White Paper Superannuation in Australia: Impact of business and regulatory changes - Anuj Puri, Isha Lamba and Gurpinder Singh www.infosys.com
Introduction The Australian superannuation industry has seen tremendous growth over the past decade. From June 2000 till June 2011, superannuation assets more than doubled from AUD 480 billion to AUD 1.3 trillion. Industry funds and small funds, which are predominantly self-managed super funds, were the fastest growing segments, expanding by nearly 410% and 461% respectively, over the same period. Figure 1: Assets in Superannuation Figure 2: Assets by fund type as a percentage of total superannuation assets Source: Australian Prudential Regulation Authority (APRA) The compulsory nature of superannuation and its associated tax advantages ensured the growth of assets even during the global financial crisis. As depicted in Figure 1, the contribution inflows meant that even though there was a fall in the previous year s cumulative assets, owing to poor performance of almost all asset classes, the total value of superannuation assets did not register a corresponding sharp decline. E.g. the total value of superannuation assets for June 2010 would have been approximately AUD 900 billion instead of AUD1.2 trillion, had there been no contributions. Figure 2 depicts that there was significant growth in the industry funds and small funds while there was low growth or decline in the corporate, retail and public sector funds. Over the years, there has been an increased legislative and regulatory focus in the area of superannuation in Australia. This has been largely driven by the need to ensure retirement savings of the aging population. This has led to deliberations on guidelines to be adopted by the various stakeholders, and actual progressive reforms and regulations. This paper is an attempt to understand the business, legal and regulatory changes in the Australian superannuation space, and its subsequent operational and IT impact on retirement administration systems. 2 Infosys
The Superannuation Ecosystem The diagram below depicts a high level overview of the superannuation ecosystem. Employer / Sponsor Plan Administrator Members / Employees Funds Figure 3: Superannuation Ecosystem Example of each player in the ecosystem: Members / Employees Employer/ Sponsor Plan Administrator Funds Individual clients, employees of 3 Mobile, Tandy, ANZ 3 Mobile, Tandy, ANZ Westpac BT, Fidelity, Ameriprise Industry Fund, Pension Fund, Commodities Fund, Self-Managed funds Infosys 3
Business and Regulatory Changes Proposal to increase the Superannuation Guarantee (SG) rate and age limit The Australian Government introduced the Superannuation Guarantee Amendment Bill (Administration) 2011, to gradually increase the SG rate from 9 percent to 12 percent over a seven year period starting 1 July 2013. The government also intends to abolish the SG age limit on 1 July 2013. SG rate (%) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 9.25 9.5 10.0 10.5 11.0 11.5 12.0 Figure 4: Timeline of incremental rise in the SG rate This increase in the SG rate is expected to benefit 8.4 million workers. An average worker aged 40 years will receive a 15 percent increase in retirement savings, while an average worker aged 30 years will receive a 24 percent increase in corresponding savings. Thus, the Australian economy will benefit from an additional AUD 500 billion in superannuation savings by 2035. While, the bill in its current form increases the SG age limit by 5 years, from 70 to 75 years, it is also clear that the government intends to abolish the age limit completely on 1 July 2013, which means that workers above the age of 70 years will be able to make superannuation contributions. The government estimates that this measure will provide an incentive for people to remain in the workforce longer, which is likely to benefit over 50,000 employees. The above changes call for additional flexibility and scalability in systems where the SG rate and the age limit can be changed on a frequent basis. With the increase in the age limit there will be a higher number of active retirement accounts in the system. The system must be able to increasingly cater to changing requirements such as managing disbursals and investing retirement proceeds. This also entails more fund managers introducing products catering to the changing requirements of their clientele. An example would be the introduction of pure debt funds to cater to the septuagenarians. Introduction of MySuper In December 2010, the Australian Government announced the Stronger Super Reforms to create a low cost default superannuation product, MySuper. From October 2013, employers must auto-enroll, and make contributions on behalf of employees into a default MySuper product, to satisfy superannuation guarantee obligations. Further, by July 2017, funds will need to transfer existing default balances of members to a MySuper product. The introduction of MySuper will lower the costs for members as well as employees in selecting a default fund. Further, funds will also have the flexibility to offer employers with more than 500 employees, a MySuper product specifically designed for the needs of the particular workplace. SuperStream: New data and e-commerce standards for superannuation transactions In order to simplify the processing of everyday transactions, the government has proposed the SuperStream package of measures, which includes the implementation of new data and e commerce standards for superannuation transactions. Standard Business Reporting will be used to develop the taxonomy and message structures for superannuation transactions. This, along with extensible Business Reporting Language (XBRL) for exchanging information will result in automated and timely processing of transactions, improved efficiency, better security, fewer missed accounts and timely flow of money to members accounts. Use of Tax File Numbers for account consolidation As part of SuperStream, the government has propagated the use of Tax File Numbers (TFNs) as the primary locator of member accounts. This would facilitate account consolidation and improve treatment of contributions, which are made without sufficient member details. Consolidation of member accounts using TFNs will lead to a reduction in administration fees and premiums paid by members, thereby maximising retirement benefits. As of June 2010, there were around 33 million superannuation accounts in Australia, which translates to an average of three accounts for every worker. This includes 5 million accounts, which are recorded in the lost member register. Identification of lost and unnecessary superannuation accounts can significantly reduce plan administration costs. With effect from July 2014, the enrolment process for new employees will be modified, enabling them to actively consider account consolidation. As part of the process, employees can use their TFN and gain access to all their superannuation accounts with the Australian Taxation Office (ATO). The employee can use this information and elect to have superannuation contributions made to an existing account or open a new default account. Any account with less than AUD 1,000 will be consolidated to the current active account, unless the member opts out. Members and funds can use the ATO online facility to search for inactive accounts, and claim any ATO held super monies through this online facility. Increase in Trustee Obligations The Australian Government seeks to increase obligations of superannuation trustees, which will require them to manage funds prudently and in the best interest of members of the fund. This will ensure an improvement in trustee decisions, fund efficiency and effectiveness, leading to higher superannuation member entitlements. Increasing trustee awareness about the expected costs of an investment strategy, taxation consequences and availability of valuation information, will help enhance retirement incomes. 4 Infosys
Reporting Requirements Currently, the law requires employers to report their employee s superannuation entitlements by highlighting the same in their pay slips, even though the employer may not make the actual contribution until the end of the quarter. Thus, employees do not always know whether their employer has really made the superannuation contribution on their behalf. However, this will change after implementation of the SuperStream Reforms. From July 2012, employers will be required to report on pay slips the expected payment on or before date in addition to the current entitlement. This will provide employees up to date information on their superannuation contributions and will allow them to follow up with their superannuation fund to confirm that payments are made by the due date. From July 2013, subject to there being no significant payroll system costs, pay slip reporting would include actual contributions paid rather than just accrued contributions. There will also be a provision for providing information on the fund that contributions are being paid into. Funds will also be required to issue statements, which shall show contributions made towards superannuation for the quarter. In addition to the payroll reporting requirements, retirement administrators and funds can offer web portals so that members can check contributions online. The government introduced the Corporations Amendment Regulations (No. 3) 2009 effective 1st July, 2009, which requires superannuation funds to report returns prominently in member statements to help them better understand their retirement savings. This measure will require funds to: Disclose returns at the investment option or sub-plan level in which the member has invested. Highlight, position and present long-term returns in a manner that will attract the member s attention. Provide long term returns for a five-year and ten-year period in the member s statement. This cannot be provided by way of an insert to the member statement. All the above measures ensure that employees are aware of all the vehicles where their money has been invested. This will help them make educated decisions about their investments and opt-in or optout of funds based on their performance. Delivery of Super Annual Reports The regulations allow super funds to use websites as the default method for delivering annual fund information to members, provided certain conditions are met. The key requirements are as follows: For the first financial year that the trustee decides to make the annual report available on the website, they must notify members of its availability, how to access the website, and the options for member to elect delivery of a hard or electronic copy. If a member elects to receive a hard or electronic copy of the annual report, the trustee must continue to comply with the choice for subsequent years until the member notifies the trustee of a change in choice. Impact of Changes The legislative focus and regulatory changes in the Australian Superannuation space is prompting each participant in the ecosystem to closely evaluate their business and operating model. Below are some ways in which plan administrators and managers must go about changing their business and operations. Product Development The clients of superannuation funds have a demographically varied profile, with their ages varying from 25 years to 75 years. With an increase in the retirement age, and increasing financial sophistication, the profile and preferences of clients are also changing, which is necessitating the need for new products catering to the changing segments. Employers are also going to be actively involved in finalising the superannuation offering for their employees. Thus, the superannuation products would need to be customised based upon the employer s inputs to maximise workplace savings. An example would be an employer defined investment vehicle. This also means that the funds and fund administrators will have to adopt an increasingly open architecture for products, which will enable clients and advisors to choose an appropriate fund. Choice Availability The use of TFN as a primary linkage for retirement accounts not only means an easier access to all the underlying accounts, but also the possibility of switching funds between accounts or changing the sponsor. Fund administrators can consider offering clients enhanced functionalities such as the ability to change the investment or its direction (opt-in or opt-out) online and the choice of retirement or superannuation plans over and above their employers contribution. This will give clients a sense of control over their investments, enabling them to make sound investment decisions while at the same time reducing the operational costs for both - themselves as well as the superannuation administrator. This will necessitate an open architecture, which will ensure a smooth flow of information and enable collaboration between sponsors, employers and plan administrators. New E-commerce and Data Standards The changes in the e-commerce and data standards for superannuation transactions will enable employers to extract specific data that may be required for their day-to-day operations such as payroll Infosys 5
reconciliation and consolidated reporting. Employers will be able to send contributions in a standard electronic format, obviating the need to submit this information to separate funds in varying paper formats. Reporting Requirements With the regulations and opportunities around consolidation, there is potential for service providers to enhance their offering. This will not only be in terms of consolidated reporting, but also in offering consolidated views on performance and risk. It is anticipated that clients will have the ability to keep track of their retirement savings by generating and archiving reports and statements on an ad-hoc basis. This will also help the investment advisors give informed advice and devise a sound investment strategy for their clients. The need for increased transparency, both from a regulatory as well as the client s point of view, will increasingly result in the fund providers and administrators offering look through capabilities, where investors can view the underlying investments in the fund. As per regulation, the funds will also have to disclose returns at the investment option or sub-plan level in which the member is invested. It is anticipated that there will be more configurable performance reporting, where clients can club several sub-funds and compute its performance over a specified period of time. Many changes in the reporting requirements would also happen as part of the SuperStream reforms. With the advent of pay slip reporting under SuperStream, employers would need to report the current entitlements to-date, in addition to the expected payment on or before date. Reports would also be increasingly tailored to specific requirements of the employers, which could include employer branding as well as employer specific messages. All the above mentioned changes will result in additional regulations around client reporting standards in order to achieve uniformity, enabling comparisons across various fund providers and administrators. It is imperative that the plan administrators are in a position to offer reports that meet the new and enhanced reporting requirements. Customer Service and Empowerment Individual clients are becoming increasingly sophisticated and demanding more information around their investments as well as the ability to manage their accounts and investments online. This implies that plan administrators have to increasingly offer enhanced capabilities around self-service; sophisticated calculators with what-if tools and scenario analysers; and the ability to create consolidated reports with slicing and dicing. This in turn will also help reduce overheads on customer service, while improving customer satisfaction. An introduction of sophisticated features, and the need to enable better counseling and customer support would necessitate the ability for client co-browsing. This becomes more important when the meaning of consolidation reporting varies from just generating reports, to a full-fledged consolidation or a roll-over of funds. Potential Perils and Pitfalls There are many regulatory changes, which will continue to happen in the superannuation space over the next few years. Further, the number, type, profile and preferences of clients are changing. There will continue to be a tendency by funds to be reactive to these changes, and continually play the catch up game. Being able to look ahead and anticipate these changes, so as to make strategic, long term choices would be the key to avoid expensive mistakes, and getting a head start in meeting the challenges. In their attempt to search for best products and services, clients will have a continual tendency to switch between funds. In order to minimise churn and protect their client base, funds will be inclined to adopt a closed architecture, thereby making it difficult for users to switch. However, regulations are increasingly moving in the direction of offering consumers (clients and interested parties) more choice of service providers (fund administrators and managers) the ability to consolidate accounts. This makes a strong case for an open architecture, where underlying systems within and across organisations would need to interact. E.g., preparation of financial statements on consolidated accounts would require the flow of information between organisations. Last but not the least, communication between clients, employees, business partners and other stakeholders is going to be important to ensure success. Communication about the strategic direction with business partners and employees would make them feel more secure about the changes and get their commitment towards the initiative. Having in the right communication mechanisms with clients would ensure their buy in and loyalty. E.g. Clients may not be comfortable sharing their TFN information until they are made aware of the new regulations and the potential benefits of consolidation of their accounts. 6 Infosys
Conclusion The Australian Superannuation industry is witnessing a slew of regulatory changes. In addition, changes in the client s profile and preferences is transforming the business and operating landscape. Together, these changes are providing an unprecedented opportunity to retirement administrators, funds and other service providers. Understanding these changes, their implications on operations and processes, and the subsequent implementation from an IT perspective, would enable the participants to win in the competitive retirement space. REFERENCES http://strongersuper.treasury.gov.au/content/content.aspx?doc=home.htm http://www.apra.gov.au/aboutapra/publications/pages/default.aspx Statistics: Quarterly Superannuation Performance, June 2011, APRA Dynamics of the Australian Superannuation System - The next 20 years:2011 2030 by Deloitte Consumer attitudes to superannuation and super policy issues by AFSA The Benefits of Simplified Superannuation Reform - The Agricultural Industry - Volume 9, 2007 About the Authors Gurpinder has over 14 years of experience in the financial services industry in the asset and wealth management domain across US, Europe, Middle East and India. He has worked in the areas of portfolio accounting, reporting, performance and performance attribution. In addition to business and process consulting, Gurpinder has extensively worked on requirements gathering and program management for large transformation programs and product development. Gurpinder holds a Post Graduate Diploma in systems and finance from Indian Institute of Management (IIM), Lucknow, and a B.Tech in Chemical Engineering from National Institute of Technology (NIT), Jalandhar. He can be reached at Gurpinder_singh03@infosys.com. Anuj Puri has 7 years of experience in the financial services industry particularly in banking and capital markets. His areas of specialty include domain and technology consulting and product development for retail and corporate banks. Anuj holds a Master of Business Administration (MBA) degree in International Business from the University Business School, Chandigarh. He has lived and worked in India, North America and Europe. He can be reached at anuj_puri@infosys.com. Isha Lamba has 4 years of experience in the financial services industry particularly in banking, asset management and payments. Her areas of expertise include business research, market and industry analysis and competitive intelligence. Isha holds a Master of Business Administration (MBA) degree in marketing and finance from the University Business School, Chandigarh. She can be reached at isha_lamba@infosys.com. Follow us on Infosys 7
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