Download a PDF of this article

Australian superannuation funds face mounting challenges in the year ahead as they seek to accelerate operational transformation of their business to improve their investment process and address growing cost pressures, all while responding to heightened regulatory scrutiny and competing with new market entrants.

Meeting this multi-faceted set of challenges will require focus, discipline, and rigor across the entire organisation. In order to succeed, industry players will need to think holistically about modernisation, draw upon lessons learned by peers across EMEA and the Americas, and adopt new technologies and processes that will position them for better performance in an increasingly competitive market environment.

Australia in focus

Over the past few years, Australia has seen a number of its largest superannuation funds internalising assets with an aim to reduce fees for its members and improve cost efficiency. Recognising the need to better manage costs and improve internal investment workflow, these organisations have begun reviewing outdated processes and initiating transformation programs to position their investment teams for future success and growth.

New regulatory requirements around investment governance are also adding complexities and driving up costs, even for those asset owners who solely use external managers. The ongoing review of APRA’s SPS530 Investment Governance Standards should be considered a cornerstone of any transformation program, with investment organisations seeking modern solutions that enable improved governance practices for both internally and externally managed portfolios.

Drivers of transformation

The hybrid investment model in action

So, what does this mean in practice? Let's say you have decided to internalise some assets and have put in place the first layer of investment personnel, front-office technology systems, and program managers to achieve this. You have now adopted a hybrid investment model and should be seeking out best-of-breed systems designed to manage both internal and external investment workflows.

The transformation from being an asset owner solely using external managers to one using a hybrid model with a large percentage of internally managed assets requires skilled active investment teams in the front, middle and back office, working in sync with each other on a transparent investment process in the most efficient way.

Duplication of research and investment workflows leads to wasted time and increased costs. A hybrid investment model requires that your internal portfolio managers and analysts have the same tools relied upon by the external managers who previously serviced their mandates.

Increased market competition

To compound that operational challenge, new entrants into the Australian superannuation market, like USD$6.7 trillion US manager Vanguard, are set to disrupt current roadmaps, place additional pressure on fees, and further accelerate the drive for efficiency at both industry and retail superannuation funds.

We’ve already seen Vanguard begin the process of disentangling itself from its superannuation mandates to become a competitor over the past several months, and that occurred during a market slowdown driven by the Covid-19 pandemic. For superannuation funds, the risk of taking no action to modernise this year should be clear.

Focus on complete investment lifecycle management

When building out internal investment workflows, it's important to look at the entire process, from idea generation, capture, and analysis through to portfolio implementation, and ongoing management.

Active investment management doesn’t begin and end with your IBOR system. For an internally managed portfolio, that is a crucial first piece of the puzzle, but the manager must go further than that. Internal managers who neglect implementing a structured investment process for idea generation, portfolio holdings reviews, company engagement, model updates, and investment team collaboration risk never capturing the entire investment story, and thus falling short of delivering the best investment outcomes.

Demand growing for ESG transparency

Global ESG assets have now surpassed US$40 trillion, according to Pensions & Investments. With Australian investment managers considered one of the mature players in responsible investment, a high degree of expertise and transparency is expected when it comes to managing the entire investment process for ESG-focused portfolios.

APRA recently said it plans to update its guidance on consideration of ESG factors in constructing portfolios, adding that updates would “provide clarity on the obligations of RSE licensees to take into account ESG factors when setting their investment strategies.”

This development will have far reaching implications for how ESG-focused portfolios are constructed, managed, and reported on across the industry. The good news is there are a number of local partners who have experience in implementing processes, procedures, and systems to support ESG workflows for a number of global investment managers. And those partners, like MackeyRMS, stand ready to support the implementation of optimal ESG workflows for organisations needing to solve for this important challenge.

Like so many challenges that superannuation funds face in the year ahead, the risk of inaction on the ESG front is far too great. Suboptimal management of ESG investments is considered perilous for both inflows and regulator engagement. For a better understanding of ESG reporting obligations as a UNPRI Signatory, see the Compulsory Reporting Process published by the United Nations’ Principles for Responsible Investment.

Global M&A activity is heating up

Industry consolidation is yet another challenge facing Australian superannuation funds. The past two years have seen a shake up across the Australian industry superannuation landscape, with merger after merger being executed.

Although the merging super funds to date predominantly use external managers, integrating investment teams, systems, and processes across multiple organisations when you are bedding down a merger is challenging. Being able to consolidate and integrate investment teams so they are equipped to collaborate on investment strategies and capitalise on the synergies created by the merger is obviously a win for both sides of the transaction.

Add in the substantial implications of Covid-19 on multiple investment teams, which now must have the ability to work-from-anywhere, and the need to integrate and streamline investment workflows into a centralised, cloud-based platform becomes even more critical.

Conclusion

As mentioned previously, in order to meet this multi-faceted set of challenges, superannuation funds will need to be focused on implementing systems and processes that empower them to adapt, transform and modernise, while ensuring investment teams remain productive and collaborative, and the investment organisation maintains complete control over the investment process and investment IP.

Those superannuation funds that apply the proper rigor in transforming their operating model will be far better positioned to perform well in an increasingly competitive market environment that we will no doubt see in the months and years ahead.

Case Study

$100 billion pension plan implements modern RMS to get a single, secure view of internal and external managers.

Read more