Member engagement has long been the holy grail of Australia’s superannuation system. If funds could just get members more interested in their superannuation, members would save more and live better in retirement. Furthermore, from the point of view of superannuation funds, funds under management (FUM) would be higher and member turnover would be lower.
However, over the past 15 years, governments have quietly abandoned engagement as a key aspiration for superannuation members throughout most of the savings phase, as they increased the role of smart defaults. By contrast, in the retirement phase, both government and fund thinking still focuses on engagement – although time will tell whether smarter defaults should also play a bigger role in this phase.
Why is it so difficult to get members engaged in super?
Superannuation is a compulsory purchase rather than it being something that people voluntarily engage with. For many people, the dominant emotion surrounding financial services is fear and, consequently, they prefer to avoid choices about it. For most, the benefits of superannuation are many years in the future and tend to be discounted. With many of the choices that funds do provide to members – such as asset allocation – professional fund managers should be able to make choices that do better than all but the most sophisticated individuals. Funds often try to engage members to make additional voluntary contributions, but the Commonwealth Government’s Retirement Incomes Review suggests that many people, particularly those under the age of 50, do not need to make additional contributions to maintain their living standards in retirement.
The system no longer relies on engagement during the savings phase
Having observed these behaviours, Australia’s superannuation system no longer assumes that people will make individual decisions to opt for low-cost funds, to close costly multiple accounts, to opt out of life insurance they are unlikely to need, or to switch out of poor-performing funds. Instead, legislation has progressively shifted toward default outcomes.
The examples of this shift are myriad. Passive members now default into MySuper accounts with capped costs. Unless members make active choices to the contrary, small inactive accounts are automatically merged. A member who changes employer now stays with their old “stapled” account by default, rather than opening an additional account. Instead of automatically acquiring additional life insurance every time a new account is opened, life insurance policies from inactive accounts have been discontinued – and young people who are unlikely to need life insurance are not enrolled in it. And, although the performance test is not yet fully operational, the intent is that members in an underperforming fund will wind up with a better performing fund even if they don’t make active choices.
Individually these changes don’t seem revolutionary, but collectively they have transformed the savings phase of superannuation so that defaults are much more likely to result in outcomes that better serve members’ interests.
Typical superannuation fees have fallen by 0.2% over six years. While the number of people with superannuation has increased, the number of accounts has fallen by 24% over six years, which should substantially reduce total system costs. The number of life insurance policies has fallen by 22% over three years, while the premiums paid remained the same – implying that most of the discontinued policies were cross-subsidising other members, rather than benefiting those who paid for them. Given these results, governments are now unlikely to reverse direction.
The shift to defaults potentially undermines the role of competition in the superannuation sector. But governments don’t seem particularly worried, as competition was never a key feature of the superannuation scheme. When it was set up, politicians and public servants wanted a non-government scheme that would make it difficult for subsequent governments to raid national savings. The fact that non-government superannuation providers might compete was a happy by-product rather than a fundamental motivation. Consequently, governments have been relatively relaxed about the shift toward defaults, even if it reduced the emphasis on competing for members, because there were other more important mechanisms to drive returns up and costs down.
In retirement, governments may be disappointed in their desire for members to engage more
Once retirement is in view though, both governments and funds are currently encouraging more member engagement. An increasing number of retirees have material superannuation balances, and many members are not using much of their balance through retirement. While the concern in the past may have been that retirees would spend their superannuation too fast, governments are increasingly worried that in practice retirees spend too slowly, leaving a larger than intended inheritance. Most retirees receiving some age pension don’t spend down their capital through retirement. Most retired households today have more wealth (not counting their home) than they had 10 years ago. Public confidence in the superannuation system might eventually be undermined if it comes to be perceived as delivering not more comfortable retirements, but tax-break boosted inheritances. Funds have ample motivation to ensure that this view never becomes entrenched.
The Commonwealth Government’s Retirement Incomes Review in 2020 highlighted the failure to use superannuation balances to fund retirement incomes. Recent legislation for a Retirement Income Covenant aims to encourage superannuation funds to maximise income across the whole of retirement. The accompanying Explanatory Memorandum suggested that funds do so by engaging more with their members such as through providing guidance about potential income in retirement, expenditure calculators, and education about drawing down capital. While it also suggested the increased use of products such as Comprehensive Income Products for Retirement (CIPRs), these too depend on highly engaged members to opt in.
Governments and funds are hoping that more engaged retirees will draw down more of their superannuation savings to fund better living standards in retirement. But there is no guarantee that funds will succeed in engaging many retirees. In the long run, it may be that funds should focus more on smart default options in retirement as well.
Engaging members when retirement is imminent, or a reality, is easier than engaging them earlier in their lives. But it is still hard. For most retirees, finance is inherently scary, the superannuation and welfare systems are complex, and they would rather focus on enjoying their retirement activities.
Consequently, both governments and funds may need to think harder about how to implement more and better smart defaults in the retirement phase. For example, governments may want to rethink minimum drawdown levels, which can act as a psychological anchor for how much retirees should spend. Using current minimum drawdowns (excluding the temporary COVID-19 discounts), and assuming 6% investment returns, a retiree would not start to eat into their nominal superannuation balance at age 65 until they turned 86 – roughly their life expectancy at retirement.
Funds might be able to help address this issue through the application of smart defaults, that automatically convert members at retirement into account-based pensions with higher drawdowns than the legislated minimums – unless the member actively chooses otherwise.
Are current engagement efforts worthwhile?
Given the emerging reality of member behaviour and government attitudes toward engagement in the savings phase, many funds may need to rethink their strategy, both about defaults and about spending on engagement.
Some funds are already following the government trend for smart defaults, recognising that they can deliver better outcomes for most members rather than relying on individual engagement and choice. For example, defaulting members into more growth assets and using well-constructed life stage solutions that automatically shift asset allocation as a member’s risk profile changes with age, is more likely to lead to high returns appropriate to risk tolerance.
Given the realities, it is quite possible that some funds are overspending on trying to stimulate member engagement in the savings phase. If members are defaulted into outcomes at least as good as their own choices, then whose interests are served by incurring costs to get them more actively engaged?
Getting member interactions right is still important
Of course, reducing the focus on engagement doesn’t mean that superannuation funds can ignore members. Moments of truth still matter. In any service industry, passive customers who are treated badly tend to leave. Hassle-free and error-free processes for activities like address changes, change of employer, change of asset allocation, and additional contributions are essential to member retention.
Rethinking engagement requires a shift in mindset. Both the direction of government thinking and member behaviour suggest that finding and implementing these interventions to defaults will make the biggest difference to members’ interests. Yet, despite this overall system shift toward defaults, many superannuation funds remain focused on trying to increase member engagement. It may be that their energy would instead be better spent in identifying interventions that would help default their members into better outcomes. Funds that are willing to consider reallocating some spending from member engagement programs and put it towards systems and processes that support better default options instead, may find they are providing a service their members will value more highly in the long run.
