Super as a Remuneration Benefit
Super is at least the second biggest financial reward provided through employment, so it is incoherent that most employers fail to ensure that super is managed as a superior remuneration benefit to attract, retain, and motivate employees.
This publication introduces the concept of managing super as an employee benefit requiring optimisation through service at an individual employee account level and whether the traditional platform model that dominates the industry meets the service needs of both employers and employees at a reasonable cost.
Super is complex, and only a minority of individuals are financially aware enough to fully understand all of the intricacies. Unfortunately, due to this lack of financial awareness, most individuals tend to make poor-quality decisions about their super based on shallow marketing slogans designed to delude rather than adequately inform.
Employers must understand their role in managing super as a superior employee benefit and take steps to ensure all employees receive service of value.
The Platform Model
Platform providers provide the mechanism that records and tracks transactional movements of an individual’s super asset resulting from fees, premiums, contributions and investments. Generally, they do not supply personal advice services at an individual account level.
In selecting a product arrangement, much is made of cost and the comparable investment performance of the MySuper defaults, but this level of scrutiny does not provide an accurate measure of overall excellence in servicing super at an individual account level.
Inherent Flaws in the Platform Model
Employers must realise that every super product provider has a similar service model in that they have traditionally avoided giving personal scaled advice at an individual account level.
The standard MySuper default proposition is a form of advice, although not ever stated as intending to optimise an individual’s super asset, but as an obligation based upon their low-cost product design. Concerningly, most members of employer superannuation plans, and even many employees in individual choice accounts, are invested in the MySuper investment default.
There are three basic designs for MySuper as presented by the financial services industry:
Life Cycle or Life Stages – This is where most MySuper investment strategies start, with a split of 85% growth assets and 15% defensive assets. The asset allocation then changes at certain ages to reduce the exposure to growth assets, and therefore risk, as the time horizon shortens and the employee is closer to retirement.
Glide Path – With this particular design, there is a standard investment strategy with high exposure to growth assets until the employee reaches a trigger age, at which point future contributions are invested conservatively but not the existing asset, which remains highly exposed to growth assets.
Fixed – This is where the MySuper investment default is usually a balanced option with a 70/30 split between growth and defensive assets. An individual’s time horizon to retirement is not considered.
Most employers are unaware of flaws inherent in the design of their super provider’s MySuper investment default or the degree of damage this can inflict on employee superannuation assets.
Following an intense analysis of MySuper designs, it is concluded:
- All designs are inappropriate in certain circumstances for different demographics.
- All three designs are more generally passive, as opposed to actively managing the asset over an individual’s career.
- In a normal market, employees with a long time horizon are generally better served by active asset allocation and full exposure to growth markets.
- Employees invested in life stages/cycles/glide paths with a shorter time horizon are automatically de-risked based on age only with no consideration of market conditions.
- When the time horizon is short and the market is unstable, employees with large super assets can find themselves confronting a GFC-style event.
- The MySuper investment default is designed to minimise employee engagement with their super asset.
- MySuper is a one-size-fits-many investment option that does not actively seek to optimise super or consider the individual’s circumstances and long-term goals.
- The annual publication of MySuper investment performance scores is misleading as they only compare the various passive options with every super provider migrating to the same average performance.
Super is an employer-funded employee entitlement and must be managed effectively like any other employee benefit. For all employees, super as a remuneration benefit is second only to their cash salary, with its ultimate purpose being to provide them with a stable income to support their desired lifestyle in retirement. In terms of financial awareness, most employees fall short.
Employers have a bargaining position to negotiate lower costs and insurance premiums with the financial services industry, yet most do not take the required action.
Many employers remain with the same superannuation model for their employees for 15 to 20 years without seriously considering the lack of value delivered, and the managers responsible for super do not understand the detrimental impact this can have on super balances because they are usually as financially unaware as their employees.
Due to its complexity, super as a remuneration benefit is often mismanaged. Employers may benefit from partnering with an external resource if they do not have the appropriate skill set internally.
AXIS Financial Group offers consulting services specifically to meet this need.