In recent years, the pension sector has undergone many changes driven by regulation, developments in technology and evolving expectations of the type of service that members want from their provider. As these factors continue to shape the sector, we look at how companies can embrace changing market dynamics using modern, cost-effective technology to seize opportunity and gain or enhance their competitive advantage.
One of the major changes in the market was the switch from retail funds to industry pension funds. Although this trend has been going on for a decade now, the 2017 Hayne Royal Commission on Misconduct in the Financial Services Industry has accelerated the transformation. According to figures from KPMG’s SuperDashboard, ten years ago, retail funds had a larger market share, at 32% than the industry with a market share of 21%. In 2017, the split was 28% retail and 24% manufacturing. By 2020, industry funds have captured 30% of the market share while retail has fallen to 25%.
These market shifts mean that assets under management (AUM) within industry funds have increased significantly. While total AUMs in the entire market doubled over the ten years to 2020 from $782 billion to $1.668 billion, assets within industrial funds tripled from $244 billion to $712 billion, and retail assets increased by two-thirds from $383 billion to $589 billion.
Historically, the retail supermarket has generally been seen as more advanced in terms of service with digital platforms, always-on connectivity, and best-practice technology infrastructure funded by the bank and parent investment firm. Conversely, the member-funded super industry has been less willing to spend money on technology, often relying on legacy systems that lack modern digital functionality.
However, dealing with an increase in the number of assets and members using legacy technology can be costly and error-prone, and the pandemic has only amplified this challenge. Similar to other companies across the country, super funds have had to find new ways to deliver through shutdowns, work from home and evolving restrictions, and those with legacy tech stacks have found the transition to be the most difficult.
Covid-19 has also boosted people’s use of online services, so we are all becoming more accustomed to logging in to our financial service providers and more self-sufficient in finding information and updating our personal data. Customers increasingly expect access to information at any time from any device. They are claiming the ability to seamlessly change details such as address, beneficiaries, and insurance system via an easy-to-navigate portal or web app, without waiting for the big fund management team to do it for them.
At the same time, the pension sector has undergone a period of significant legislative change. Greater regulation has resulted in products like MySuper funds becoming increasingly standardized, with strict government-imposed rules, particularly around fee structure and cost transparency, removing many of the previous points of difference. In the past, choosing a premium service provider and choosing a fund meant evaluating all available options and deciding which option best suited needs, but the effect of regulation has meant that there is now much less variance between offers. For super boxes looking to increase market share, the product is becoming more and more difficult to differentiate, making it even more important for providers to differentiate in other ways.
The benefits of smart sources
As a result of the convergence of these market forces, many industrial super funds are now seeking to modernize their operations by reassessing whether the best approach is to outsource certain components of their business to a third party or to do it all internally.
The traditional conversation when thinking about how to manage operational functions is to either outsource everything or keep everything in-house.
The argument for outsourcing tends to create cost efficiencies, reduce risk, and can help build scale, while the benefits of doing it all internally are often about retaining knowledge within the company and maintaining greater control over the customer experience.
Smart sourcing refers to outsourcing some functions and outsourcing others, allowing you to experience the best of both worlds. It no longer has to be an all-encompassing or all-encompassing approach. You can now oversee costs and risks, while setting yourself apart, increasing customer engagement, and controlling your own destiny. The skills and disciplines that you wish to retain within the company can be held within the company and appropriately resourced, while services that are better managed by third parties can be provided by an external partner.
Create your own points of difference
For example, you can manage key customer touch points such as customer service and claims management internally, while pension payments may be more efficient and cost-effective if outsourced to a specialist provider. You may also want to run your investment operations internally, but use a third-party tax or annuity solution. The advantage of smart sourcing is that you can pick and choose what you want to offer, using state-of-the-art technology to add the best third-party solutions to your existing in-house expertise to create a truly unique offering.
By integrating legacy, on-premises, and third-party solutions into a modern digital front end via API connectivity, Super Trusts can create a single differentiated solution that meets the needs of today’s members. Cloud technologies and infrastructure models such as Software as a Service (SaaS), which can be scaled up and downgraded based on demand, level of security, and degree of maintenance required, are a cost-effective option for funds looking to modernize their operations without having to implement an entirely new technology package. Adopting a modular approach can create a robust solution that is flexible to incorporate new functionality as required. It can reduce costs and risks by increasing direct processing between systems, while the fund remains in overall control of customer touch points.
The pension sector has undergone a period of massive change. Using smart sources, funds can create a unique offering that supports evolving customer and market needs, while reducing costs and improving efficiency. Funds can leverage their in-house expertise and benefit from the best third-party solutions available at the same time, bringing them all together with innovative modern technology that provides a competitive advantage and supports business growth.