Against the backdrop of intense merger activity and intensifying regulation, Australia’s superannuation funds are increasingly turning their attention to back office operations.
Complexity born of multiplying investment manager relationships, duplications, legacy systems and an all-too-frequent reliance on manual processing for fee calculations, fund composition checks and other tasks – all represent a massive data processing challenge and a cost burden that ultimately rebounds on their members.
Taking control of their data, automating key processes and minimising the number of external market connections are all live issues.
Consolidation happening faster than predicted
In a recent white paper, Deloitte calculated the industry would almost triple in value to more than $9 trillion, in current dollars, over the next 20 years. Russell Mason, Deloitte’s superannuation leader, predicts half a dozen ‘mega’ funds and ten to 20 ‘mid-size’ funds to emerge within five or six years. ‘It’s happening faster than many people thought,’ he says.
This February saw the merger of Sunsuper and QSuper complete, to form Australian Retirement Trust (ART). The fund has more than $200 billion in funds under management, putting it just behind the largest superannuation fund, AustralianSuper. Antony Gold, head of investment operations and performance at ART, says ‘to get all the transfer documents and consents in time to do the merger was a significant task. It was all manual work.’ Post the merger, he believes the fund should be able to do a lot more with automation and in the selection of the right systems.
At Cbus, which is currently merging with Media Super to create a $70 billion-plus fund, Nancy Day, chief operating officer, investments, says ‘our ability to leverage internal data platforms and systems enables us to automate processes. The trend we see evolving is harnessing data and technology to improve efficiency and investment insights to support decision-making.’
With their size, says Mason, funds are taking more control over the processing of member contributions and looking to access new technologies. ‘Data getting transferred correctly is increasingly important’, he says: ‘With the use of crediting rates, as was the norm, a lot of mistakes could be adjusted away without loss to the member. Now, it has to be distributed correctly to the cent.’
At asset and investment consultants Frontier, David Jenkins, head of technology and operations, says ‘size can generate a degree of complexity that makes it hard to be nimble.’ He believes asset consultants are in a good position to advise on new technologies as they are ‘solutions providers’ and do not have to queue up for the same budget as IT specialists.
Fees in the spotlight
Consolidation across the industry is only one driver behind the new focus on investment operations. Naturally, performance is the primary focus for any investor. The impact of fees incurred by the fund will naturally influence this hence the growing level of focus on this area. Then there is regulatory direction to provide the ‘best level of service possible at the right price’. This all cries out for more automation yet, as Northern Trust confirms, ‘faxes are still in use in some areas’. Manual processing can lead to inaccuracies, poor communications with custodians (creating pricing difficulties) and delays with investment manager charging and billing.
Performance-based fees and fund management rebates are both areas where automation is non-existent. Performance fees can be calculated over different time periods and involve varying methodologies, such as high water marks.
The Australian Securities and Investments Commission’s latest guide to superannuation funds on the disclosure of costs and fees, RG97, becomes compulsory for all superannuation funds’ product disclosure statements from September 2022. Gerard Brown, head of investment execution at superannuation fund HESTA, says there are still some inconsistencies with RG97. He says it is difficult to segregate the right expenses per asset class.
‘The estimation of performance fees can add complexity’, he says. ‘It is a bit of a fine art. There are different interpretations around how to average performance fees, looking forward over the next 12 months based on the previous year’s history or a proxy.’
Managing data effectively now key
Jo Leaper, head of operational consulting at JANA Investment Advisers, says: ‘Every client is looking at data and what’s happening with it. Super funds are looking for alpha from wherever they can get it. They have to look at the costs of setting up data warehouses and other arrangements. They have to see what they are trying to get out of the data, what types of data and its quality.’
Lounarda David at IFM Investors says ‘I have always considered data as a strategic asset and been a fan of getting the data right first and then choosing or developing the technology to use it.’ Aggregating data into a warehouse or centralising it into a unified data model is a challenge. She says managers and super funds have the choice of either building a data warehouse themselves or buying data as a service from an outsourced provider.
‘Imagine for a super fund having to receive data from all its different managers in structured or unstructured formats that may not even be compatible. Yet they are used in data warehouses which generate inaccurate information and insight. So, it’s not surprising that many warehouse projects fall apart because they built the technology first and the data came second.’
She says the industry is evolving with the need for data lakes, which are a by-product of increasing complexity and volumes, but are loosely structured in terms of the format. Custodians use the concept of data lakes so they can provide data to clients rather than providing reports on the data. But what is considered ‘big data’ varies depending on the capabilities of the organisation managing the data and sophistication of technology used to process and analyse the data.
Automated solutions already there
After years of focusing on front office issues such as member engagement – and pushing through consolidation to achieve scale benefits – funds are increasingly turning their attention to optimising back office operations. This means finding ways to harness, manage and process data by bringing it together in a timely and efficient manner, to automate key tasks and achieve speed, control and accuracy.
Automated solutions are already there to deliver the centralised, real-time information funds need to manage their investment management relationships effectively – and provide more efficient data access for their service providers. The technology is proven. In fact, there are solutions the can help superannuation funds automate activities such as their investment manager monitoring and the processing / checking of their charges.
Firms such as Calastone have solutions that can centralise and share data using distributed ledger technology, allowing permissioned groups to enjoy real-time information on-demand. Moreover, by leveraging Calastone’s leading network, superannuation funds can be quickly and easily connected to Australia’s custodians, fund administrators and other authorised parties helping to eliminate the cost of managing multiple market connections.
As funds get ever bigger, the challenges of managing bespoke relationships and agreements with multiple investment managers and custodians become ever more apparent. Many funds will doubtless respond by rationalising the number of relationships they maintain. But the data management and information-sharing issues will remain.
With ever sharper regulatory engagement, the ability to demonstrate effective oversight, control and governance is also at a premium. Rising to the back office challenge is now an imperative.
Russell Mason, Superannuation Lead, Deloitte
Antony Gold, Head of Investment Operations and Performance, ART
Nancy Day, Chief Operating Officer, Investments, Cbus
David Jenkins, Head of Technology and Operations, Frontier
Gerard Brown, Head of Investment Execution, HESTA
Jo Leaper, Head of Operational Consulting, JANA Investment Advisers
Lounarda David, Chief Operating Officer, IFM Investor
Greg Bright, Industry Commentator