Over the past ten years in Australia there have been significant changes to the operating models of not-for-profit superannuation funds and the services they provide to members. The cumulative impact of these changes has begun to be fully realised as the flow-on effects of COVID-19 have highlighted the complexity inherent within many funds.
With the aim of improving member outcomes and retaining scale, over time many not-for-profit funds have put in place a range of fund enhancements and investment related changes, such as:
- Increased range of investment options, including ‘direct’ investments (with the corresponding ability to switch);
- Daily unit pricing;
- Relative high allocation to unlisted and real assets;
- Investment management internalisation.
The end result has been that many not-for-profit funds have begun to look like investment platforms on the member-facing side, while some funds are beginning to resemble fund managers in the way they manage fund investments and undertake asset allocation.
Diagnosis – increased complexity and interconnectedness
Assessed individually these changes have largely been successful and have improved net returns to members, and provided increased member services and benefits.
However, when taken as a collective the diagnosis is that both the member and investment operations of not-for-profit superannuation funds are now a lot more complex than they were a decade ago. Incremental changes have greatly increased operating model complexity and resulted in the operations of a superannuation fund becoming much more interconnected.
This has been brought to light with the confluence of factors surrounding COVID-19. The market correction, subsequent impact on market liquidity and unexpected regulatory changes have highlighted how interrelated the member and investment operations of a superannuation fund are, and how decisions made around product features provided to members greatly impact investment operations and vice versa.
Treatment – integrated development and delivery of member benefits
How do not-for-profit funds respond to this condition of complexity and interconnectedness?
We believe that a more integrated approach to the development and delivery of member benefits is required. One that takes into account the interaction of fund features at the member account level with the underlying investments that support members’ superannuation and retirement savings.
As a result we recommend a ‘whole of fund’ approach to product development built upon the following foundations:
- a holistic product development mindset where customer needs, investment management capability and operating model implications are all key inputs into decisions around new product design and the development of new features for members;
- an integrated operating model with functional capability across key operational areas, organisation structures to encourage interaction and collaboration, and a supporting technology, data and service provider ecosystem. Importantly a well designed and implemented integrated operating model will bring together what are often disconnected member and investment operating models within many superannuation funds;
- a clearly defined product development capability with an appropriate level of skills and resources backed by supporting product development processes and governance frameworks. This capability is the glue to enable a true ‘whole of fund’ approach involving all functional areas.
While this already happens to varying degrees in some not-for-profit funds, there is scope to learn from successful asset management firms who have experience in bringing together the customer insight and delivery capability of product teams with the investment focus and expertise of front office teams.
An integrated approach to product development which expressly involves the investment team from the start of the process helps ensures product features are in tune with underlying investment characteristics (including risk factors and asset and liability profiles). While incorporating the subject matter expertise of other functional areas, including service providers, throughout the process provides input as to what is practical from an operational, system, process and regulatory perspective.
Prognosis – benefits of an integrated approach
In an environment of increased regulatory and market uncertainty, the outcome of an integrated approach to product development is expected to be two-fold:
- Development of investment options and fund features that:
a) meet demonstrable member needs; and
b) tie-back to the underlying investment infrastructure that support them, from both an investment allocation and investment operations perspective.
This may result in a simpler range of investment options being offered in the future as funds factor in upcoming Design & Distribution Obligations (DDO) requirements, the cost/benefit to members of product development and underlying investment constraints;
- Greater coordination and collaboration across member and investment-related functions. Different functions coming together in a coordinated way will enable funds to have the required focus and capability to develop innovative retirement solutions for members.
This ‘whole of fund’ approach treats the symptoms of increased complexity and interconnectedness that funds are currently experiencing, and provides the antidote to ensure this vitally important part of the industry will come back in an even healthier position.
Shoreline can help. With extensive experience in product development and target operating model design for asset owners and asset managers, we are able to assist funds with product development frameworks and operating model design. If you would like to find out more please contact us.