The sounds of change

The Australian superannuation funds environment has changed dramatically over the past 10 years, yet the underlying formula by which the major fund administrators are paid has hardly changed at all.

This simple fact goes a long way towards explaining why, confronted by the workload flowing out of the Federal Government’s Simpler Super arrangements, the administrators are now openly discussing different, more remunerative cost formulas.

And it is not just the administrators who are banging the drum about the need to change remuneration models — so are some of the leading commentators and analysts.

It is all about delivery. In the new choice of fund and Simpler Super environment, superannuation fund trustees have felt the need to deliver their members a greater range of options and services — everything from online access to super balances to enhanced insurance offerings and access to financial planning.

The problem for these funds is most of their contact with members occurs via their administrators — something that inevitably created pressure for a new pricing formula.

And there is no doubting the degree of that pressure. In less than half a decade, most administrators have gone from providing a basic interface with respect to issuing member statements and handling enquiries to needing to maintain fully-fledged call centres backed by sophisticated computer platforms.

What is more, a dearth of experienced personnel means superannuation fund administrators are being forced to pay top dollar to fill many key positions.

The desire of administrators to achieve better cost-recovery is hardly surprising in circumstances where any reading of the documents attached to a Federal Budget reveals that Comsuper — the body charged with handling the administration of the big public service funds — operates on a full cost-recovery basis.

The bottom line is that Australia’s major superannuation administrators are experiencing one of their busiest-ever periods as they seek to bed down a range of regulatory and administrative changes flowing from two key Commonwealth initiatives — Simpler Super and the Anti-Money Laundering and Counter-Terrorist Financing legislation.

When the Federal Treasurer, Peter Costello, brought down the Budget in May last year, the superannuation industry welcomed the so-called Simpler Super changes as a distinct improvement.

Costello, in discussing the changes, even went so far as to suggest that the new initiatives would make administration easier. However, the timetable he imposed meant administrators are only now beginning to deal with the implementation and come to terms with the added workload.

While the financial services industry has been widely consulted with respect to the Anti-Money Laundering and Counter-Terrorist Financing legislation, superannuation administrators are only now in a position to make the relevant changes to their systems.

What nobody clearly contemplated at the time of the 2006 Budget and during the debate over the anti-money laundering legislation is the degree to which both initiatives would impact on the activities of the administrators.

Nor could the various parties have contemplated the degree to which the changes might impact on the financial relationship between administrators and the superannuation funds they service.

According to the general manager, marketing and business development with Pillar Administration, Mark Luciano, the changes have generated high levels of activity within the industry aimed at ensuring that all funds are compliant by the relevant implementation dates.

The Government’s changes have also altered the dynamics of the superannuation administration sector, with some in the industry now suggesting that administrators are going to have to review their fee structures to reflect the extra workload.

This was the view proffered by the managing director of Sydney-based superannuation ratings house SuperRatings, Jeff Bresnahan, at the recent Conference of Major Superannuation Funds on the Gold Coast.

Referring to the legislative and regulatory changes confronting the industry, Bresnahan pointed to the complexities that surrounded the changes to the superannuation surcharge and suggested that the changes associated with the amendments and anti-money laundering, particularly the provision of tax file numbers, would be every bit as challenging.

He said administrators would be faced with multiple handling of both money and forms.

Bresnahan suggested that the task of superannuation administration was getting harder, not easier, and that this situation was being exacerbated by the fact that not all companies had invested adequately in the necessary information technology platforms.

Provocatively, Bresnahan suggested that administrators needed to take a harder line with their superannuation fund clients in circumstances where most are earning too little to cope with the investment necessary to upgrade their systems.

He said administrators were entitled to a minimum of 20 per cent of fund earnings to ensure future development, but most were currently coping with less than 10 per cent.

While the administrators may be bemoaning their rate of cost-recovery from clients, the superannuation funds themselves are no doubt looking at their annual costs and wondering how they are going to handle any increase in charges.

The cost of administration represents a substantial impost for most funds, with the Association of SuperannuationFunds of Australia in late 2001 estimating that aggregate administration costs for superannuation in 1999-00 had been in the order of $2.45 billion.

It said that while this was a considerable sum, it had to be seen in the context of the $21.7 million in accounts in superannuation funds and the $477 billion in assets in funds as at June 2000.

According to the APRA research, the average cost per account in 2000 was $110.

Pillar Administration chief executive Peter Cormack readily acknowledges that the changes that occurred over the past two or three years have served to make the old pricing formulas redundant.

He said from the administration end of the equation, it was no longer appropriate to simply apply a “per member” formula with respect to costs.

“Things are getting tighter, and the things that sustained the old pricing model have gone out of the window,” he said. “We are now increasingly looking at activity-based pricing, which more accurately reflects the work that you actually do.”

Cormack underscored the need for a new pricing formula when he pointed to one instance where a fund’s membership had increased by just 6 per cent, but the activity levels with respect to administration had increased by 30 per cent.

“On that basis, the old formula based on a certain amount being paid per member simply doesn’t work,” he said.

Asked how the push for a change in formula were being viewed by the trustees of client superannuation funds, Cormack said he found them willing to listen to the arguments being put by the major administrators.

“They are pretty understanding about what has changed in the industry and the need to move to a model that moves with levels of activity,” he said.

Cormack pointed out that many of the changes being implemented by administrators at the moment simply reflected the contents of the last Federal Budget and a refinement of a number of the regulatory requirements.

He said the changes flowing from the new anti-money laundering requirements were yet to flow into the system, and would require even further adjustment.

The bottom line, according to Cormack, is that people these days are much more interested in superannuation and changes in superannuation policy, such that every time a new announcement is made, activity levels in call centres peak dramatically.