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What New Zealand must learn from Australia’s super experience

Author: Russell Mason

The Australian superannuation system with almost universal coverage and assets of over $1.4 trillion has under-gone major change over the past decade. Licencing by the Australian regulators, choice of fund, significant changes to the maximum contribution rules and, most importantly, like New Zealand, the Global Financial Crisis have all contributed to the pressure placed on trustees and fund members.

So what have we, in Australia, learnt from the events of the last 10 years that might be applied to the New Zealand superannuation environment? I believe the most important lesson, and one which we haven’t made the most of, is that the power and decision making has shifted from the employer to the employee. If we went back 25 years the decisions concerning super all lay with the employer. The employer decided whether or not to invite you to join the company fund, the employer chose the sole investment option, the employer fixed the level of death and disability cover a member had and, with a majority of members in a defined benefit arrangement, the employer effectively decided the end-benefit that an individual would receive.

Today, much like in New Zealand, it is all about choice. As an Australian employee I decide which fund to join, whether to put in additional member pre or post tax contributions, the investment option that best suits my risk tolerance and the level of insurance cover I should have. While default options exist for all these decisions an increasing number of Australian employees are making their own decisions and electing to move away from the default arrangements.

This has meant that funds now have to:

  1. Sell themselves to members and compete in an open market.
  2. Communicate to members in plain English.
  3. Target their marketing to their members’ specific needs.
  4. Re-think the benefits that they are offering to members.
  5. Be flexible.
  6. Stop treating their members as a single homogenous group and instead realise that there are an infinite number of different member profiles.
  7. Act smarter!

Some funds have gone a long way to achieving this goal however the majority are still behaving as though it is business as usual. The New Zealand market is no different. As New Zealanders’ average balances grow and fund members take an increasingly greater interest in superannuation as a result of both larger balances and impending retirement, so the demands of members will increase.

So what can New Zealand do differently (or perhaps adopt more quickly) than their Australian counterparts?

  1. Accept that we are in a digital age and embrace it. Whenever possible communicate with members electronically. Don’t assume a 60 year old prefers to receive paper communications. Ask them. Costs can be contained and communications improved if technology is used smarter.
  2. Use analytics to better segment your membership. Twelve months ago I was at the board meeting of a fund with approximately 100,000 members that spent over $400,000 per year in mail-out costs knowing the mail-outs were only going to be of interest to a small portion of the members. By taking the membership data that the fund held, over-laying it with publicly available data such as census information and using analytical tools the fund was able to target only those members to whom the mail-out would be of interest (thus avoiding the irritation factor of “junk” mail) and reducing the mail costs to less than $100,000. This enabled the savings to ultimately be passed back to the members.
  3. Educate members in the need for additional savings over and above KiwiSaver.  Australians thought the Superannuation Guarantee (SG) would be enough when it reached 9%. While the SG certainly has helped many Australians in retirement, 85% of retirees still rely wholly or partially on the age pension. If retirees want to maintain a reasonable standard of living in retirement then they need to make additional voluntary contributions throughout most of their working lives. Too many Australians have received this message too late. Members need to be educated from the day they join a fund how much to put in to have an adequate retirement benefit.
  4. Realise that members want to learn more about their superannuation and want to be more financially literate. Having a fund web-site means that trustees can cost effectively provide members with educational material on-line thus allowing members to access information not only when they want they it but also about the topics that are of interest to them.
  5. Develop a good post-retirement pension system. Australia has grappled with this for years and still has not come up with an adequate solution. New Zealand and Australia stand out as the only two OECD countries that have a lump sum pension system. We let members save over their working lives and then, at retirement, we give them a lump sum and expect them to make this money last for the balance of their lives, which for all of us is an unknown factor.

The New Zealand government and superannuation industry is at an important turning point in the development of an adequate and sustainable superannuation system. While the Australian system is acknowledged as being world class it still has its short-comings which New Zealand has the chance to avoid. With the right tax environment, better communications and flexibility in benefit design New Zealand’s superannuation system can be the envy of the world (or at least very importantly the All Blacks of super compared to the Australian system).

 


Forward Focus March 2013 contents:

 

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