Super funds must keep track of increasing operating expenses

What happens next after Royal Commission reports
June 15, 2018
Managing money efficiently
June 18, 2018

CONTRIBUTED ARTICLE by James Lindgren*

 

With the latest APRA fund data shows that average operating expenditure per member for all categories of superannuation fund (except corporate funds) has steadily increased since 2004, it is increasingly important that superannuation fund trustees ensure that any increasing operational expenditure is helping to improve member outcomes, particularly in the current regulatory and political environment.

The Royal Commission into Banking and Financial Services is likely to focus on expenditure by superannuation funds on areas other than administration or investment management; nonetheless it is important that superannuation trustees remain vigilant in monitoring operational expenditure to ensure any increases are justifiable.

Data recently released by APRA provides a high-level picture of the trends in operational expenditure by most large superannuation funds in Australia.

Funds are required to report to APRA operational expenditure for each reporting period. This includes administration costs, commissions, advertising and promotional expenditure, and other such costs.

QMV’s analysis of the data shows that since 2004, average operating expenditure per member for all categories of superannuation fund except corporate funds has moderately increased.

Source: QMV Analysis of APRA Fund Level Superannuation Statistics at 30 June 2017.

NB: A very small number of funds have been excluded where missing or incomplete data causes outlier and non-representative results.

In itself, increases in the absolute operational expenditure of superannuation funds aren’t necessarily a bad thing. In many cases, the expenditure has been directed towards measures which provide improved service and security to members.

Ignoring adjusting for inflation, the 14 year period between 2004 and 2018 has included the implementation of an eye-watering agenda of regulatory change, significant changes in technology and data security risks, and greater internalisation of some investment operating costs. It is therefore not surprising that it has become more expensive to operate the superannuation system.

Yet much of the investment in technology intended to promote greater operational accuracy and efficiency should be seen to start to place some downward pressure on operational expenditure.

Similarly, the slow but steady consolidation of the number of superannuation funds is often justified on the basis that greater economies of scale will benefit members. While such scale efficiencies may also be reflected in investment related expenditure, consolidation should place some downward pressure of operating expenditure in the long run.

The growing scale of assets within the superannuation system means that when viewed relative to each dollar of member savings being managed, operational expenditure has steadily fallen since 2004 across all categories of fund.

Source: QMV Analysis of APRA Fund Level Superannuation Statistics at 30 June 2017.

NB: A very small number of funds have been excluded where missing or incomplete data causes outlier and non-representative results.

With a continued regulatory focus on the quantitative monitoring of member outcomes, superannuation trustees must consider how operational expenditures directly relate to the member outcomes identified in the business strategy of each superannuation fund.

Superannuation trustees can actively promote a prudent focus on operational expenditure through:

  • Regularly testing the market for services provided by third parties
  • Ensuring that robust operational risk controls are in place, to protect against potentially expensive remediation projects
  • Modelling the possible savings and costs to members of consolidation with other funds or promotion of organic growth in member numbers
  • Investing in advancing technologies that enable efficient self-service and low-cost member services

-oOo-

* James Lindgren is a consultant at QMV which provides independent consulting services and technology systems to superannuation funds, trustees, administrators and wealth management organisations.

 

ARTICLE FIRST PUBLISHED IN INVESTOR STRATEGY NEWS: http://www.ioandc.com/why-funds-need-to-look-at-link-between-expenses-and-outcomes/