Superannuation: efficiency crisis?
Firstly, a warning; some may be surprised by what I’m about to convey given my background and field of expertise, heading up one of the leading suppliers of specialist IT platforms to the financial services sector.
Bravura Solutions has numerous clients in the superannuation industry, and we have firsthand experience of some of the critical issues it faces. As such, one might expect me to be leaping on the IT bandwagon, citing improved technology platforms as the answer to a host of industry ills, be they real or imagined.
However, that’s not quite the case. On the contrary, I believe that IT issues such as use of ageing and legacy platforms, the slow uptake of straight through processing (STP), compatibility difficulties and so on are just one part of the picture – and that further, they are no different from those facing any other industry.
Processing and technology are just one aspect. Every piece of the IT continuum may perhaps be a little bit old, not as efficient and not quite as good as it could be, but this is the efficiency story the world over and is far from confined to the Australian superannuation industry. So, is there room for improvement? Sure. Are we in an efficiency crisis? I do not believe so. I think the issue has been overblown.
Some perspective needs to be applied here.
To some extent reform is being driven by policy makers and that’s fair enough – to a very real degree the superannuation industry represents the future of this country. However, it’s also about well intentioned people confusing lower returns with costs. The fact is that a member may have in the past year lost 20 per cent of their returns – losses that at the moment might stand at, say, $100,000.
So, it’s against this backdrop that you need to look at the efficiency issue. What’s the best case scenario with best STP workflow: saving a dollar a member? So it’s going to take 100,000 years to get them back to square one?
I think it’s important we frame the efficiency issue from that perspective. Disappointment about returns has brought a lot of this focus on systems to the forefront – but we need to keep in sight the fact that the difference between the most expensive and the most efficient is not huge in this industry. Some of us are focusing on the dollar a day, when what we are really caring about is the $100,000.
There are some key stumbling blocks to upgrading IT systems – however, these are far from confined to the superannuation industry.
Something we need to overcome in the long-term is almost a cultural difficulty when it comes to IT expenditure that applies across many different industries. Essentially, this is a reluctance to spend money on IT projects because, in the minds of some of the decision makers concerned, the benefits may not kick in until a way downstream. So the view is: I just do all the spending and have the pain of implementation and carry all the risk without being there to get the rewards. Therefore, I won’t spend the money.
It’s for this reason that a number of key players in the industry still rely on green screen proprietary software dating back to the mid 1980s – a similar situation to having a whole lot of people out there still talking on their ancient Motorola ‘bricks’.
At the same time however, I’m concerned – again, perhaps surprisingly – that an excessive preoccupation with upgrading processing and IT may have the reverse of the desired effect.
If everyone comes to the party at the same time, looking for new IT solutions and under pressure to put those solutions in yesterday, there’s a real danger that the wrong decisions will be made. We are looking at very complex and expensive infrastructure, and there is a real chance that if the industry rushes to action, it may make choices that limit future capability for growth and performance because not enough time has been spent planning. You could not imagine a major bank or IT company suddenly announcing to the market that they are going with a totally new system and it will render them paperless within three months – the same applies here.
It’s important to avoid a simplistic approach in which one is tempted to seek a ‘one word answer’. And the example is STP.
There is absolutely no doubt that STP is a desirable thing, that it can boost efficiency, dramatically decrease processing times, cut down on manual handling mistakes and so on.
However, the question that needs also to be asked is, realistically, how is STP alone going to address the issues that exist outside of, or alongside of, the processing side of the business? What we need to do is take a holistic view of the industry, look at all of its component parts and address issues that affect it in a systematic manner that also takes into account the complex interdependencies concerned.
And, for the many industry service providers who are contemplating an IT spend, first and foremost they need to thoroughly explore the ROI concerned. It’s an area that can be neglected in the rush to a solution. And, again, proper planning is paramount.
Fundamental to any IT choice is the question: what is the ROI of the investment? What is the cost benefit analysis? Often the fact is that when you pull everything apart, plan out the scenarios, look at how something will work in practice, in the absence of addressing other issues, what you end up with is a situation that’s exactly the same after they’ve spent their $5 million, or whatever it is, as before. The only real difference is that they will have spent $5 million in the process. Fine for the software company but, as for the fund concerned and the members of the fund, well that’s another matter.
So, if IT alone is not the answer and a holistic approach is required, what range of measures will lead to improvements in efficiency?
True efficiency goes beyond what type of platform you are using. It’s more about a review of total processes and, perhaps even more critically, matters of scale and consolidation. The simple truth is that scale will create far greater efficiencies and far lower costs than a single investment in the best IT solution around. Scale brings true efficiencies because scale players can afford to implement STP in a way that delivers the benefits: the workflow, the optical character recognition, the major savings on the cost / benefit front. It all comes down to the “why is wholesale cheaper than retail? Scale. The best practice version of all the IT efficiency measures available only works with the scale players.
And, not only is scale critical for efficiency, the converse applies.
Differences in scale across the industry mean you get very dramatic imbalances that are difficult to justify on any merits or equity based reading of the situation. So, for example, you might be looking at the difference between administrative charges of around a $100 licensing fee per member for a very small fund right down to less than one dollar per member for the larger players who have their act together on all of this. It’s an anomaly that cries out to be addressed and it’s consolidation that is the answer, not just throwing money at a new IT system.
Fund managers and trustees should also be wary about the potential pitfalls of the ‘build your own’ system.
The IT industry in general, and that related to financial services processing in particular, is now so specialised and sophisticated that such attempts from non-specialists face low prospects of success.
It may have been different in the early days of the industry which, quite frankly, is when some of these systems hark back to. But where we are now in technology and what can be done is so far ahead of that time as to be almost a different planet, we’re speaking a whole new language. It’s a bit like saying “I need a new car so I’m going to build my own…”
In my view, the proof of this pudding is most decidedly in the eating.
You could probably count on the fingers of one hand, the number of workable ‘build-your-own’ systems that have been created in this country out of perhaps 100 attempts.
There are also other issues that may be lost in the ‘efficiency’ noise.
Rather than worrying excessively about efficiency, if we let this argument that the industry’s inefficient keep running then it obscures some of the real issues, some of the things we may not be so well prepared for, such as anti-money laundering (AML) measures and protection against fraud such as identity theft.
While we may not be seeing so much of this in Australia as overseas, you have to look at the size of the pool concerned and be aware that a big pool like that will attract the sharks. It’s just a matter of time and we need to be ready for it.
So, finally, some intelligent next steps for trustees and fund managers looking to boost efficiency through IT?
What the smart operators should be doing, and what we are suggesting, is getting a specialist team in, comprising genuine experts in the field working on a consultancy model. Get expert help with the thinking, knowing what’s available and the business planning that’s going to reveal the true cost benefits and the true return on investment.
That’s the way to boost efficiency, to make measurable improvements – to start really living best practice.