Geoff Warren
Super fund members are more engaged with their default fund selection than previously thought, according to new research sponsored by the Centre for International Finance and Regulation (CIFR), published last week prior to its conference being held in Sydney this week (August 11-12).
The research paper, ‘Structure and Responsibilities in Default Superannuation Funds: Influences and Effectiveness’, suggests that fewer than one-third of super fund members passively default at both the fund and investment option level within a fund.
The research was co-ordinated by CIFR’s Geoff Warren and involved Susan Thorp and Doug Foster of the University of Sydney, Scott Donald of the University of NSW and Adam Butt of ANU. Key findings are:
> The MySuper regime has helped to ensure and enhance the suitability of default products, in part by requiring the industry to specifically address the nature and needs of their default members.
> A minority of fund providers (perhaps up to one-quarter) made meaningful changes to their default products in response to MySuper. Most were retail providers, many of which embraced a lifecycle approach, reduced their fees, and shifted to lower-cost investment strategies.
> The superannuation industry is turning its attention towards retirement products, as well as member engagement and tailoring. It now largely operates within the frame of life cycle theory; and is not primarily focused on just wealth accumulation and short-term relative returns.
> In balancing their role as fiduciaries and product providers, fund executives portray their primary aim as meeting member needs, and business considerations as either secondary or as constraints. We outline some business incentives which suggest the claim that members are central might be credible.
> Nevertheless, business considerations are clearly influential. Many providers aim to deliver a competitive product in terms of its peer-relative performance, price and features. The nature of business influences suggests that policy makers should pay close attention to those who choose the default provider; and the mechanism by which fees are determined and then translated into fund design.
> The ‘typical’ default fund member is often characterised by providers as disengaged and poorly informed for the purpose of MySuper design. However, some fund executives recognise that this is an over-simplification and members are in fact different; and our member survey bears this out. Acknowledgement of member differences is driving interest in engagement and tailoring.
> The member survey indicates that less than one-third of members passively default at both the fund and investment option level. Many defaulters feel they lack the knowledge to choose, and hence trust the default. Characterisation of members as disinterested is simplistic and overlooks the role of trust.
> There is some accord between what the survey indicates that members want and how fund executives perceive member needs. Both indicate that retirement outcomes are central; but there is a lack of clarity around what funds should aim to deliver. Dissonance exists between the low risk aversion expressed by default members, and the aggressive default investment approaches adopted by many funds.
> Key messages for policy makers relate to: accommodating retirement product development, including integration with MySuper; fostering of smart defaults; focusing on value for money, rather than fees in isolation; being wary of using a tender to pursue lower fees through commoditised default products; addressing the entities responsible for choosing the default providers; and remaining cognisant that many default members are actually paying attention and depending on the integrity of the system, to compensate for their own lack of skill.
