Against a backdrop of continuous regulatory change, the drive towards lower operating costs, deeper member engagement and better member outcomes is creating new challenges for super funds. The ability to meet these challenges and keep a lid on costs and risks will require funds to consider alternative administration options. John Burke reports.
The status quo
In the Australian superannuation marketplace, there has only been two options available historically for fund administration. The first, more traditional approach involves super funds managing all aspects of administration in-house. This task entails not just direct administration duties such as transaction processing and database management, but also a myriad of other duties that underpin and support the administration process, such as IT infrastructure management and mail house services.
The second approach involves the outsourcing of fund administration functions to a third party provider. Under this arrangement, all back-office activities are performed by the third party administrator, leaving the fund free to focus on key aspects of their business, such as executive management, marketing and compliance.
A shrinking market
While these two administration models have effectively dominated the Australian superannuation landscape for many years, recent developments stand to further restrict choice in this already limited space.
Until relatively recently, there had been a reasonable mix of providers offering outsourced fund administration services in Australia. In the past few years, however, the number of providers has progressively reduced as the consolidation of administrators has occurred. Most recently, in December 2014, Superpartners was acquired by the Link Group. As a result of this ongoing consolidation, the field for outsourced fund administration has significantly narrowed to just a few major third party providers.
This changed landscape has served to create a competitive vacuum of sorts in the superannuation marketplace that could arguably be filled by alternative fund administration options, potentially delivered by alternative providers. When considering how to deliver the best possible retirement outcomes for their members, funds will need to think outside the square and consider the full range of possible fund administration models available to them.
The self-administration option continues to offer the advantage of complete control over a fund’s operations. Self-administered funds are arguably best placed to bring disruptive and highly differentiated products and services to market because they have control of their technology and service infrastructure. Funds, with the ability to invest for the long-term, can keenly focus on delivering the best possible service and price to members, without having to wait in line for third party providers to deliver solutions for them. This control translates directly into competitive advantage at a time when funds are facing greater competitive pressure than ever before.
However, increasing consumer demands to lower costs and reduce fees makes the self administration option less well suited to smaller funds. The bottom line is that the size of many funds makes it difficult to achieve the economies of scale to perform the various aspects of fund administration – such as transaction processing – at a cost competitive price.
Third party administration
The engagement of third party administrators continues to be a popular approach to fund administration in the Australian marketplace and for good reason.
As indicated above, this model allows superannuation funds to focus on their core strengths, while passing on the administrative burden to a third party provider. Funds free from paperwork can develop and hone activities such as product design, customer service initiatives, maximising investment returns and growing the membership.
Another key advantage of the outsourced administration approach is the ability of specialist administrators to achieve all important economies of scale. Standardisation of bulk transaction processing is just one area that vastly improves efficiency and significantly reduces costs.
In the Australian marketplace, the greatest detractor to the third party administrator model is the current narrow choice of providers. Funds reviewing outsourced administration options should look carefully at their ability to take advantage of truly modern and flexible operating models and technology to ensure they get the most out of their relationship with their administration partner.
A relatively new approach that super funds should consider is blended administration. Instead of handing over fund administration ‘lock, stock and barrel’ to a third party administrator, this approach allows funds to hold onto some aspects of administration, while outsourcing others. Typically, funds would retain the high value, low volume tasks such as member engagement, and hire an administrator to take on the low value, high volume tasks, such as transaction processing. Keeping call centre operations in-house is a textbook example of this approach.
There are a number of key advantages to the blended administration model. First is cost. Through economies of scale, third party administrators can achieve standard, high volume tasks much more cost competitively than an individual fund. Second – and even more important – is the potential for differentiation. Third party administrators keep costs down because they perform relatively simple tasks in a standardised way. Differentiation is almost impossible to achieve at scale. In the current climate where customer satisfaction and member engagement are so highly valued, funds are looking to develop areas of specialised and personalised customer service that will set them apart from their competitors in the eyes of their customers. That’s why certain areas of fund administration such as call centres and customer complaints management are increasingly retained in-house within a blended arrangement.
While there are some examples of this approach in practice, its broader adoption is hampered by technology constraints. Unfortunately, many funds currently lack the modern technology needed to support a blended arrangement in a seamless manner that meets the 24/7 expectations of today’s customers.
Platform as a service
Another innovative model emerging in the fund administration marketplace is platform as a service. At its heart, this approach enables super funds to access best of breed computer hardware, software and expertise without the headache or costs associated with installing, managing and maintaining the IT environment themselves. For an agreed fee, providers will set up, deliver and manage a next generation administration platform on the fund’s behalf.
There are considerable advantages to the platform as a service approach. It’s a great way for funds to access the very latest technology, without having to pay for all of it, all the time. Instead, funds can dial up or down their IT environment, choosing to access hardware, software and IT specialists according to their changing needs over time. The costs of the platform and associated services are shared with other subscribers, making this approach extremely cost effective. It also gives funds faster access to innovation and considerably shortens the time to market.
While we are yet to see a lot of platform as service in the Australian market, there is great potential for its uptake in the years ahead.
Another fresh approach to fund administration is onshore offshore, which can be employed to great effect with blended administration.
Under this model, high volume, low value tasks such as transaction processing are not only outsourced to a third party administrator, they are outsourced offshore. At the same time, low volume, high value tasks, such as call centres or insurance claims management are kept in-house onshore.
This approach seeks to take advantage of best practice operations and lower labour costs available in some regions around the world. It works well to drive administration costs down and increase a fund’s overall cost efficiency. It also delivers on data security and privacy considerations by enabling data to remain onshore.
Under the right circumstances, it is equally possible to successfully combine onshore offshore with platform as a service.
While the onshore offshore model is popular in many sectors, particularly banking and retail, it is yet to take hold in superannuation administration. At the end of the day, however, superannuation funds have a fiduciary duty to serve the best interest of their members, so it can be solidly argued that lowering the cost of administration through offshoring ably meets this standard.
As the Australian superannuation industry evolves, it is inevitable that we will see the range of fund administration options available increase and diversify.
Funds wishing to remain sustainably competitive, need to look beyond traditional ways of operating and open themselves up to these new approaches. In the face of competing pressures, they must weigh up the fund administration model that will deliver the best outcomes for their fund and their members.
In every instance, technology is pivotal to super funds taking advantage of the alternative administration solutions on offer. Whether employing third party administration, blended administration, platform as a service or onshore offshore – or a combination of these models – modern, flexible and scalable technology will prove a key enabler.