In March this year, the Productivity Commission released the Draft Report on stage 2 of its review into the superannuation system. The focus is on a range of alternative default models expected to deliver greater efficiency than existing default fund arrangements.
My greatest concern is that, if efficiency measures are implemented too soon, our retirement system may fail to successfully innovate and attain the level of excellence that our population deserves. We need a fundamental debate on innovation versus efficiency and when it is the right time to switch focus.
The great thing about reviews in Australia is that we are encouraged to share our thoughts via submission, and here is mine.
Don’t focus on efficiency at cost of innovation
When I think about productivity two words come to mind: efficiency and innovation. There is some overlap between the two as, clearly, you can innovate to achieve efficiency. However, in superannuation, there are so many ‘greenfield’ innovation opportunities in the delivery of retirement outcomes that we can treat the two words as distinct. Both words can help drive a better, more productive system.
The Productivity Commission has focused heavily on efficiency versus innovation. This has been a common theme amongst nearly all superannuation system regulatory reviews (‘Cooper’ Super System Review, ‘Murray’ Financial System Inquiry and now the Productivity Commission). Why would this be the case? Cost savings are tangible whereas the benefits of innovation are less tangible. Additionally, cost savings are easily understood by people further distanced from superannuation such as politicians whereas the benefits of innovation become even more of an unknown and not well understood. This probably adds to the pressures faced by people running these regulatory reviews.
I believe that successful innovation provides the greatest potential uplift to retirement outcomes of Australians. In my submission, I estimate that the uplift through better retirement solutions is a multiple of what would be derived from efficiency measures.
But here is the catch: if we switch to a heavy focus on efficiency then the potential to innovate is restricted and many of the potential future innovation-based gains will be lost. Why? Because innovations cost money in the short term, have a failure rate, and deliver benefits in the long term. This does not fit well in a system with a primary focus on efficiency.
There’s a time to switch emphasis
One disappointing reflection on the overall good work of the Productivity Commission is their failure to establish a single aggregated measure of system performance. This makes it difficult to compare the benefits of efficiency versus innovation. The lens through which the Productivity Commission is looking at the complex superannuation system is potentially not completely clear.
If we don’t want to stifle innovation, when is the right time to switch from an innovation focus to an efficiency focus? I argue that the optimal switching point is when the system has matured to the point where it has achieved the majority of its potential. Any earlier restricts the potential to successfully innovate in the future. When that maturity point is reached then efficiency techniques are highly appropriate.
What does this ‘potential innovation-driven system’ look like? To me it looks like a system with the following characteristics, largely driven through technology:
- A system which has a clear and quantifiable objective around the delivery of retirement outcomes. This measure is used as a driver of resourcing and prioritisation by super funds.
- A system which, starting with defaults, actively manages the two major risks which super funds should be managing for their members: investment and mortality risk.
- A system which uses technology to personalise solutions as much as possible, from defaults all the way through to advised members (and the segmentations in between). And it means making use of information and preferences.
- A system which provides outstanding engagement, again supported through technology.
The challenging question is whether the industry will reach this level of innovation-led excellence. If you believe that it will then the recommendations of the Productivity Commission represent a potential threat to the achievement of system excellence.
On this question, however, I find myself wavering between the words ‘will’ and ‘can’. Will the system really get there? After all the Superannuation Guarantee celebrates its 25th anniversary this year, how much time does a system need to reach its potential? Across the industry I see agents, structures and objectives which don’t necessarily align with what is required to deliver system excellence.
Preoccupation with regulatory changes stifles innovation
In defence, it is fair and accurate to state that the system has been held back by constant regulatory change. It hasn’t really had a clean run at innovation. Perhaps super funds are not great innovators and require innovation prompts from the Productivity Commission.
I find myself uncomfortably settling on the word ‘hope’.
In my submission to the Productivity Commission I make an alternative set of recommendations:
- I detail an all-encompassing measurement of retirement outcomes that could be used.
- I encourage a 3-5-year window for a clean run at innovation, after which the industry has either successfully innovated to reach system potential, or it has failed to reach its potential and presumably never will. Either way there must be a deadline for a system not running efficiently.
- I introduce the concept of innovation targets and prompts.
It is a crux time for the superannuation industry. The ability to focus on member retirement outcomes, measure these holistically and innovate to improve outcomes is of utmost importance. Unless we can deliver and demonstrate the benefits of innovation, there is a likelihood that the opportunity space for future innovation will soon shrink as we are forced to become a system focused on efficiency.
David Bell is Chief Investment Officer at Mine Wealth + Wellbeing. He is working towards a PhD at University of New South Wales. These views represent the personal views of the author, and not necessarily his employer.