Eight key questions to help super funds navigate volatility – and prosper

By Michael Pennisi

“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.

This poses several challenges for super funds

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.

What are the opportunities?

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:

1. Are your key settings – strategy, purpose, culture and vision – clear, engaging and fit for upcoming challenges and opportunities? This is the bedrock that will unite your people around a common “north star” and help make your fund a magnet for new members and the best people. Review, recast if necessary and communicate them widely.
2. Is your investment philosophy articulated and understood by your members and people? Ensuring your members and your people understand your fund’s investment beliefs, the drivers of your strategy and the decisions you make, helps your people to better service your members and build their trust. If you haven’t already, package them up and make them available to your people, your members and stakeholders.
3. Do you have the right people, systems, structures and processes in place? Being successful in today’s environment may require different skillsets, operating models, systems and processes. Now is the time to methodically review each and to make necessary changes to set your fund up for the future.
4. Do you have a compelling employee value proposition and a focus on developing your best people and attracting the best in the market? Consider how you define and communicate your EVP, what programs you have in place to develop and support staff and leaders, and the employment policies and standards that underpin the organisation. The old adage that we are only as good as our people has never been more true.
5. Do you understand your revenue and cost base, your demand and supply levers, and the tipping points? It is essential that you have a handle on the economics of your fund, both the cost and revenue side of the equation. Is your cost base right? Do you understand the cost of acquiring and retaining members? Areas of inefficiency? Your vendor relationships, terms and conditions? Now is the time to unpack each to ensure you have a strong grasp on “running the business of the business”.
6. Is your product, service suite and member experience engaging and efficient? Design through the eyes of your members and with a focus on simplicity and efficiency. Make sure they are relevant, engage brilliantly and remove friction points. Break from the pack and don’t be another Blockbuster – find your Netflix moment (before Stan, Apple TV and myriad competitors came along).
7. Do you understand your fund’s big risks and have mitigations in place? A case in point is cyber threat maturity and readiness. A successful cyber incursion into a major fund would materially test member and system-wide trust. Consider also the functions you outsource – do you understand and mitigate against risks from your vendors?
8. Are your projects delivering the expected outcomes and are governance structures helping? Projects are expensive, time-consuming and unfortunately, delivery sometimes disappoints. Ensuring you are doing the right projects in the right way for the right effort and cost will pay dividends – not just financial.

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.