The benefits of smart-sourcing your superannuation back-office function

In recent years, the superannuation sector has seen a multitude of changes driven by regulation, developments in technology, and evolving expectations for the type of service that members want from their provider. As these factors continue to shape the sector, we look at how firms can embrace the changing market dynamics using cost-effective modern technology to seize the opportunity and gain, or further their competitive advantage.

A changing market

One major market change has been the transfer from retail to industry superannuation funds. Although this trend has been happening for a decade, the 2017 Hayne Royal Commission into misconduct in the financial services industry accelerated the shift. According to figures from KPMG’s SuperDashboard, ten years ago, retail funds had the larger market share, with 32% compared to industry with a market share of 21%. In 2017, the split was 28% retail and 24% industry. By 2020, industry funds accounted for 30% of market share while retail was reduced to 25%.

These market shifts have meant that assets under management (AUM) within industry funds have increased substantially. While the total AUM across the whole market has more than doubled over the ten years to 2020 from $782 billion to $1,668 billion, assets within industry funds have risen threefold from $244 billion to $712 billion, and retail assets have increased by two thirds from $383 billion to $589 billion.

Digital demands

Historically, retail super has generally been seen as more advanced in terms of service with digital platforms, always-on communication, and best practice technology infrastructure funded by their bank and investment company parent. On the contrary, member funded industry super has been less willing to spend money on technology, often relying on legacy systems that lack modern digital functionality.

However, dealing with increasing asset and member numbers using older technology can be costly and prone to error, and the pandemic has only amplified this challenge. Similar to other businesses across the country, super funds have had to find new ways to deliver their services through lockdowns, working from home, and evolving restrictions, and those with legacy technology stacks have found the transition the most difficult.

Covid-19 has also boosted people’s use of online services, so we’ve all become more accustomed to logging on to our financial service providers and more self-sufficient in finding information and updating our personal details. Customers increasingly expect to access information at any time from any device. They demand the ability to seamlessly change details such as their address, beneficiaries, and insurance regime via an easy-to-navigate web portal or app, without waiting for the super fund’s admin team to do it for them.

Homogenisation of products

Simultaneously, the superannuation sector has experienced a period of major legislative change. Greater regulation has resulted in products such as MySuper funds becoming increasingly standardised, with strict government-mandated rules, particularly around fee structure and cost transparency, removing many previous points of difference. In the past, choosing a super provider and selecting a fund meant evaluating all the available options and deciding on the one that best suited needs, but the impact of regulation has meant there is now significantly less variation between offerings. For super funds looking to grow market share, it’s becoming harder to differentiate products, making it more important for providers to stand out in other ways.

The benefits of smart-sourcing

As a result of these converging market forces, many industry super funds are now seeking to modernise their operations by re-evaluating whether the best approach is to outsource certain components of their business to a third party or do it all in-house.

The traditional conversation when considering how to manage operational functions is to either outsource everything or keep it all within the company.

The argument for outsourcing tends to be that it creates cost efficiencies, reduces risk, and can help build scale, while the benefits of conducting it all in-house often relate to retaining knowledge within the firm and maintaining greater control of the client experience.

Smart-sourcing refers to in-sourcing some functions and out-sourcing others, allowing you to experience the best of both worlds. It no longer has to be an all-in or an all-out approach. You can now oversee costs and risk, while differentiating yourself from the crowd, increasing client engagement, and gaining control of your own destiny. The skills and specialisms that you want to retain within the company can be kept in-house and properly resourced, while services that are better managed by expert third parties can be tendered to by an external partner.

Creating your points of difference

As an example, you can manage key client touchpoints like customer service and claims management in-house, while pension payments might be more efficient and cost-effective if outsourced to a specialist provider. You may also want to run your investment operations internally, but use a third-party tax or annuity solution. The bonus of smart-sourcing is that you can pick and choose what you want to offer, utilising modern technology to add best of breed third-party solutions to existing internal expertise to create a truly unique proposition.

And by integrating legacy, internal systems and third-party solutions into a modern, digital front-end via an application programming interface (API) connection, super funds can create a single, differentiated solution that meets the needs of today’s members. Cloud technologies and infrastructure models such as Software-as-a-Service (SaaS), which can be scaled up and down based on demand, security level, and the degree of maintenance required, are a cost-effective option for funds seeking to modernise their operations without having to implement a completely new tech stack. Adopting a modular approach can create a robust solution with the flexibility to incorporate new functionality as required. It can reduce costs and risk by increasing straight-through processing between systems, while the fund remains in overall control of the client touchpoints.

The superannuation sector has experienced a period of immense change. With smart-sourcing, funds can create a unique proposition that supports evolving client and market needs, while reducing costs and improving efficiency. Funds can capitalise on their in-house expertise and take advantage of the best available third-party solutions at the same time, bringing it all together with innovative, modern technology that provides a competitive edge and supports business growth.