Supertrends. The trends shaping Australia s superannuation industry. kpmg.com.au

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1 Supertrends The trends shaping Australia s superannuation industry kpmg.com.au

2 Contents Executive summary...3 Industry overview...7 Segmentation and member account trends...12 Cost cutting challenges and industry consolidation...18 Demographic change...23 Environmental and Social Governance...29 A focus on technology...31 Insurance overview...35 Conclusion

3 Executive summary 3

4 Executive summary At KPMG, we believe that the future of the Australian superannuation industry is very positive and well positioned to capture the opportunities being presented. Industry overview It is clear that the Australian superannuation industry is integral to our economy. It not only forms an important part of household and national savings but has become the largest asset outside of the family home. Ultimately, when super performs well, we all benefit. In brief, Australia s superannuation industry: is the third largest private pension fund market globally (behind the United States and United Kingdom); accounts for 24 percent of total Australian financial institution assets, putting its share second only to that of Australian banks; and grew its system assets by approximately 15.3 percent during the 30 e 2014 financial year to $1.85 trillion 1. This is slightly down on the 15.7 percent increase during the 30 e 2013 financial year where assets totaled $1.62 trillion 2. Both the 2013 and 2014 years had the highest annual rate of growth in superannuation assets since the Global Financial Crisis began. 1. APRA Statistics Quarterly superannuation statistics for e APRA Statistics Annual superannuation bulletin e With an ageing population, combined with the challenges of fiscal responsibility, the industry will need to constantly provide innovative solutions that focus on meeting individual needs. This is especially important because, despite total superannuation asset values currently exceeding annual Gross Domestic Product, there are concerns that the industry does not have the capacity to meet the ongoing demands of Australians in retirement. Going forward, the industry must be fully aware of today s trends in order to meet tomorrow s challenges. Segmentation and member account trends The distribution of assets by segment, as a percentage of total assets held within the Australian superannuation system, has changed significantly over time. The small funds segment, predominantly self managed superannuation funds (SMSFs), remained the largest sector of the Australian superannuation industry. As at 30 e 2014, small funds held the largest proportion of superannuation assets, accounting for 34 percent of total assets, whilst retail funds and industry funds held 26 percent and 20 percent of total assets respectively. Although SMSFs represent a relatively small portion of the total superannuation member accounts, they continue to be the fastest growing of any fund type. We expect this growth to continue over the coming years, even though there is anecdotal evidence of this growth slowing. Consequently, we expect strategies around SMSFs and self-directed investment options (including pension options) to be developed further by industry, retail and corporate funds as technology improves and provides more flexible options. We estimate that total system assets will grow from $1.85 trillion in 2014 to $3.5 trillion in

5 Cost cutting challenges and industry consolidation Outside the SMSF space, industry funds continue to grow their share of superannuation assets increasing from approximately 15 to 20 percent of superannuation system assets in the decade to 30 e The trend in recent years within all fund sectors to consolidate with smaller institutions has continued as funds are looking to provide greater value to members through lowering the total costs per fund therefore resulting in lower fees passed onto members. We expect this trend to continue as funds pursue growth and lower costs. Consolidation has contributed to the average size of superannuation institutions (measured by assets) increasing significantly during the past decade. However, in the 5 years to 30 e 2014, despite the average fund size dramatically increasing, total costs to members has actually increased. The inability of superfunds to reduce costs per member over this 5 year period suggests that achieving greater scale may not necessarily result in a reduction in the total costs per member. The inability of funds to reduce total costs to members is partly due to the increased regulatory burden, enhancements in the range of quality services offered to members, and the cost of competition. MySuper is expected to improve outcomes for the majority of members who do not wish to be actively involved in choosing their superannuation arrangements. Demographic change The superannuation industry is undergoing significant change in its membership demographics. As the majority of baby boomers reach preservation age and come to the end of their accumulation phase in the next 10 to 15 years, the proportion of fund members drawing an income stream from their superannuation account is increasing and the proportion in the accumulation phase is falling. Ultimately, these drawdowns will impact fund s assets. Given the increase in pension members, we believe pension innovation is important, both in relation to the product offering and improving the risk management within the product to increase the certainty of outcomes. Member engagement is a top priority on all superannuation funds lists. Given the lack of genuine product innovation, we believe that there may be the potential for more radical propositions to shake up the industry and perhaps even present new solutions to the pensions time-bomb. Environmental and Social Governance factors The incorporation of Environmental and Social Governance (ESG) factors into the funds investment decision-making processes is being increasingly acknowledged. Funds need to transparently demonstrate how ESG criteria is embedded across asset classes and incorporated within their governance framework to meet stakeholder demands to understand more about the sustainability of their funds investment decisions. Being visibly green and ethical will no longer be a nice to have for funds. Members will expect ethical and socially responsible behaviour to be baked into operating practices. Retirement product innovation is important to manage risk and increase the certainty of outcomes. 5

6 A focus on technology As the pace of external change increases, so does the need for flexibility and agility in the core operating model of super funds. Technology will need to move far higher up the agenda and more radical options will need to be considered to drive the change required to support sustainable growth within the superannuation sector. Cyber losses now cost society around US$400 3 billion per annum, compared to catastrophic events which cost an average of US$200 4 billion per annum. Not only does this represent a significant threat to the superannuation industry, it also offers an opportunity as funds reconsider their insurance needs as a means of protection from the risks of cyber-attack. Conclusion The Australian superannuation industry continues to grow, strengthen and mature. Superannuation institutions that fail to innovate and successfully manage the impact of our ageing population, increased regulatory pressures, SMSF growth, advancements in technology and more operationally efficient superannuation institutions, face the increased likelihood of membership reduction. Strategic planning by funds is critically important to successfully negotiate these factors. Technology will need to move far higher up the agenda and more radical options will need to be considered to drive the change required to support sustainable growth. Insurance overview Insurance within superannuation is changing and will have a significant impact on the super industry. The entire insurance value chain is impacted, from distribution to intermediation, risk carriers and service providers, as other industries set foot into insurance markets. Super funds are ultimately impacted through the insurance offerings provided to members, premiums paid and the level of interaction between fund and insurer. A focus on more accurate insurance data, technological improvement and a better member experience is required. Key questions or considerations In each section of this paper we have included a number of key questions or considerations things that we should be thinking and doing today to ensure our industry and the funds we are working with are sustainable and high performing in Net losses: Estimating the global cost of cybercrime Economic impact of Cybercrime II, centre of strategic and international studies e Greening the global economy Michael Bennett. 6

7 Industry overview 7

8 Industry overview For the period 1 July 2013 to 30 e 2014, assets in the Australian superannuation industry increased by 15.3 percent, and from $635 billion in 2004 to $1.85 billion in On our estimates by 30 e 2015 superfund assets will be over $2 trillion and by 2025 almost $3.5 trillion. Over the past 10 years, Australian superannuation assets have grown faster than all other large superannuation systems globally and all other financial sector assets in Australia. This significant growth in superannuation assets is driven by positive investment returns for 9 out of the last 11 years. Although these returns have considerably helped shape these asset values today, continued inflows of member and employer contributions have also influenced this asset growth which has generally exceeded investment earnings. Figure 1: Total superannuation assets Figure 2: Rate of return (ROR) and volatility , , , , Entities with more than four members 1, , , , , , , Source: APRA Statistics Annual Superannuation bulletin e APRA Statistics Quarterly Superannuation performance e Asset projections for 2015 to 2018 predicted by KPMG. Source: APRA Statistics Annual Superannuation bulletin e 2013 and e 2014 Quarterly Statistics. 8

9 Growth over the 11 year period to 2014 is understandable given the tax advantages associated with superannuation, the increase in the super guarantee and the wage growth of members. However, we are now seeing a slow down in employer contributions received by Funds. Are we beginning to see the impact of the ageing population? With significant growth in the number of pension members and recent declines in the number of accumulation members. Effective from 1 July 2014, the compulsory Superannuation Guarantee percentage increased to 9.5 percent. No further increases to superannuation guarantee will occur until 1 July However, a slow decline in monies received by funds may be inevitable given the declines in the number of accumulation members. How do we compare? The superannuation and banking sectors dominate the Australian financial system. Superannuation is becoming an important component of people s savings with financial literacy likely to improve as people become more engaged with their superannuation. As at 30 e 2014, superannuation institutions represent 24 percent of the Australian financial landscape, as shown in Figure 3. System assets have been growing steadily at the expense of all other financial institutions. This growth is also reflected when compared to the rest of the world. We could possibly be at a tipping point with the impact of our ageing population combined with the Australian Government freeze on the SG Rate until Is it the beginning of the end of an amazing growth story? Over the past 6 years, Australia was one of the very few large retirement systems in the world where assets declined as a percentage of GDP. Figure 3: Share of Australian financial institution assets ADI s (Authorised deposit taking institutions) RFCs (registered financial corporations) Life Insurance Superannuation Other managed funds General insurance Securitisation vehicles e % 9% 9% 15% 9% 4% 5% e % 4% 4% 19% 7% 3% 3% e % 3% 4% 24% 5% 3% 2% Source: B1 Assets of Financial Institutions, Reserve Bank of Australia, January

10 The United States (US) still owns the majority of assets under management of all Organisation for Economic Cooperation and Development (OECD) countries, with assets worth USD 13.9 trillion in However, the weight of assets held by pension funds in the US shrank from 67 percent in 2001 to 56 percent in To a degree this trend is consistent with a broader shift in economic prosperity away from mature developed economies to faster growing economies within the OECD. Other countries with large pension fund systems are shown in Figure 4. Figure 4: Geographical distribution of retirement fund assets in the OECD as a percentage of total assets Australia not keeping pace Figure 5 shows that the OECD weighted average asset-to-gdp ratio for super funds increased from 72.4 percent of GDP in 2011 to 84.2 percent of GDP in 2013 with Australia achieving the third highest ratio at percent. Despite the strong growth in superannuation fund assets, the level of retirement savings in Australia is not keeping pace with overall economic prosperity. In the 6 years to 2013, superannuation fund assets declined from 106 percent to 103 percent of GDP. This may be due to the asset allocation of Australian superannuation institutions, which typically invest in equities (compared to retirement funds overseas) and the relative underperformance of equities since In contrast, over the 6 years to 2013 retirement savings outpaced GDP growth in the US, the UK, Japan, Netherlands and Canada. One feature that many of the largest OECD retirement systems have in common is the dominance of defined benefit plans. Australia is the obvious outlier, with 90 percent of retirement fund assets held in defined contribution plans, followed by the US with 43 percent of assets in defined contribution plans. A growing interest in defined contribution plans, as opposed to defined benefit plans, is evidenced in some countries (particularly Australia) by the closing of defined benefit funds to new members. A key implication of moving to a mainly defined contribution system is a shift in the risk and benefits from the employer or government to the individual Switzerland Canada Japan Netherlands Australia Other United Kingdom United States Source: OECD Global Pension Statistics Database. 10

11 Investor education, protection and support in super needs to increase While the financial motivation is clear, we believe the majority of the population is not sufficiently investmentinformed or engaged to make appropriate choices. As such, we believe investor education, protection and support in super needs to increase. There is financial services regulation to protect investors in all other forms of investment. However, in one of the Figure 5: Retirement fund assets as a percentage of GDP United States United Kingdom Austrailia Japan most important financial decisions an individual will make, they are left without adequate support. Is it right or even efficient and appropriate that each member of a Defined Contribution (DC) scheme needs to seek independent investment advice or could the industry provide better support and education to inform decision making? Key questions or considerations Government should consider the impact of our aging population and the freeze on the SG Rate until Furthermore Government policies should focus on making our superannuation industry more sustainable and competitive to address the issues associated with longevity. A more transparent target framework for building a better future for all Australians is needed that is bipartisan, equitable and sustainable across generations. Are we adequately protecting those members with small balances to ensure they can live comfortably in retirement? How can we better engage, educate and improve the adequacy of retirement incomes for all members? Netherlands Canada Switzerland Weighted average Source: OECD Global Pension Statistics Database. 11

12 Segmentation and member account trends 12

13 Segmentation and member account trends There are five main types of superannuation funds: 1. Industry funds regulated superannuation entities that have historically provided for employees working in the same industry or group of related industries. 2. Retail funds regulated superannuation entities that offer superannuation products to the public on a commercial basis. 3. Corporate funds regulated superannuation entities generally only open to people working for a particular employer or corporation. 4. Public sector funds regulated superannuation entities that provide benefits largely for government employees, employees of statutory authorities, or are schemes established by a commonwealth, state or territory law. 5. Small super fund predominantly self managed super funds (also called SMSFs), which are regulated by the ATO and have less than five members. They work like any other super fund, but the responsibility of managing it rests solely with the Trustee, who is often the member. The distribution of assets by segment, as a percentage of total assets held within the Australian superannuation system, has changed significantly over time. In the decade to e 2013*, the small funds segment (predominantly SMSFs) sector remained the largest sector of the Australian superannuation funds industry. Between the years ended 30 e 2012 and 30 e 2013*, SMSF numbers grew by over 7 percent from 475,816 to over 509,362. Industry funds assets increased by 21.5 percent during the year to e 2013*, with small funds assets (which include SMSFs) increasing by 15.5 percent. As at 30 e 2013*, small funds held the largest proportion of superannuation assets, accounting for 34 percent of total assets (see Figure 6). Retail funds held 26.1 percent of total assets, industry funds held 20.1 percent, public sector funds held 15.9 percent and corporate funds held 3.8 percent of total assets. We believe technology has played a significant role in the growth of the SMSF sector. In the past it has been expensive, complicated and time-consuming to run an SMSF. But now, the online investing, trading, advice and administration worlds are converging, and we re starting to see a world where the fund s online administration and compliance, brokerage account and banking are all linked. Figure 6: Assets by type of fund as a percentage of total superannuation assets as at 30 e 2013* % 20% 40% 60% 80% 100% Industry Corporate Public sector Retail Small Source: APRA Statistics Annual Superannuation Bulletin e 2013 and Over the past 10 years, SMSFs have grown the fastest of all segments and now represent approximately a third of Australia s superannuation system *Latest available information at the time of publishing. 13

14 Self managed superannuation funds The SMSF sector has been growing at an impressive rate over the past 10 years. In e 2008, it overtook retail superannuation funds to become the largest single superannuation category by asset value in Australia. Figure 7: Fund size by Superannuation Fund Category The number of SMSF members has almost doubled over the last decade, whereas the assets in this segment quadrupled. As at e 2013*, there are 509,362 accounts held by 964,000 members, with net asset value totalling $506 billion. Although SMSFs represent less than 3.2 percent of the total superannuation member accounts, they have been the fastest of any fund type when it comes to growth. They account for the majority (99.4 percent) of the small funds in terms of assets. Hence, SMSFs hold an estimated 31 percent of total superannuation assets Corporate Industry Public sector Retail SMSF * SMSFs also offer the potential advantage of lower annual administration fees compared to retail, industry and corporate accounts where the Trustee can derive cost savings through managing larger balances. The average SMSF balance per member equates to $524,900, which is the highest average balance per member account compared to the other segments. Furthermore, over the past 5 years the average balance per member has grown faster than any other segment. Source: APRA Statistics Annual Superannuation Bulletin e 2013* Since e 2007, Australia s love affair with SMSFs has continued with assets increasing significantly and the number of funds increasing by 50 percent. *Latest available information at the time of publishing. 14

15 Representing over a third of Australia s superannuation assets, increasing regulation and scrutiny will place increasing cost pressures on SMSFs. Given over half of SMSF members are new to running their own SMSF, they could find negotiating volatile market conditions challenging. Self managed superannuation fund asset allocation Listed domestic shares and cash and term deposits make up 32 percent and 29 percent of total net assets in SMSFs respectively, with the rest of the balance spread across a diverse range of listed and unlisted assets. Figure 8: Average account balance per member Average Account balance ($) 000 s Type of fund * Corporate Industry Public Sector Retail SMSF Source: APRA Statistics Annual Superannuation bulletin e 2013* Figure 9: Superannuation Funds, Number of Entities, Member Accounts, Assets, Average Account Balance, 2013* Number of entities Number of member accounts ( 000) Assets ($billion) Corporate Industry 52 11, Public Sector 38 3, Retail , Small Funds 512, (incl. SMSFs) PST Balance of life office statutory funds TOTAL 512,761 30,732 1,619.0 There is a clear correlation between the size of a SMSFs balance and its diversification from listed domestic equities and cash and term deposits. The correlation persists throughout the ATO record period from 2004 to For SMSFs with lower net asset balances, cash and term deposits are the single largest asset class followed by listed domestic shares. While they continue to be the two most popular classes of investments for funds of all balances, the following trends can be observed in relation to asset allocations amongst different sized funds: SMSFs with balances greater than $50,000 provide, on average, the greatest proportion of their balance to cash and term deposits. The percentage of allocation towards cash and term deposits decrease as SMSF balances increase, as funds diversify into other asset classes. Listed domestic shares are the second largest investment class for SMSFs with balances less than $50,000, and as their balances increase it absorbs some of the transfer of funds away from cash and term deposits until it becomes the largest asset class for SMSFs with balances less than $5 million. For funds with balances less than $150,000, listed trusts remain the only real option to diversify away from cash and term deposits and listed domestic equities. *Latest available information at the time of publishing. 15

16 It is clear that SMSFs with low balances are faced with significant hurdles in finding avenues to diversify their investment holdings. Smaller SMSFs will experience difficulties in investing in assets classes, such as real property and unlisted trusts, due to the size of their balances. They are also limited in their ability to access cost effective investment advice in relation to more complex investment categories. This leads to a limitation in their ability to diversify asset class risk, as well as achieving better investment returns throughout the investment lifecycle. From 2013 industry fund growth significantly exceeded SMSF growth, possibly signalling that the growth within SMSFs has slowed and reached maturity. We are seeing new banking products and an increased focus on integrating wealth management which may have added to the slow growth of SMSFs in Figure 10: 2014 Average SMSF Investment Allocation Figure 11: 2013 SMSF Asset Allocation by fund size Listed trusts, 4% Other managed investments, 5% Other Assets, 2% Unlisted trusts, 9% Non-residential real property, 12% Residential real property, 4% Overseas Prop (resid & non-resid), Managed Investment & other Assets, 1% Listed shares, 32% Debt securities and loans 2% Cash and term deposits 29% Percentage $1-$50k $50-$100k $100-$150k $150-$200k $200-$500k $500k-$1mk $1m-$2m $2m-$5m $5m-$10m >$10m Unlisted trusts Cash and term deposits Listed shares and trusts Non residental real property Unlisted Shares Other assets Source: ATO self managed super fund statistical report e Source: ATO self managed super fund statistical report e SMSFs are not well diversified with one third in cash and term deposits and one third in listed shares. 16

17 Cost of investing through SMSF vs APRA Regulated Funds In September 2013, the Australian Securities and Investments Commission published a consultation paper considering SMSF costs. As part of the process, ASIC commissioned Rice Warner to examine the minimum cost-effective balance for SMSFs compared with large super funds (which are regulated by the Australian Prudential Regulation Authority). This analysis suggests that (on the basis of annual administrative costs alone) SMSFs with a balance of less than $100,000 are not competitive against APRA regulated funds. SMSFs with balances between $100,000 and $150,000 may be cost competitive against either retail, corporate or industry funds dependent on the level of administration work that the trustee is able and willing to perform. For SMSFs requiring full service, the balance of the fund must be over $500,000 to be cost competitive against industry and retail funds. Members set up SMSFs due to their ability to take a more active role in managing and investing the member s own retirement savings. Although some of the larger APRA regulated funds have made innovative advances in their product offerings, the difference in customisation of investment options from SMSFs, may still be too great to stop the flow of engaged members who seek a more active management style by taking their retirement savings to the SMSF sector. Key questions or considerations Will SMSFs continue to grow as quickly as they have in the past? Will technology advancement and innovation through online investing and trading, robo advice, banking and insurance, be a big disruptor to the super industry, including SMSFs or other member directed investment options? What are your growth and member retention strategies? Future considerations for self managed super funds Pricing pressures on existing players SMSFs and the property market Regulation changes directed at SMSF market Cost of operating SMSFs and estimating returns a future focus area The rising competition in the SMSF market has led to pricing pressure on the existing players (i.e. industry funds) as funds look to retain members considering a switch to SMSFs. While there is risk associated with investing in aggressive funds by SMSFs, another area of concern is the risk related to Australia s property market. In recent years there have been changes introduced in legislation that allow SMSFs to borrow money to invest in property. This kind of investment strategy is being heavily promoted and represents a potentially speculative demand for property that did not exist earlier. It further poses the risk of artificially pushing the demand in the property market and could exacerbate Australia s property price cycles. With the rising popularity of SMSFs, regulatory bodies are keeping a close eye on market operations. In 2013, ASIC became the registration body for approved SMSF auditors (to raise the standard of SMSF auditor competency and ensure there are minimum standards across the sector). The regulatory bodies are also focusing on costs involved in setting up SMSFs. As a large number of players provide SMSF administration services and advice to customers, the way they charge varies significantly. 17

18 Cost cutting challenges and industry consolidation 18

19 Cost cutting challenges and industry consolidation Consolidation and scale The superannuation industry continues to consolidate, driven by pressures to reduce costs. Not only has there been a reduction in the number of registrable superannuation entity (RSE) licensees and registrable superannuation entities, but there has been an increase in fund mergers and acquisitions within the corporate, industry and public sector fund sectors. Integrations within wealth management divisions have also taken place. In the future, it is expected that this trend will continue given the reinstatement of temporary loss relief for fund mergers. In addition, the increase in regulatory obligations will continue to put pressure on smaller superannuation funds as they strive to deliver value to members at competitive costs. Challenges funds are facing to reduce costs In the past 5 years, the average size of superannuation entities and total costs per member have increased. Though international comparisons are not straight forward, the operating costs of Australian superannuation funds are higher than in many other OECD countries 5. Since e 2009 average fund size has increased by 52 percent, with the total cost per member also increasing by 52 percent. Only in the year to e 2009 did total costs per member actually decrease, followed by continuous yearly increases to 30 e The inability of super funds to reduce costs per member over this 5 year period suggests that achieving greater scale does not necessarily result in reduction in total costs per member. This failure could reflect the manner in which superannuation funds are charging fees to members and may be partly due to enhancements in the range of quality services offered to members by superannuation institutions. Figure 12: Number of superannuation entities Corporate Industry Public Sector Retail Small Funds , , , ,091 Actual 2013* ,375 Source: APRA Statistics Annual Superannuation Bulletin e 2013 and KPMG forecast KPMG Forecast ,465 Whilst the scale of economies appear not to have been realised on industry consolidation with costs per member increasing on prior year, the unprecedented change in regulation and enhancements to member services comes at a significant upfront cost. Whether this pace of change and associated costs will slow and benefits start to be reflected in decreased costs to members remains to be seen. * Latest available information at the time of publishing. 5. RBA, submission to the Financial System Inquiry (March 2014) 19

20 With increased transparency with tools like dashboards being introduced, superannuation funds will continue to be placed under increased pressure to innovate in order to manage costs and demonstrate value to members. These enhancements represent value to members, but their cost may have offset other scale related cost reductions. Many of the implemented enhancements have cost funds millions of dollars in upfront capital expenditure, with an expectation of a significant reduction in operating costs across the industry and a corresponding reduction in member fees. Currently, funds are yet to evidence the benefits of these enhancements. It is expected that the ongoing operational costs of funds will actually increase after these improvements are fully implemented due to an increase in contract services and ongoing maintenance costs. Enhancements include: MySuper MySuper is a cost-effective superannuation product intended to provide a simple set of product features, irrespective of who provides them. By replacing more complex default products, MySuper s simplification has enabled members to compare funds more easily based on a few key differences cost, investment performance, and the level of insurance coverage. It has also ensured that members do not pay for unnecessary features they do not use. MySuper is expected to improve outcomes for members who do not wish to be actively involved in choosing their superannuation arrangements, while maintaining freedom of choice for those members who do. Members wishing to make active choices with their superannuation can opt for an alternative product, or manage their own superannuation affairs through an SMSF. Per APRA statistics issued on 2 October 2014, as at 30 e 2014: Total assets held in MySuper products was $363.2 billion, representing 20 percent of total superannuation assets and 32 percent of RSE assets. Almost half of the $359.3 billion in investments 6 in MySuper products at 30 e 2014 were held in Australian and international listed equities. The annual representative member statement of fees and other costs for generic MySuper products with a single investment strategy ranged from $290 to $1,322, with a median of $532. In 2014, our experience of the MySuper product has been positive. We have evidenced variation in relation to the Mysuper investment strategy, investment performance, product features and fee structures. We found that the level of focus on the administration fees continues to be a key focus across the industry. While competitive fees are imperative, the range of fees charged to members by super funds are extremely varied. We believe that fees will continue to be a focus and that funds with high fees and low returns will come under scrutiny. Figure 13: Investments by asset class (MySuper products) Unlisted equity 7% Property 9% Cash 9% Infrastructure 7% Fixed income 16% Others 4% International listed equities 24% Australian listed equities 24% 6. The difference between investments and total assets includes tax assets, receivables, reserves, derivatives and other assets. 20

21 SuperStream SuperStream is a package of measures designed to enhance the back office of superannuation, dealing with administrative processes ultimately making the flow of contributions more reliable and timely. Under SuperStream, excessive costs caused by manually processing money transfers and data will be significantly reduced by encouraging electronic transmission of linked financial and member data and using standardised formats. These savings are expected to flow through to members in the form of lower fees. However, the savings arising from these appear to be more than offset by the ongoing investment in technology and other additional costs, including increased disclosure obligations and levies payable to regulators. Tighter regulations Significant regulatory change in the superannuation industry over recent years has added to uncertainty and increased compliance burdens. In 2013, APRA released a comprehensive suite of reporting standards, reporting forms and instructions for APRA-regulated superannuation funds. The new standards take account of developments in the superannuation industry as well as the prudential regulation framework. In particular, the standards are intended to strengthen APRA s ability to identify, evaluate and, where appropriate, investigate and respond to risks faced by superannuation entities. Implementation and ongoing costs in complying with the new system are expected and are likely to include new compliance and reporting systems (including IT setup); educating key personnel; and updating internal and external governance arrangements. The costs per entity will vary, with ongoing compliance costs expected to be comparatively minor. It is unavoidable that we will see continued change. Funds need to be agile, adapt with change and look to innovate where possible. In 2014, we saw members and regulators paying greater attention to risk management frameworks, control environments and fund governance arrangements. We believe that the future will bring greater scrutiny in both the direct correlation to increasing member awareness, engagement and financial literacy, but also a result of the amplification of the potential risks in a more connected, mobile and globalised world. For super funds, it will be critical to ensure that a risk focus is embedded within the fund, but in such a way that it does not stifle innovation. Along with rapid globalisation and the increasingly interconnected nature of risk, comes the need to review and reassess business continuity planning exercises. While other industries such as manufacturing, sourcing or insurance may be at increased risk of supply chain disruption, no sector is immune. Super funds will need to consider how to best mitigate against future disruptions. For super funds, it will be critical to ensure that a risk focus is embedded within the fund, but in such a way that it does not stifle innovation. 21

22 Greater competition The significant growth in SMSFs has resulted in many large financial institutions spending significant amounts of capital to provide members with greater investment choices through their SMSF offerings or member direct investment options to try and replicate the options provided to SMSF members. The future of the member direct investment options is questionable and yet to be quantified. KPMG believes that operational efficiency can also be enhanced by increasing competition in the sector. One way this can be achieved is through the publication of meaningful and regular industry statistics on costs and performance. Much of this data is already available as APRA now collects a significant amount of data on fund performance and efficiency through the revised APRA Reporting Forms and the MySuper dashboard that Funds are required to disclose on their website. It is also important that this information is obtainable, comparable and easy to understand. Internalisation of investment management activities One of the initiatives being considered by a number of funds is the internalisation of investment management activities once funds get to a sufficient size and scale. Funds indicate that reducing investment costs associated with investment manager fees, including performance based fees, is a key driver in establishing in-house investment teams. It has been found that funds with more internal management performed better than funds with less. 7 We believe the development of these in-house operations will assist in improving efficiency providing that they are supported by appropriate investment governance and operational frameworks. These frameworks should allow the Trustee and Management to monitor and manage the performance, risk and efficiency of these in-house investment operations. Key questions or considerations Will the challenge to deliver higher quality superannuation services, through better products, higher quality advice, lower costs and higher returns drive significant consolidation of the industry through mergers or closer alliances? What should trustees be doing today to adequately protect the best interests of the members of their funds by 2025? How are the Stronger Super changes including MySuper, SuperStream and the Prudential Standards impacting our industry and the individual funds? How will our industry and individual funds be assessed in terms of success by 2020 when the FSI has suggested a review of default arrangements? What key indicators of success should we be working on now for then? KPMG believes that operational efficiency can also be enhanced by increasing competition in the sector. One way this can be achieved is through the publication of meaningful and regular industry statistics on costs and performance. Given the continued focus on costs, what strategies are in place to improve operational efficiencies and realise benefits to members? 7. Rotman International Journal of Pension Management, How Large Pension Funds Organize Themselves,

23 Demographic change 23

24 Demographic change Ageing populations, low birth rates and high levels of fiscal debt are creating a well-publicised global superannuation time bomb. In countries with welldeveloped pension systems, the issue is one of increasing dependency ratios, low savings rates, a low interest rate environment and high levels of consumer mistrust and disengagement. For less developed economies, the challenges are compounded by even lower levels of pension provision. While the industry is well aware of the problem, very little has fundamentally changed over the last 20 years. For example, in Australia, while there has been a shift from Defined Benefit (DB) to Defined Contribution (DC), the introduction of MySuper and recent changes to SG rules, is this sufficient? We believe further product innovation is required. How will the industry innovate sufficiently to encourage saving and to help investors live the kind of retirement lifestyle they expect? Will it even be possible for individuals to live the lifestyle they envision? Will it be the design and launch of a radically different pension proposition in the accumulation or, perhaps more importantly, decumulation space? Or will it be more subtle innovations which make the current product set more effective, less costly and increase the breadth of appeal? Data produced by the Australian Bureau of Statistics shows clear signs of Australia s ageing demographics. The baby boomers, who formed a significant portion of the Australian workforce during the past 40 plus years, are now nearing retirement. The superannuation industry is also undergoing significant changes in its membership demographics, which generally tracks the long-term national trend. As of 2014, over 10 percent of the membership base for the Top 200 APRA Regulated Funds membership base is over the age of 60 and 33 percent of total vested benefits. The majority of these members will be coming to the end of their accumulation phase in the next 5 to 10 years. The retirement of this generation, which only came under the current Superannuation Regime during the later part of their working life, will bring significant challenges and opportunities to the Australian superannuation industry one that has yet to experience such a significant shift of its membership base into Pension Phase. Since e 2004, the number of pension members has more than doubled, whereas, the number of accumulation members has hardly increased over the same period and from e 2009 has actually started to decline. The Australian market is reaching a tipping point in terms of the impact of the ageing population with pension members doubling and accumulation members beginning to decline such that new risks are beginning to emerge. 24

25 Some of the increase in pension members may be due to the availability of the transition to retirement pensions introduced in July However, this only marks the start of an ageing population s effect in Australia with retirements of later generations, who have spent their entire working life under the Superannuation Regime, to be characterised by even larger account balances. Superannuation membership in Australia is rapidly ageing Forward projections by the Australian Bureau of Statistics indicate that the growth of the 50 plus age group will continue to track above the national population growth rate and national working population growth rates for the next years. KPMG expects the portion of members over the age of 60 to increase significantly in the next years as a larger portion of the population will have held a superannuation account. Accumulation versus Pension Membership Growth The negative returns experienced by the majority of superannuation account holders during 2008 and 2009 is a perfect example of the sequencing risk faced by members in the later stages of their accumulation phase. In these years, account balances had negative returns of 8 percent and 12 percent respectively. Something that was unprecedented in the short life of the Australian Superannuation System. By the end of the 2012 financial year, nominal investment returns of those funds had yet to fully recover the total nominal loss experienced in those 2 years. The timing of these events would have had a significant impact upon members nearing retirement (regardless of whether they drew down their vested benefits during retirement or used the balance to purchase a pension product). Those nearing retirement have a larger amount of financial capital in their superannuation fund to be affected by negative returns, and less human capital and time to replenish lost retirement funds or wait for rebounds in investment returns. Figure 14: APRA Regulated Top 200 Super fund Historical Membership by Age Group Percentage The negative returns experienced by the majority of superannuation account holders during 2008 and 2009 is a perfect example of the sequencing risk faced by members in the later stages of their accumulation phase < Source: Superannuation Fund Level Profile & Financial Performance e Note: membership numbers have not been adjusted for individuals with multiple accounts. 25

26 Figure 15: Lump sum versus Pension Payments A$ m Lump sum Pensions Source: APRA Statistics Annual Superannuation Bulletin e 2013 Increases in the value of pension payments have been sustained throughout the decade with a year on year increase recorded in 9 of the 10 years to 2013*. Notably, the value of pension payments as a proportion of total payments has also increased significantly, from around 34 percent of total payments in 2004 to approximately 51 percent of total payments in 2013*. Recent financial market turmoil, combined with a growth in the number of pension members and recent declines in the number of accumulation members, is forcing superannuation funds to focus greater attention on managing liquidity and cash flow. Given the increase in pension members, we believe pension innovation is particularly important in the following two areas: 1. Enhancing the current decumulation product offering In addition to improving the simplicity and transparency of the pension purchase process and enhancing the way liquidity is provided, we believe that with healthcare improving, careful consideration should be given to how to extend beyond the traditional at retirement product marketplace to help the older generation find healthcare and the more active retirement lifestyles they are likely to expect. 2. Improving risk management within the product to increase the certainty of outcomes We believe there is a need for improved risk management and potentially greater risk sharing to improve participation and investment certainty. In the current Defined Contribution system, individuals bear all the investment risk, yet the majority invest via a standardised asset allocation model which moves to fixed income as an investor nears retirement age. Very few individuals pro-actively change their asset allocation dynamically through the life of the product or as their personal circumstances change. In today s low interest rate environment, the absence of interest rate hedging can often result in pension levels which are significantly below expectations. We believe there could be opportunities for a more fiduciary solution in the pension arena, with asset managers taking on a greater oversight role. This role could include more active management of the assets against a defined target and even potentially the inclusion of some form of embedded guarantee or a guaranteed floor to help improve confidence that the intended outcomes will be delivered. * Latest available information at the time of publishing. 26

27 Member engagement is the number one priority for the industry. The members of tomorrow are likely to be very different from the members of today. Member engagement A top priority on all superannuation funds lists is improving member engagement. This is closely followed by becoming more operationally efficient and, due to the ageing population, focusing on post retirement products. Member engagement is concerned with ensuring members are proactive and make smart choices for their retirement. Participants in the superannuation industry have long been segmented into fund and product types, but recently (driven by the Cooper Review) the industry has realised that segmentation of the industry is critical to member engagement and a re-think is required. Super funds are currently working hard on finding ways to improve member engagement. It is a common theme throughout the industry that superannuation needs to be simplified and that funds need to be engaging with members throughout their working and post retirement life. Greater product offerings, educational seminars and enhanced reporting to members are areas that super funds are working towards to help retain members. We believe that member engagement can also help to improve competition within the sector. Engagement does not imply that members must know their account balance for any given year; improving engagement is about enhancing the member s awareness and experience while in the sector. Innovation within the sector can assist in developing new product and service suites for accumulation and retired members to improve the members experience and engagement. Below are a number of initiatives that can improve engagement with super members: Integrate banking and superannuation Online banking is second only to ing for internet activities for those aged 18 34, 90 per cent of which access the internet multiple times a week. 8 Member engagement can be enhanced by integrating banking and super arrangements on a single platform. Other enhancements include funds using smart phone applications to communicate with members (particularly Gen Y). This form of communication improves member engagement and encourages self service which in turn reduces operational costs to the fund. Mobile capabilities are emerging as critical tools for engaging device driven members. We are evidencing that Australian super funds are behind in this space. In an increasingly networked and connected economy, members are likely to expect and value aggregation across a broad number of financial service providers, as opposed to having to manage a series of separate financial relationships. For such a shift to take place, relationships, networks and connections with peers and competitors, or co-operation, will be paramount to support future propositions and service models. Such a transition would significantly impact super fund structures, as processes will extend beyond existing organisational boundaries. In addition, as outsourcing relationships continue to develop into operating models, providers are likely to be seen as extensions of the funds organisational structures, presenting its own challenges. Publish projections on future balances Publish projections on future super balances and lifestyles to raise member engagement and understanding of superannuation. These projections should include considerations of the impact of different return and risk targets (portfolio options) for the member in both accumulation and retirement. We note that some funds within the industry are already incorporating projections on member statements that are presented to members via video linkage. Additionally, the projections should enable the member to take into consideration their anticipated or desired future expenses. These projections should be compared to the lifestyle of the member if relying on the age pension. 8. Australian Communications and Media Authority, Australia in the Digital Economy, May 2009, page 10 &

28 Looking at the problem of member engagement through a different lens Given the lack of genuine product innovation in the superannuation sector, we believe that there may be the potential for more radical propositions to shake up the industry and perhaps even present new solutions to the pension s time-bomb. Solutions, outcome orientated products, protection and target date funds are increasingly prominent but to a large extent these are incremental developments based on the existing product set. However, could we not look at the problem through a different lens? Cash at retirement is a means to an end rather than an end itself. People need the cash to buy products and services which they aspire to in retirement; holidays, cars, healthcare, etc. The amount reflects to a large extent their expectations of retirement and what these will cost. However, it is increasingly difficult to anticipate what the world may look like and what things will cost given the difficulty in predicting the future. One potential solution is to take away the risk around cash or transfer the risk from an industry which is perceived to have underperformed against its original promise. This could potentially be achieved by locking-down value earlier at regular points during your working life. It could also be achieved by taking away the means and moving directly to the end itself; contributing during your working life to guarantee a new car every 3 years, regular holidays, health checks and care, etc. It could be feasible that individuals would be willing to build relationships directly with the product or service providers and make regular payments during their working life to guarantee these in retirement. While potentially fraught with regulatory challenges and not necessarily obviating risk, it is feasible in our view. Indeed, we are already familiar with time-shares which is a similar concept. We believe that such a concept, if appropriately worked through could have the potential to improve investor engagement and individuals readiness to save. Another focus of super funds over the past 12 months has been to improve data quality. This area has seen the implementation of SuperStream (as discussed on page 21 of this document) whereby improvements in data quality are expected. However only time will tell. APRA will be paying particular attention to this area and have stated that data integrity needs to be at the front of mind for all funds tendering for services, particularly administration and insurance, with a focus on sustainable pricing that supports adequate management of data. At 30 e 2014, we saw a majority of super funds being compliant with the new APRA Prudential Standards. This demonstrates that funds are willing to improve data quality and provide more accurate reporting and better service to their members. Key questions or considerations The need and demand for pension product innovation is clear with pension payments now more than 50% of total payments. How will you balance the simplicity and transparency of the pension purchasing process with improved risk management to deliver better certainty around outcomes? What products and services will be developed to engage and retain members in retirement and improve retirement outcomes? What action will need to be taken to improve member engagement? How will funds move to B2C relationships when members enter retirement? When and how will funds engage with members to improve their experience when in the fund? How can member engagement be improved through strategic alliances to better integrate and co-ordinate service offerings? Can members be motivated to invest more for retirement by contributing to the delivery of actual assets like cars, holidays and housing rather than just a cash balance or pension in retirement? 28

29 Environmental and Social Governance 29

30 Environmental and Social Governance Growing but not yet mainstream The incorporation of environment, social and corporate governance factors into superannuation funds investment decision-making processes is increasing. This is driven by a growing number of requirements such as the Financial Services Council (Standard 20), the ASX Corporate Governance Council s Recommendations and signatory requirements under the UN Principles for Responsible Investment. The pressure to transparently demonstrate how ESG criteria are embedded across asset classes and in governance, processes and reporting is also due to stakeholder demands to understand more about the sustainability of their funds investment decisions. The perception that mainstream investors do not care about ESG is outdated. They are increasingly taking into account non-financial information into their investment decisions, and it is paying off. The Responsible Investment Association of Australia s 2014 Benchmark Report found that the return of the Average Responsible Investment Fund (comprises 27 funds) was per cent while the average return for the S&P/ASX 300 Accumulation Index was per cent, for the year ended 31 December Further, trends in improved investor engagement and disclosures in relation to ESG by corporates are emerging. This push comes from the increased focus of capital markets on understanding the risks and opportunities of non-financial risk and through the emergence of better business reporting frameworks and practices. On a broad scale, the independent, not-for-profit Asset Owners Disclosure Project has brought the lack of transparency about ESG criteria into the public arena. The type of ESG criteria, the methodologies funds use and the rigour with which these criteria are applied varies widely. There is a further need for funds to understand the complex investor landscape and communicate more effectively. The superannuation sector is increasingly competitive and a transparent, robust ESG framework could provide a point of differentiation to retain or attract new members. Better practice integration can be a key differentiator KPMG has seen a growing amount of interest in the integration of ESG in the market. Investment managers increasingly use ESG considerations to analyse longterm quality and investment returns. However, the development and integration of an ESG framework is a big step that many asset owners and fund managers are yet to take. Complying with standards and processes such as the UN PRI and ESG integration is easy to demonstrate, but it is difficult to determine how well this is done. Better practice integration can be difficult, but getting it right is a significant differentiator and is worth investing in. ESG as a factor in superannuation funds decision making is increasing but we are yet to see superannuation funds being held accountable. Being visibly green and ethical will no longer be a nice to have for funds. Members will expect ethical and socially responsible behaviour to be baked into operating practices. Key questions or considerations Members expectations around the incorporation of environment, social and corporate governance factors into superannuation fund decision making process is increasing. How will the fund manage its ESG philosophy and strategy? Will funds consider the development of a well developed ESG framework as a significant differentiator worth investing in? Will social media play more of a part in holding funds accountable? 30

31 A focus on technology 31

32 Executive summary Industry overview Segmentation Cost cutting challenges and industry consolidation Environmental & Social Governance Demographic change A focus on technology Insurance overview Conclusion Contacts A focus on technology Many superannuation funds are characterised by a myriad of legacy systems. While work has been ongoing for some time to improve the connectivity and integration of these systems, it is questionable whether many have gone far enough. In fact, many funds recognise that a large proportion of technological development has focused on resolving the problems of yesterday. We believe that a robust core platform which can support customised and tailored propositions to address funds increasingly diverse needs and service expectations will be crucial. As we have seen, generational differences alone will necessitate a platform capable of dealing with members who will want to interact in different ways, through different types of media and who expect information to be provided in a wide variety of formats. In addition, the ability to allow others to plug and play on the platform may also be increasingly important as open architecture becomes more prevalent. With a growing number of members valuing the concepts of transparency and simplicity, anything that can be done to simplify fund portals and web applications is likely to pay dividends in member acquisition, retention and satisfaction levels. In the future, funds that delay updating their administration systems stand to miss out on vital IT capabilities. Time taken to reach 50 million users 75 Years 38 Years 13 Years 4 Years 3 Years 2 Years 1 Years 35 Days 1. G.Kofi Annan, quoted on visual.ly/reaching-50-million-users hile funds have already been working W hard to improve operating platforms, we believe much of this work has been focused on addressing the legacy of yesterday and problems of today, rather than preparing for the future. 32

33 The amount of data available about members (e.g. their needs and lifestyles) and about markets (e.g. their profiles and dynamics) is increasing exponentially and is often difficult to interpret. Sources range from employers, advisors and other external market data feeds. Over time, this is only likely to increase as feeds from other sources, such as social media, are integrated into fund systems. There are further challenges in managing data quality issues, ensuring that insights are relayed effectively to the relevant functions and that the business remains compliant with regulatory requirements, particularly around data privacy. Making sense of this efficiently, creatively and using it to predict behaviours will be one of the core sources of competitive advantage. The opportunities presented by efficient data analytics are recognised across the industry. IT systems are no longer simply about transaction processing and number crunching. Those functions can, and in many cases, have already been outsourced. Increasingly, we are seeing a trend towards more funds outsourcing more middle-office and back-office functions in an effort to focus technology on delivering genuine differentiation, to move the cost base to a more variable model and to enable business resources to focus on their core competency of investment, product and member engagement while also improving service levels. There are also potential advantages in using outsourcing as a means to keep up-to-date with the rapid pace of technological advancement and support more rapid proposition development. If executed successfully, outsourcing can significantly improve cost flexibility and agility and could better equip a fund to capitalise on the opportunities and respond effectively to the challenges created by the marketplace of the future. Cyber security The amount of data continues to grow exponentially as does the rate at which super funds share data through online networks. The Internet of Things in which billions of machines, from tablets and smartphones to ATM machines, security installations, environmental control systems and thermostats, are linked together has left the realm of science fiction and is becoming reality. We believe that positively managing cyber risk not only takes control of uncertainty across the fund; you can turn it into a genuine strategic advantage. 33

34 The consequence is that, super funds increasingly open their IT systems to a wide range of (mobile) machines and by definition lose direct control of data security. Furthermore, business continuity, both in society and within funds, becomes increasingly dependent on IT. Disruption to these core processes can have a major impact on service availability to members. Recent cyber breaches at super funds (globally) highlight the increasing sophistication, stealth, and persistence of cyber attacks that organisations are facing today from nation-states, organised crime, and hacktivists, as well as threats from within the fund (which often pose the greatest risk). Not surprisingly, cyber risk is rapidly climbing up Management s, Senior Executive s and the Board s agenda. Funds need to protect themselves against cyber attacks and ensure that an appropriate response can be provided. We believe that super funds need to change their outlook on cyber security. They should do this by playing to their strengths rather than their fears of what might happen. Investment should be balanced between risks and potential impacts. We believe that positively managing cyber risk not only takes control of uncertainty across the fund; you can turn it into a genuine strategic advantage. Technology has become ubiquitous, with digital and mobile devices embedded into every aspect of our personal and business lives. If super funds fail to adapt to the new digital landscape they will risk falling behind. Key questions or considerations How well aligned is your fund strategy and your IT strategy? Have you documented your target operating model for your administration function including what is outsourced and what is not? How well do you use technology to engage with members and differentiate your services? Does your use of technology enable you to drive down your cost base and enable business resources to focus on their core competency of investment, product and member engagement? Do you have a cyber security strategy and how does this have regard to your Business Continuity Management and Data Management requirements? 34

35 Insurance overview 35

36 Insurance overview Insurance protection plays a vital role within the superannuation industry and is a key focus for the regulators. For a number of members each year, Total and Permanent Disability (TPD) or premature death mean that they or their dependants need to call on their superannuation savings earlier and for a longer period than they would have expected. Insurance plays a crucial role in allowing those needs to be met. Benefits of insurance within superannuation is that it is often cheaper (as funds can negotiate with the insurer in bulk), there are tax advantages and it is easy to manage because premiums are automatically deducted from members accounts. Currently, we are witnessing super funds looking to strike the right balance in offering the right insurance product to members to protect against the risks of being unable to contribute to an adequate standard of living and the impact of premiums paid. Given that life, TPD and income protection insurance are complex products, and each fund has a different demographic of members with varying risks, super funds are finding this tough. It also appears the regulators are concerned. Past pricing levels, the approach to tenders in the group life insurance market and the management of insurance data are all areas of trepidation. Whilst still growing, the insurance industry, due to competitive pressures has seen a sustained slowdown in premium rate increases in 2014 across the industry. However, this is not the case in the super industry, whereby premiums increased in The Australian insurance industry has evolved in recent years through the emergence of low cost online insurers, the introduction of aggregators and more recently, the introduction of non-traditional market participants such as supermarkets. Whilst the largest insurers continue to dominate the Australian market (in particular the superannuation industry), several of the smaller challenger brands have demonstrated outstanding premium growth in recent years (albeit off a smaller base). Over the past year, insurance remains an area of focus for all funds, with premium increases being driven by deteriorating claims experience. 36

37 Globally, insurers continue to focus on cost discipline, putting in place programs to promote technological change to drive operational efficiencies including the streamlining of policy and claims management systems. This trend is expected to continue, resulting in a benefit to Australian superannuation funds. Additionally, a number of insurers have introduced online portals for funds to view and manage their policy and lodge claims online in order to enhance the fund experience as a method of differentiation from their peers. Increased online interaction with funds also provides further opportunity for cost savings for the insurers who have invested heavily in technology in recent years. Hopefully, these cost savings are passed onto members of super funds. Key questions or considerations Given the complexities of member insurances, do you have an adequate Insurance Management Framework in place including adequate cost management disciplines, a quality data strategy, adequate systems to streamline policy and claims management that will enable an enhanced member experience? In the insurance sector, the analysis of policyholders spending habits are starting to displace traditional actuarial data as a more appropriate predictor of individuals risk (and therefore pricing) profiles. Can this happen within the superannuation industry in an equivalent manner? 37

38 Conclusion 38

39 Conclusion The Australian superannuation industry has continued to grow, strengthen and mature over the last decade. Australia is considered to be moving ahead whereby assets and the rate at which they grew relative to GDP between 2001 and 2013 were above the OECD average. We have witnessed significant growth in the number of self managed superannuation funds (SMSFs) at the expense of industry, corporate, public sector and retail funds. Asset values, contributions and benefit payments across all types of superannuation entities have also increased noticeably over this period. This growth trend is expected to continue, provided that any future tax reforms do not make superannuation less attractive as a retirement savings vehicle. Growth of total superannuation assets may accelerate further if financial markets continue to perform positively and as the rate of Superannuation Guarantee increases in the coming years. We have also seen growing interest in the integration of ESG and technology in the market. Investment managers increasingly use ESG considerations to analyse long-term quality and investment returns. However, the development and integration of an ESG framework is a big step that many asset owners and fund managers are yet to take. Technology continues to be developed and is playing a significant role in the growth of funds and SMSFs through its ability to provide research, trading options, administration, online investment and banking all at the one time. Australian superannuation institutions are facing a number of challenges over the next years. Growth in the SMSF segment, an ageing Australian population, upfront and on-going running costs of the MySuper reform including SuperStream, Prudential Standards, changes in the digital landscape, the competition among funds and member engagement are all areas of trepidation for all super funds. If funds fail to respond to these challenges they face the risk of decreased fund inflows and increased benefit payments that will ultimately impact the funds asset values. However, funds that adapt to these challenges quickly through innovation will be more attractive to potential members and other smaller superannuation funds through the merger process. Given the competitive environment, smaller superannuation funds could face a severe cost disadvantage through a lower membership base that will ultimately see asset growth decline. Super funds must find ways to improve member engagement. Greater product offerings and plan flexibility, educational seminars, enhanced reporting to members and greater IT portal capabilities all of which will help retain members and grow their fund. For super funds, keeping abreast of members changing expectations in terms of access, connectivity and service with their super fund is likely to create significant challenges. At the same time, leveraging the exponential volume of data created in relation to member needs and behaviours is likely to become an increasingly important competitive differentiator. Cyber security should be on every super funds agenda. Management, Boards, and members all expect sufficient attention to be paid to this key business risk. 39

40 Insurance within the Australian superannuation system has evolved in recent years. A number of insurers have now introduced online portals for funds to view and manage their policy and lodge claims online in order to enhance the funds and members experience as a method of differentiation from their peers. Increased online interaction with funds also provides further opportunity for cost savings for the insurers who have invested heavily in technology in recent years. Over the past decade, the focus of the Australian superannuation industry has been on the accumulation phase of the members account. Currently, we are evidencing a change in focus as funds are now concentrating on providing post-retirement products to the ageing population. While it is clear that Australians are ageing, it remains vital that super funds focus and cater for all age groups, otherwise they run the potential risk of membership loss. Individuals who engage in super at an early age and who start investing early in their life-cycle will be more likely to maximise their retirement savings. Funds must acknowledge the importance of creating opportunities for younger generations to learn about superannuation investments while emphasising the fact that younger members need to start investing as early as possible. The future of the Australian superannuation industry is in our hands. As discussed throughout this publication, there are currently many challenges and opportunities facing the industry. Super funds that innovate and embrace new technology across all areas of their operations will be best placed to respond to these challenges and thrive in the longer term. 40

41 Key questions for top management teams We are not attempting to predict the future. We are simply looking to better understand the trends at work and how they could impact the Superannuation industry the profile of the future membership base, their needs, requirements and behaviours, the industry value chain and business and operating models. We believe that while these trends present a range of challenges, there are also significant opportunities for the industry. We also recognise that the spectrum of potential outcomes is broad and the pace of change could differ substantially in a number of areas. However, we are firmly of the opinion that funds should consider these trends and agree: Which trends will impact you most? Where do you need to act today? What do you need to do? What do you need to monitor and track going forward? What will you need to keep an eye out for and act upon if it occurs? What could happen which could change the rules of the game and what will you do about it if it does? Clearly, funds are likely to be impacted in different ways by a different combination of trends. There is also no one-size fits all response or strategy. Each fund should consider the impact of the trends taking into consideration the: Current market and competitive position Vision and strategic and financial ambition Core capabilities Willingness and ability to change Appetite for investment and risk We hope that this paper stimulates debate within your fund. We also encourage you to think carefully about how your business may be impacted and more importantly how you should respond. 41

42 kpmg.com.au Contacts Sean Hill National Leader, Superannuation T: E: [email protected] John Teer National Sector Leader, Wealth Management T: E: [email protected] KPMG Superannuation Services Pty Limited ABN , Australian Financial Services Licence No The information contained in this document is of a general nature. It has been prepared to provide you with information only and does not take into account your objectives, financial situation or needs. It does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on the information contained in this document. Before acting or relying on any information, you should consider whether it is appropriate for your circumstances having regard to your objectives, financial situation or needs and also whether or not any financial product is appropriate for you. You should obtain the Product Disclosure Statement relating to any financial product mentioned and consider the statement before making any decision about whether to acquire the financial product. To the extent permissible by law, KPMG Superannuation Services Pty Limited, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement 2015 KPMG Superannuation Services Pty Limited, an affiliate of KPMG. KPMG is an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG, the KPMG logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. May QLDN12140ADV.