on?
DB: It is more complex than you think. The industry as a whole is only just now working out an objective (a recommendation of David Murray’s Financial System Inquiry). Think about income in retirement: people want higher income; they would prefer an income stream which is smooth and not bumpy; they would be upset if they outlived their retirement savings; and a bequest is worthwhile. We also know that people are generally risk averse – the pain of a lower outcome is larger than joy of an equivalent higher outcome.
Some of these features pull against each other: income level versus bumpiness, longevity risk versus bequest and so on. We have spent the last year working through all these issues with a collection of industry experts and academics and have packaged this up into a mathematical function. We now have what we call a ‘better scoreboard’ for assessing retirement outcome solutions and services.
GH: This sounds good but where does it place you in the super fund pack?
DB: Actually we will be sharing all of this work with everyone – industry, academia, regulators and policymakers. There is a bigger issue at play - nationwide retirement outcomes - and we want to contribute. We will make sure you get a media pass Graham when we release all this work.
GH: Won’t most people find this complex modelling a bit confronting? How do people know it is not just gobbledy-gook with some pretty pictures?
HM: I trust Dave and his team. They do a lot to test their models, including the use of external testers, and are active collaborators with the academic world which also acts as a control. Their commitment to education of our Board, our Investment Committee, our Executive team and our staff has really helped us along our journey.
GH: Well why don’t you call David your ‘CRIO’?
HM: We are uncomfortable with the concept of a dedicated CRIO. Delivering good retirement outcomes is at the heart of what we do as a firm. This makes me, in my role as CEO, effectively the CRIO that Jeremy refers to. It is my role to make sure that all my teams are collaborating, and that we engage with industry and regulators. It is my role to make sure we deliver the best possible retirement outcomes to our members. So my core responsibility is the delivery of retirement outcomes regardless of its complexities.
DB: I think you may see variations to this model. QSuper has a similar model to us. Some funds, particularly those with a defined benefit legacy such as UniSuper, have internal actuarial teams which could do the heavy lifting on the modelling side. Perhaps funds that don’t quite know where to start could create the role of a CRIO.
GH: I haven’t seen much evidence to suggest that other super funds are doing similar work. Do you think this will lead to further industry consolidation?
HM: Who knows what motives will drive the next wave of industry consolidation. We like the idea of merit-based mergers, and we hope that as the industry becomes aware of the work we are doing, they would like to collaborate and work with us in a variety of ways.
Harry Mitchell is Chief Executive Officer (the unofficial ‘CRIO’) at Mine Wealth + Wellbeing. David Bell is Chief Investment Officer at Mine Wealth + Wellbeing and is working towards a PhD at University of New South Wales. Both Mine Wealth + Wellbeing and Challenger/Accurium are sponsors of Cuffelinks.