Account consolidation in super five things you should think about

Transcription

1 Account consolidation in super five things you should think about A review of the impact of account consolidation on the superannuation sector and some suggested ways forward AUTHORS: PAUL DIVINY, PHIL NOBLE DATE: APRIL 2012

2 Account Consolidation Five Things You Should Think About Account consolidation presents a major challenge for superannuation funds The Australian Tax Office proposes far-reaching reforms By 2015, superannuation accounts are expected to decline by 10 million from 33 million today to approximately 23 million. This implies a conservative reduction in account keeping fees of ~$750 million per annum in 2012 dollars. For various reasons, many funds have large numbers of inactive members on their core registries, ranging from 30-70% in some cases. These members are typically low cost-toserve as they rarely if ever use member services (contact centre, advisers, seminars, benefit payments, switching), insurance services (underwriting, claims) or generate correspondence other than benefit statements, ATO statutory reporting and so on. Therefore, today, revenue from this group goes straight to the bottom line and helps underpin the administration, investment and insurance cost structure for active members, keeping these artificially low. Removing these accounts poses considerable challenges for the industry. The Australian Tax Office is taking far-reaching reforms to deliver their target reduction of 10 million accounts, using a three-pronged approach: Auto consolidation: a) Multiple accounts within a fund for the same member (from 1 July 2012) b) Low balance (initially $1,000 then perhaps up to $10,000) lost and inactive accounts including those in Eligible Rollover Funds (from 1 January 2014) Member initiated consolidation within same fund and across different funds via member consent Anti-account proliferation measures encouraging new employees (representing one in seven workers each year) to consolidate all of their accounts via an electronic interface using the enhanced SuperMatch and SuperSeeker services. Our forecasts suggest that if 10m accounts disappear, around 60% will involve auto consolidation or roughly half the estimated 12 million lost and inactive accounts in existence today. The remaining 40% will come via member initiated rollovers (2m) or anti-account proliferation measures in force for new employees (2m). Exhibit 1: Breakdown of account consolidation 2

3 Significant activity is required between now and mid 2014 Exhibit 2: Australian Taxation Office account consolidation timetable (Indicative Only ) Activity Funds can use TFN as Primary Identifier Funds can, with member consent, search the ATO for 'lost' accounts Intra-fund account consolidation becomes compulsory ATO to provide new online service listing member's ACTIVE accounts as well as LOST and unclaimed accounts. Funds can also search this service, with member consent. Funds will report all accounts, including inactive accounts, to the ATO Inter-fund auto-consolidation of inactive accouts (two years without contribution or rollover) will begin, starting with accounts below $1,000. Process initiated by the ATO and conducted annually. The ATO account service will now include all accounts: ACTIVE, INACTIVE and LOST accounts Employees will be encouraged to consider account consolidation during enrolment process New employees that do not exercise super choice will be enrolled in the default fund and have inactive accounts rolled into this account Threshold increased to at least $10,000 subject to review by Treasury, APRA, ATO and industry consultation Jul- 11 Oct- 11 Jan- 12 Apr- 12 Jul- 12 Oct- 13 Jan- 14 Apr- 14 Recent debate has focussed on how superannuation funds can respond to these regulatory changes There are a number of ways a superannuation fund can respond. SPP is undertaking ongoing research into the challenges and opportunities facing the superannuation industry. We have canvassed the opinions of thought leaders across very large and small funds, administrators and industry associations. Our thoughts are also shaped by experience in this and similar sectors that have undergone regulatory-induced change. Based on our insights, superannuation funds should optimise operational effectiveness, while reducing costs and delivering value to members. Specifically, this paper focuses on five main areas in which to do this: Minimising the cost of detecting and consolidating duplicate accounts Understanding the revenue and cost impacts of this change over the next three-five years Shifting costs out of administration Changing the administration revenue model Ensuring auto consolidation flows in your fund s favour by turning adversity into advantage. We look at each of these in turn. Source: <insert>. 3

4 Exhibit 3: Five steps to deal with account consolidation 5.Ensure account consolidation flows in your favour 4. Change administration revenue model 1. Minimise cost of duplicate account detection & consolidation 3. Shift costs out of administration 2. Understand revenue & cost impacts if accounts consolidate 1. Minimise the cost of detecting and consolidating duplicate accounts Ensure you can identify duplicate members in your current registry as well as future proofing your process so it never happens again. For many funds, duplicate accounts are a reality and can number up to 10% of members. Paperbased contributions involving deemed members largely contribute to this phenomenon. An automatic merging solution can automatically match candidates using identification standards and business rules (e.g. member chose to hold two separate accounts for insurance and/or investment reasons). This helps minimise the costs involved. Funds should not view this as a once off event, timed to comply with the Government mandate. Until data standards are fully deployed for electronic contributions, duplication risk remains. We recommend repeating the exercise regularly or better still, error-proofing your new member registrations to avoid any duplication in the first place. 2. Understand the revenue and cost impacts over the next three five years Examine your key revenue and cost drivers and test what might happen under a range of scenarios. Member accounts drive large slices of revenue and cost. On the revenue side, account keeping fees range from $1 - $2 per week plus an ad valorem fee in some cases. On the cost side, each account (active and inactive) generates administration, marketing, trustee office and professional services overheads. Hopefully, your fund s cost structure is sufficiently transparent to allow detailed modelling of various scenarios. This can be challenging although not impossible when you have outsourced your administration. In these cases, it may be prudent to consider supporting your administrator s capital investment program in return for more visibility on how it affects your cost structure. Scenarios requiring modelling range from loss of all inactive accounts through to a neutral impact, i.e. every lost inactive account balance is replaced by rolling in a competitor s inactive account balance. If you choose to benchmark your cost structure after this exercise, take care not to use external benchmarks based on yesteryear they must be forward looking also. Scenario modelling by SPP and subsequently verified by industry participants, highlights what happens to a typical fund s member administration surplus under a scenario where all inactive accounts disappear over the next five years. In this example, a fund s starting point is 30% inactive members. As Exhibit 4 demonstrates even a gradual loss of a superannuation fund s inactive account base leads to a severe deterioration in the administration surplus most organisations have become accustomed to. Unit variable costs rise as the account base shrinks, compounded by above inflation fixed cost increases as regulation bites. Finally, external competitive tension restricts unit account keeping fees from rising more than inflation. 4

5 3. Shift costs out of administration Whilst an active member oriented model may succeed, you need to reduce costs to stay competitive in the longer term. Despite your best efforts, the external environment is expected to continue to put pressure on account keeping fees, especially with undifferentiated basic account offerings. Major retail funds, exploiting technological advances and changes in default fund regulations, will drive members to online superannuation portals, using the lure of low account keeping fees to attract internetsavvy, above average balance members from your fund. What can you do? One option is to examine your current processes to find ways to remove time, rework and cost from your operation via: Executing an end to end electronic commerce strategy for members and employers; Improving residual paper processes that cannot be effectively automated; and Partnering with technology and business processing outsourcing providers to drive further innovation and efficiency. Based on our earlier analysis, a target cost reduction of 30-40% is desirable to restore your administration surplus. 4. Change your administration revenue model When reducing costs is still not enough, introducing new revenue models to augment the basic account keeping fee is a must. Many superannuation funds have an ad valorem administration fee to cover the higher transaction costs and other overheads involved in managing active accounts. Fees typically range from 0.1 to 0.5% and may involve capping. Bank transaction account marketing practice provides some insights into how a range of fees act as incentives and disincentives to drive consumer behaviour. Superannuation funds could waive fees if members used electronic commerce channels instead of paper or could introduce an annual fee package covering superannuation, insurance and limited financial advice. Exhibit 4: Revenue and cost impacts are significant SCENARIO - NO INACTIVES BY 2016 Assumptions: 2012 Inactives = 30% of base 2012 members = 200,000 Account Keeping Fee = CPI increase only Account Growth = 2.5% organic only Administration Revenue ($m) Accounts ('000) Operating Surplus/Deficit ($m) $16 $15 $15 $14 $14 X Annual Account Keeping Fee Accounts $1.2 $0.2 -$1.2 -$2.5 -$3.3 - Variable Administration Costs ($m) Administration Expense ($m) $17 $17 $16 $15 $14 + $12 $12 $12 $11 $10 X Annual Adminstration Costs $52.0 $57.2 $65.0 $72.8 $78.0 Fixed Administration Costs ($m) $4 $4 $4 $5 $5 5

6 Segmentation of your member base is vital. You need to determine specific target markets you would like to tailor offers for, understand their desired value proposition and then determine the best way to reach and fulfil their needs. Business intelligence and Customer Relationship Management systems are useful tools for such an exercise. 5. Ensure auto consolidation flows in your fund s favour by turning adversity into advantage Ask what your model would look like with a 100% active member base. Whilst it seems unthinkable, your fund may need to re model its operation based on a 100% active member base. It may take five years; however, this scenario is plausible, particularly for medium to small funds. Ask yourself what will and will not happen if this becomes a reality. Try completing this assessment tool and ask yourself whether this is satisfactory. If not, you have cause for action. In 2002, the Reserve Bank of Australia regulated the setting of credit card interchange fees with little warning. Overnight, card issuers faced the reality of half their income disappearing for accounts used for payments (as opposed to lending). Responding to this change, they repriced their products differentiating on value adds such as frequent flyer programs. In turn, cost structures were addressed including the move to new and cheaper application channels. Whilst the industry suffered a structural shift in profitability, the average consumer still values the services offered and continues to avail themselves of the various value-adds. For example, does member engagement increase by dedicating all resources to members who actively want to belong to your fund? Can this greater stickiness provide long term retention opportunities from advice, health insurance, and other user-pays services? Can you leverage electronic rollovers and proof of identity technology to increase your share of wallet of these members? Exhibit 5: Assessment Tool Are these outcomes satisfactory? What will happen? What won t happen? 100% active member base All members receive regular contributions Cost base held artificially low by inactive accounts 70/30% member base Constant targeting of inactive members by competitors Rising member engagement 6

7 About SPP We are a general management consultant firm focussed on ensuring our clients and partner organisations gain the benefit of a structured, tailored, and evidence-based approach to solving complex business problems. Established in 2005, SPP has delivered successful outcomes for a broad range of commercial and government sector clients. As a result, we have strong relationships with many businesses, from Top 50 listed companies through to small enterprises. About the authors Phil Noble Phil has a broad range of experience in general management consulting, as well as in Banking and Insurance. Phil started SPP with the aim of bringing good strategy and general management practice to businesses with a minimum of fuss, and maximum impact. Paul Diviny Paul is a highly innovative, senior financial services executive with expertise in program management, consulting, business transformation, marketing, sales and operations management in superannuation, business banking, consumer lending and payments, gained in some of Australia s leading financial institutions. Strategic Project Partners Level 41, 120 Collins Street Melbourne, Victoria 3000 Phil Noble m t e phil.noble@spp.com.au Insig ht Influen ce Impa ct 7