“We live in interesting times.” This is a common sentiment among super fund executives and directors.
After a sustained bull run, investment market volatility is back. So too is inflation. This contrasts to the period before COVID, when inflation did not materially impact individuals’ financial outcomes and seemed consigned to economics textbooks.
Uncertainty is also permeating many aspects of our everyday lives. Amid cost-of-living and mortgage stress, the daily news cycle features economic, geopolitical, cybersecurity and environmental challenges. Often outshining the positives, these issues are front of mind for super fund members.
Super funds typically have lean administration budgets and operate with tight margins. For large funds with inhouse administration, people costs are a major impost on operational budgets.
Like most businesses, funds construct budgets based on estimates of costs and revenue several years into the future. These estimates consider past experience, current conditions and a healthy dose of judgment about the future.
Before COVID, funds could be quite confident that budgets would hold true. Inflation was predictable and workable, and economic growth and market performance were strong. In this environment, medium- to long-term assumed investment returns were multiples of budgeted administration cost increases. Today, however, inflation in Australia is hovering at rates not seen for years and the jury is out on whether it has peaked or is stickier than some originally thought.
This is causing indigestion for CEOs and CFOs as they seek to balance their books, invest for the future, and manage within administration fee constraints. Their challenge is to deliver the products, services and advice members need and expect, while keeping administration fees at current levels or, even better, reduce them.
The costs of servicing and engaging members are rising.
People and vendor costs are rising beyond the long-term projections that underpinned many funds’ administration fee levels. Labour markets are tight (though beginning to moderate), which means attracting the best talent has been difficult while cyber, economic, environmental and geopolitical uncertainty are mainstream concerns.
Together with investment market volatility, these forces are increasing the demand for services, help and guidance (a large fund reported a 20 per cent increase in the last quarter of 2022), driven by uncertainty as members seek comfort and confidence. These factors put pressure on administration budgets and the ability to meet service expectations within cost envelopes in the short term.
Administration fee revenue may undershoot long-term expectations.
Historically, administration costs have increased more moderately than investment returns and growth in funds under management (FUM). For funds with administration fees pegged to FUM, this has been advantageous. But with cost pressures mounting, investment market volatility and challenging returns, this formula may be tested in the short term.
Of course, time will tell but what is certain is that above-trend member and FUM growth will be critical, regardless of a fund’s administration fee makeup.
Meeting members’ investment expectations is getting harder.
The sustained investment returns of the past decade or so have been excellent for members’ retirement balances. However, this has created an expectation among some members that this will continue indefinitely – even though funds have for many years cautioned members on volatility and reasonable return expectations.
In the current environment, members accustomed to the double-digit returns of the past may be harsh judges of their fund’s performance, which could lead to dissatisfaction; higher demand for advice, information and guidance; and switching and/or fund transfer requests. Educating members on the importance of long-term investment horizons, investment objectives, risk and return is vital.
It is often said that we can be sure of just two things in life: death and taxes. I’d add a couple more: that inflation and periods of uncertainty will wax and wane. What is not known is how long they will persist and to what degree.
Therefore, it is reasonable to ask “What actions should my fund be taking now to weather the storm and to prevail in the long-term?” My response is to start from the top and move through the value chain to ensure that your products, services and business model are fit for purpose – not only for today, but for the next five-plus years.
These eight questions may be helpful thought-starters:
Armed with the answers to these questions, you are well on your way to ensuring your fund is strongly positioned to navigate and prosper in what is likely to be a more uncertain future.
Get in touch to explore how we can help your super fund rise to the challenges of the future.
Connect with Michael Pennisi on LinkedIn.
Published on 25 May 2023.