In a previous blog, I asked if the Productivity Commission had underplayed the importance of cost efficiency in superannuation in its review of competitiveness and efficiency in superannuation.
IQ Group didn’t just leave it there, but has written a submission to the Productivity Commission showing how back office efficiency and cost efficiency can be given a higher priority in assessing the efficiency of superannuation using a simple model.
Measure more but keep it simple
The Productivity Commission identified 84 items of evidence required for the system assessment, and concludes that 43 of these items require new data sets. We think this both overestimates the usability of the 41 existing items and underestimates the administrative burden and the design and consistency challenges in gathering the 43 new data sets.
IQ Group has suggested focusing on a small number of basic efficiency measures, and proposed basic indicators for cost efficient superannuation administration. The core elements for administration are record-keeping and member details, contribution processing, and rollovers and benefits. The efficiency of these can be assessed by their cost, timeliness, accuracy, and usefulness to a member.
This may seem basic but this information is not collected, collated or assessed on a standardised basis across the industry. A lot of information is collected through APRA data reporting but not this information.
Despite the introduction of the three day transaction processing requirement through SuperStream, there are widely differing levels of transactional performance in superannuation, and this is likely to continue – and measurement of SuperStream efficiency itself is not standardised.
A framework for cost minimisation
We proposed having system-wide benchmarks together with a comprehensive and focused set of functional level benchmarks identified above (eg, timeliness of benefit payments).
This model can built from a baseline understanding of existing best practice examples from throughout the superannuation industry, and across administration.
As a starting point, IQ Group suggested to the Productivity Commission a model based on:
1. Consulting with superannuation industry for the collection of this administrative information on a consistent and cost-effective basis for super funds and their products;
2. Introducing a requirement for this over a reasonable period;
3. building a best practice administration measurement framework based on this information;
4. Populating information collected into the framework, using a simple rating;
5. Including assessment against the best practice administration framework as part of the APRA prudential supervision process;
Not only will this potentially help drive cost efficiency and cost minimisation, it would also contribute to promoting competition, as funds could ideally promote their ‘best run’ status.
Understanding the cost of different types of superannuation products
The use of such a potential framework and standard measurement would allow consumers to see that one of the most efficient levels for service provision may be on a mass market basis, but will also allow them to see the premium cost for tailoring to meet their particular needs.
The framework could be developed for each of main superannuation product types, to avoid the risk of just setting a lowest common denominator. This would also give an informed retail consumer the opportunity to better understand the reason for differences between products and product types, and whether or not it is sufficient to justify any additional cost.
This approach has the value of potentially greatly increasing fee and cost transparency in superannuation, and could have the systemic benefit of encouraging providers to concentrate on cost minimisation just as much as return maximisation.
The Productivity Commission report is also already making a positive contribution to the debate about the efficiency of superannuation, and IQ Group looks forward to being part of that debate.
Executive Superannuation Policy Advisor, VIC