19 June 2012
Auto-consolidation: super funds need marketing alpha too
Over the past couple of weeks I’ve been presenting at the FEAL June lunch series on the commercial impacts of Stronger Super. While the best known of the Stronger Super reforms is MySuper, it’s probably not the most important in terms of long term impact. The Stronger Super reform which will really transform the super industry is auto-consolidation.
For those not up on auto-consolidation, the idea is that from 2014, inactive accounts of less than $1,000 will be automatically consolidated into members’ active accounts, via ATIO data matching. Suspend your disbelief for a minute that the ATO can actually make this work. There are a lot inactive accounts out there, so if it does work, funds could lose a significant portion of their members – anything from 5-30% depending on the profile of their membership, with the not-for-profits generally most exposed.
Auto-consolidation presents serious issues. Even allowing for Member Benefit Protection, inactive accounts are usually generating fees for funds (and certainly for their administrators), so we are talking potentially significant reductions in revenues.
If matched by an equal cut in costs,that would be fine. But this may not be the case; indeed it may be that inactive accounts are fixed cost in nature because they generate little activity. A loss of inactive accounts means that administrators lose, because they were being paid regardless. Funds are likely to see declines in their net revenue position as well.
Let’s be clear – we are not saying auto-consolidation is a bad thing, assuming it can be done without creating a mess. And the scope for creating a mess is huge - by mixing up the accounts of people with similar names or data, for example, or perhaps unintentionally cancelling insurance being funded from an otherwise inactive account.
If auto-consolidation can be done cleanly, the efficiency gains will be significant. That’s good. However the process will result in a painful revenue-cost gap, at a time when new cost pressures are coming – including product development, retirement income, and advice.
This gap will call for tough decisions by funds on products, services, and pricing. Yes, you could close the gap by increasing fees to remaining members - and we will likely see more asset based fees for example. But you can't just keep increasing fees in isolation of what competitors (both collective and SMSF) are offering.
Auto-consolidation will also be an independence issue. More than any other issue, auto-consolidation is likely to drive consolidation of small funds via the loss of scale. Fewer accounts can only mean fewer funds of minimum economic scale.
No matter which scenarios you subscribe to, one implication is unavoidable – marketing skills and strategy are going to be much more important. This is a tough one for the not-for-profits in particular. They may not have had to compete for their members, so the marketing muscles may not be well toned at present.
But they will need to be. When you’re faced with losing perhaps a fifth of your members and / or a big increase in competition, pretty much no amount of investment alpha is going to save you. What will you need here is marketing alpha – superior results derived from market insight.
It’s marketing alpha which will help you get to the right decisions about what to offer members as their needs become more segmented, and as competing low cost and premium offers proliferate. It’s what leads funds to the right decisions about how to respond to SMSFs. And it’s also what gets you to the right strategies to meet the challenges of auto-consolidation.