In Super we have grown up with closed loop service environments that have provided us with: Resilience, Scale, and Distributed investment in technology.
And as recently as 18 months ago IQ ran a masterclass in Super fund operating models, which for its time was quite relevant …
However, time, the world, and technology has moved on.
Wave 2 mergers, competition, advice reform, consolidation of service providers, and demand for data have all set the idea of a steady target state under pressure.
It also raises legacy product and insurance complexities that somehow seem to defy our best efforts for standardisation.
Our thinking now is that we need to look at operating models not as destinations, but as change engines that enable us to regularly re-evaluate and evolve our approach.
Stanley McChrystal called it, building for Complexity not for Complication.
The new operating model paradigm challenges us to identify the key factors which help us to understand, assess and respond to our changing environment. All within the context of dynamic strategy, competition and a sandy regulatory landscape.
So, what makes a successful and continuously evolving operating model, admin strategy and technology service platform?…
Not engagement, benefits, or retention, but the unwritten instructions that drive most of our activity. Research demonstrates that when we map a process, it covers less than 50% of the actual activity within a team. Culture guides the rest, and can be the difference between standing still, and evolving.
Culture (supported by key operating intelligence) supports the adaptive organisational business model and direction.
So will AI bridge any culture gaps? Not likely. Centaurs (AI enhanced human teams) still require us to set in place a model for decision and action that is focussed on our goals and reflects our ethical and commercial compass.
Automation for its own sake just takes you to the wrong place, faster.
It wouldn’t be budget night if there weren’t a raft of superannuation announcements, and tonight’s Budget didn’t disappoint. This blog isn’t so much about what was announced as it is about the work that super funds need to do to put the announcements in place.
However, while most of the announcements require new laws to be passed by Federal Parliament and will get lots of media coverage, most require relatively small effort to implement on the part of super funds and administrators.
SG contributions to be increased from 9.5% to 10% from 1 July 2021
The Budget papers don’t mention the legislated increase in the Superannuation Guarantee – meaning that it’s increasing to 10% on 1 July. Legislation, to give effect to the increase, is already in place, and no action means … it’s going ahead.
Employer payroll software already anticipates this (and subsequent) increases and so the increase will occur seamlessly. The level of SG contributions received by super funds will increase but this will not require any system or process changes.
The Government hasn’t announced any moves to stop future SG increases in the Budget, although they may do so in the future. Some on the Coalition backbench are on the record that they want to see the SG frozen at current levels, but they haven’t prevailed tonight.
Current law provides that the SG will increase by 0.5% in each subsequent 1 July until it reaches 12% on 1 July 2025.
Removal of the $450 per month income threshold to receive SG contributions
Many workers in very low paid jobs, or who work in multiple jobs at the same time, will be receiving superannuation contributions, many for the first time.
Hundreds of thousands of new accounts are likely to be created. These new accounts are likely to be subject to the 3% fee cap introduced by the Protecting Your Super laws for accounts with account balances less than $6,000. The large number of new accounts, and the fee cap, may require super funds to review arrangements with their outsourced administrators.
As many of these new members may have short term employment and may be more itinerant than the overall population, it may be more difficult to get and maintain their details. This will also have cost implications and put pressure on administration arrangements. Fund communications about superannuation rules and employer obligations will have to be reviewed and changed.
Overall, however, super funds will welcome this measure as it means that even low-income workers will receive an additional supplement on retirement, and the compulsory superannuation system takes another step towards greater universality.
Increasing the voluntary super that can accessed under the First Home Super Saver Scheme from $30,000 to $50,000
This measure is a small change to the early release of superannuation arrangements. It does not open up access to superannuation for housing on a widespread basis. It is much less of a change than some commentators had predicted.
Although the First Home Super Saver Scheme has been in place since 2017, it has had a very low take-up rate. The Budget announcement increases the amount of superannuation that can be accessed, but this needs to be changed in the applicable law. Our crystal ball is telling us that the level of take up is going to continue to be small and won’t have any impact on housing affordability.
Most of the administration for the scheme will continue to be done by the ATO, and funds will not be stressed implementing this change. SG contributions cannot be accessed under the scheme, only voluntary and salary sacrifice contributions. This change will have very little administrative impact.
Work test abolished for people aged between 67 and 74 years
Super fund rules and processes need to be reviewed to accommodate this change, along with fund letters and communications. Super funds won’t need to ask these older members if they meet the work test. This will simplify the administration arrangements in engaging with older members.
Lowering the access age for the home downsizing age from 65 to 60 years
The home downsizing measure is already in place for people aged 65 years and older. The rules around the treatment of proceeds paid into super are well established (eg. payments are not treated towards either concessional or non-concessional contribution caps). People using this will have to provide the same documentation to support eligibility for it, as for the existing measure.
2 year transition of legacy retirement product members to better products
People in market-linked, life-expectancy and lifetime products (commenced prior to 20 September 2007) will be able to leave these products for more flexible retirement products on a voluntary basis. Legislation is needed to give effect to these changes.
The process of transition is likely to be complicated and potentially tricky. Funds with older retirement products will need to establish significant programs of work and associated member communications to support this reform.
Other superannuation changes scheduled for 1 July 2021
Many superannuation rates and thresholds are reviewed and may change each 1 July. These changes take place independent of the Budget changes.
Here are some of the key rates that change on 1 July 2021:
SG employer contributions increase from 9.5% to 10% of earnings.
Maximum super contribution base increases from $57,090 to $58,920 per quarter.
Concessional contributions cap increases from $25,000 to $27,500.
Non-concessional contributions cap increases from $100,000 to $110,000.
Superannuation co-contribution lower-income threshold increases from $39,837 to $41,112; higher-income threshold increases from $54,837 to $56,112.
Transfer Balance Cap increases from $1.6 to $1.7 million.
IQ is well placed to support super funds through these changes and we look forward to working with clients to navigate the complexity and ensure all stay on track for success.
By Kath Forrest (Head of Strategic Growth and Capability)
The application of Blockchain and Distributed Ledger Technology (DLT) in Superannuation.
What is Blockchain?
Blockchain is a shared or distributed ledger technology (DLT). The digital information “blocks” are distributed in a “chain” across a network of computers, rather than at a single source. When a block stores new data it is added to the chain.
Transactions on the blockchain network are approved by a network of thousands or even millions of computers and cannot be altered once they are made part of blockchain. Almost all human involvement in the verification process is removed, reducing the possibility of human error and the records are more accurate. An advantage of blockchain is that if a single computer on the network contains an error, the error would only be within one copy of the chain.
Blockchain is an example of a DLT, however not all DLTs are blockchains. Distributed ledger technology is currently at the forefront of some of the most significant financial market innovation in Australia.
Why use Blockchain in Superannuation?
Several potential benefits of blockchain and DLT identified for the financial services sector include:
Reduction in costs –
Investments have a high volume of transactions requiring data to be verified by multiple parties. By using a distributed ledger, trades can happen faster, more efficiently and more cost effectively. Currently stock trading can take three days or more for the settlement and clearing process. This results in money and shares to be frozen during that time. ASIC is closely monitoring the transition in Australian market infrastructure taking place right now as the Australian Securities Exchange (ASX) implements a new DLT-based clearing and settlement system.
Increased accuracy –
Current superannuation ledger systems are often siloed and can contain multiple versions of the ‘same’ data. Blockchain can reduce the complexity of data and number of interfaces. It also enables transaction approval on the blockchain network with almost no human involvement in the verification process, reducing the possibility of human error.
Operational efficiency –
Blockchain can reduce the complexity of data and the number of interfaces so the administrative operations have the potential to be faster, more accurate and transparent. The introduction of blockchain can also supersede numerous existing superannuation ledgers, allowing organisations to consolidate their systems.
Anti-money laundering (AML) and know your customer (KYC) practices are also potential areas that may gain significant benefit through the introduction of distributed ledger technology. Currently, financial institutions must perform a multi-step process for each new customer. KYC costs can be reduced, and efficiency improved through cross-institution client verification. This will also allow for increased monitoring and more effective analysis.
Minimise fraud –
Superannuation fraud is one of the main categories of fraud perpetrated in Australia. The ability to verify identity for financial transactions is key, and distributed ledgers offer enhanced methods for proving identity, as well as the possibility of digitising personal documents.
Reducing external threats –
Cyber-attack, fraud and compromised data risks are significantly reduced when a ledger is distributed across multiple parties. Successful falsifying of records requires falsifying the entire chain – a near impossible task.
Why hasn’t DLT progressed further in the industry?
As noted above, Australia’s $3.0 trillion (at the end of the December 2019) superannuation system has potentially a lot to gain from adopting distributed ledger technologies (DLT). While much of the industry is well advanced in their consideration of DLT, there is some uncertainty regarding how to best apply blockchain applications to realise benefits.
In a speech at the China Financial Summit 2019, ASIC Commissioner Cathie Armour stated that the Australian government is demonstrating “ its strong support for the development of a varied and sustainable fintech sector in Australia.” The Commissioner also noted that the Senate established a Select Committee on Financial Technology and Regulatory Technology which will inquire into:
the size and scope of the opportunity for Australian consumers and business arising from financial technology (fintech) and regulatory technology (regtech)
barriers to the uptake of new technologies in the financial sector;
the progress of fintech facilitation reform and the benchmarking of comparable global regimes
current regtech practices and the opportunities for the regtech industry to strengthen compliance but also reduce costs
the effectiveness of current initiatives in promoting a positive environment for fintech and regtech start-ups, and
any related matters.
When the report is released towards the end of the year, we will have a clearer understanding of how the government and the sector may approach these opportunities. Adoption has not completely stalled however, and ASIC is closely monitoring ASX’s transition to a DLT clearing and settlement system.
The Regulator’s focus, regardless of the technology solution, “remains to ensure the Australian financial markets retain their integrity, resilience, and robustness, and operate fairly and effectively”. In the meantime, funds, administrators and trustees will have the opportunity to explore numerous options blockchain technology offers, which may deliver benefits for their organisations and members. Blockchain technology is certainly a growing area. It will be interesting to see how Blockchain progresses into the future across multiple industries and how the superannuation industry might use it.
If you have any questions about Blockchain, please contact IQ Group at: email@example.com.
Overall, it’s hard to argue that the Financial Services Industry doesn’t need more accountability. Several of the major findings out of the Royal Commission regarded the professional misconduct of individuals, which can be hard to detect let alone regulate.
BEAR (Bank Executive Accountability Regime) has been in place for a time now, so it makes sense for FAR to come into play. That said, FAR is not only more sweeping, it also has some strengthened effects that some of us might consider going a bit far.
FAR is all about lifting standards of behaviour for executives across financial services – extending BEAR to superannuation and insurance – by making nominated Accountable Persons personally accountable for the activities of their company for which they are responsible. Their responsibilities will have to be identified, with these and any breaches reported to APRA. Penalties will apply at an individual and corporate level, including circumstances where things haven’t been done.
Increased accountability and transparency are a good thing but there’s been little consideration about the impact on people who may not be as senior – or as well paid – as executives in banks.
Firstly, it’s important to realise that one of the reasons FAR is stronger than BEAR is because of the difficulty of ASIC historically experienced getting convictions for misconduct in the current regulatory environment. Many companies under investigation in the past have been slow to comply in providing requested information or provide poor information upon request. However, an obligation that requires individuals (in addition to entities) to be “cooperative” to FAR allows ASIC to find fault without understanding why a person may not be cooperating.
ASIC can find fault based on perceived cooperation prior to even examining any evidence of misconduct. Thus, a lack of cooperation with someone accusing you of wrongdoing becomes a crime in and of itself, and a regulator who finds no misconduct whatsoever can still charge someone, potentially doing significant harm in the process.
This sort of regulation is banned in many democratic countries due to how they undermine due process. For example, the United States’ Fifth Amendment is a constitutional right that protects an individual from being forced to incriminate themselves and ensures that people are found guilty of actual crimes. These protections prevent the historical use of duress to extract information and confessions because, in practice, this type of power fosters “witch hunts” and abusive regulation. It would hard to argue an individual would not feel extreme fear and duress if ASIC suggested they are not being “cooperative enough” and that in itself is enough to find them guilty of not meeting their obligations whether they’ve done anything wrong or not.
Also, at least with BEAR it’s clear who your executives are, and the people targeted for BEAR were quite specific. FAR has definitions based on job function as to what an ‘accountable executive’ looks like across eleven spheres, including Human Resources. It’s entirely possible in smaller companies that people may be in a position of obligation without knowing it, particularly if their company is negligent in identifying them or telling them that they’ve been identified. With a company unable to provide professional liability insurance for these members, there’s a great deal of individual risk in taking these roles that people may be unprepared for.
While a lot of this has to do with how FAR is implemented – which we really don’t have a strong precedent for as BEAR itself is only a couple of years old – it seems reasonable to assume that the Financial Services Industry will see talent walking away and these roles becoming far more costly to fill.
The impact of this is magnified by the higher penalties proposed for FAR. Maximum penalties could be the greater of either $10.5m or the benefit derived (or detriment avoided) by the entity because of the contravention multiplied by three (where this can be determined by the court); or 10% of the annual turnover of the company (capped at $525m or 2.5m penalty units). What’s more, it’s suggested that companies will be limited in their capacity to insure their accountable persons against breaches of FAR.
It was International Women’s Day (IWD) this week and my wife and I hosted a dinner over the long weekend. Although we’ve only known our guests for a few short years, the friendship we have built with them is exceptionally strong. The four women in this group have connected so well that it is clear to see that they look out for each other, step in when one of them needs a hand and provide support whenever required.
Now I’m starting to reflect, why is there still a need for a Women’s Day? After all, the first International Women’s Day was first held more than 100 years ago. My colleagues discuss forming a team for the Mother’s Day Classic (sponsored by Women in Super) and I commit to participating. I now need to persuade my family to get up early on the Sunday morning so we can walk/run together. *my fingers are crossed*
Unfortunately, despite all the progress we have made as a society, gender inequality persists, and so the need for IWD remains. I am naturally aware of the challenges women face regarding their superannuation account holdings given my job history however I decide that I should spend a few minutes to learn a little more about this inequality. Coincidentally one of IWD’s ten values is equality.
I read a research article stating that women retire with a super balance 42% less than men on average. Another report quotes 47%. Regardless of the actual figure, the difference is not right. I understand mathematically why this is the case. Proportionally more women work part-time and many of them are not in the workforce to care for family. However, my female friends, family and colleagues are also likely to retire with a lower super balance, often as much as $150,000 less.
What does equality mean though? It’s about ensuring everyone has the same opportunities, regardless of their gender, social-economic background or age. In my research I uncover an interesting publication by the World Economic Forum (WEF). Published annually since 2006, the Global Gender Gap Report reveals that the gap in equality is reducing. It is not only women who benefit from this progress. The entire world economy gains when the talents of all people are able to flourish. The impact this has on families should not be under-estimated.
As Australians we enjoy opportunities and freedoms people in other countries could only imagine. We aren’t world-beaters when it comes to gender equality though. The WEF report found that for eleven years in a row Iceland was the most gender equal country. Interestingly other Scandinavian countries (Norway, Finland and Sweden) round out the top 4. Rather than moving to Norway, what can be done here?
There is no single magical solution, otherwise this problem wouldn’t exist today. WEF’s research forecast that all things being equal, with current trends, the overall global gender gap can be closed in 99.5 years. If that is an appalling number, consider that the same report estimates that the economic gender gap will take 257 years to be eliminated.
Numerous suggestions are available online recommending ways for women to retire with more money (i.e. spousal contributions, contribution splitting, legislative changes – $450 cap, Low Income Superannuation Tax offset and concessional tax caps). Other suggestions are more generic in nature such as seeking financial advice, accessing online resources and tool, consolidating funds, checking for lost super with the ATO and confirm the right level of insurance within the super policy.
The real gains to be made though relate to bridging the wage gap and retaining women in the workforce. Fortunately, evidence indicates women are increasing their representation in management positions. Similarly, flexible working and access to childcare has resulted in approximately 20% more women return to work after paid parental leave.
Advances in equality are being made very slowly and a single day focusing on the prospects of women will not create a secure financial future for women in retirement. Perhaps the Retirement Income Review Final Report due in June will result in meaningful change. Time will tell.
IQ Group team members attended a fabulous Women in Super Lunch hosted by First State Super and Ariel Investments. Rupal Bhansali, Chief Investment Officer and Portfolio Manager for global fund manager Ariel Investments shared her insights and experience in the global investment world of non-consensus investing.
Rupal shared her experience and insights in an open and inspiring presentation. The Author of the book Non-Consensus Investing: Being right when everyone else is wrong, highlighted the potential pitfalls and shared real world case studies of upset victories and how to win by not losing.
Rupal shared some of her challenges and achievements as she progressed to become a member of the Barron’s Investment Roundtable.
One of the most powerful messages of the whole session was when Rupal shared how she responded to childhood challenges that played a key role in who she is as a person today. Her strength and passion for overcoming adversity in our personal and professional lives was inspiring.
All attendees were most appreciative to receive a complimentary copy of the book and walked away with some tips for “smart investing”.