Who will win the super industry’s skills arms race?

Fed by compulsory employer contributions, Australian superannuation is now a $1.85 trillion industry.

Bomb

Some would see the superannuation funds who are the gatekeepers of this mountain of money as having an unassailable position. Yet there are a number of converging forces, including the recommendations made by the recently released financial system inquiry, that will threaten the status quo:

  • New competition – Rising popularity of SMSFs (Self Managed Super Funds)
  • Cost pressure – Criticism over high fees and the introduction of low-fee products
  • Regulation – Push for more stringent governance standards for superannuation Boards, including a set proportion of independent Directors
  • Sequencing risks – Employees may decide to retire during a share market crash, hindering the typical response of topping up funds during down years
  • Technology Infrastructure – Risks in sourcing, maintaining, consolidating, overhauling and upgrading administrative and information technology (IT) systems and platforms
  • Technology Innovation – Members demand digital tools for oversight and budgeting, enabling forward-looking planning rather than a rear-view snapshot
  • Product Innovation – Demand for new products such as lifecycle investment and post-retirement solutions
  • Turnover – With the ability to compare and switch funds online, members can move their funds often and more quickly
  • Size – Challenge of growing big enough to compete with banks for distribution, tap into benefits of scale for investments such as infrastructure assets and enable potential in-sourcing of investment management
  • Market – Low-interest rate environment intensifies search for yield
  • Security – Ensuring data integrity for reputation and informed decision making

These challenges will bring the acquisition of talent into centre court. A report by Heidrick and Struggles noted that funds will be seeking Directors and executives with:

  • Strong investment skills,
  • Experience in customer-facing businesses,
  • Mergers and acquisitions experience,
  • Knowledge of international investment markets,
  • Wealth management capability,
  • Experience with managing risk, and
  • Technology backgrounds.

Although cultural fit can be an issue when hiring the right skills into industry super funds from the corporate world, with new recruits often having too great a focus on short term returns, Heidrick and Struggles states that the sticking point has usually been the organisations’ reluctance to pay for the skills they need. Yet according the search firm “the time is coming when they won’t have a choice”.

Egan Associates’ analysis places average and median remuneration for the Chairman of Australia’s top 40 superannuation fund organisations* at a little over $100,000. The second highest paid member of the Board, often the deputy chair, is around $70,000. The average remuneration of the balance of the Directors serving on these Boards sits between $50,000 and $60,000.

In comparison, Chairmen of companies with a similar level of total assets receive payments more in the order of $500,000, the deputy or lead Director in the range of $230,000 to $280,000 and other Directors in the range of $200,000 to $225,000.

It is over-simplistic to benchmark using only one metric (as we have noted in previous newsletters). It’s also important to note that the payment of trustees is complex due to non-independent trustees receiving remuneration from parent or related organisations. However, the above comparison does highlight a discrepancy in how trustees of Superannuation Boards and Directors of listed companies are remunerated. Superannuation fund trustees often receive only 20% to 30% of the remuneration of listed company Directors.

Given the skills requirements of the industry and where these skills are likely to be sourced, superannuation funds may be forced to narrow this gap. Those organisations which address Board renewal now will have the best choice of candidates.

Front of mind must be:

What capability mix will be required on the Board to ensure the optimal Board composition?

  • What remuneration is required to attract the right candidates?
  • Are appropriate structures and cultures in place to retain the right candidates?
  • Do new hires have the time to tackle regulatory and industry challenges?
  • How do the skill sets break down over the whole Board and over the committees?
  • Are Board trustees able to:
    • Provide outstanding governance while also ensuring compliance with APRA and other demands?
    • Create and communicate an enduring vision for the organisation?
    • Ensure investment choices are made that reflect the central ethos of the organisation while also achieving a sustainable level of return and fees that satisfy members’ needs now and in the future?
    • Develop the means to embrace technological change that will deliver member services and products more efficiently and create new products and services?
    • Maintain and build relationships with the media, government and other stakeholders?

Remuneration and capability considerations will be equally important when acquiring the right CEO to lead superannuation organisations through these changes.

Egan Associates is able to assist superannuation funds in conducting Board reviews of current Board performance, creating capability matrices to identify future skills needs for Board renewal and CEO succession, and determining appropriate remuneration levels for Key Management Personnel.

Should you want more information on this matter, please contact Vince Murdoch on vmurdoch@eganrem.com.

*The top 40 funds were selected using APRA’s fund-level research released in January.

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