An age-old structure is unsuitable for the super industry, Conexus report finds

The Conexus Institute believes the $3 trillion superannuation industry is struggling with legacy systems and processes ‘unsuitable’ for large financial organisations.

The operational structure of much of the super industry may be substandard, the Conexus report says.

The $3 trillion superannuation industry is “struggling with legacy systems and processes” that are “unsuitable for large financial ­organisations”, according to a report by the Conexus Institute.

The report says there are “significant concerns that the operational structure of much of the super industry may be substandard, including core information technology systems, processing and staffing.”

The report on the Systemic Impacts of Big Super, by Conexus Institute executive director David Bell and research fellow Geoff Warren, says significant investments need to be made to upgrade the back office systems of many super funds “to a state that can support the operations of major financial organisations providing tailored services to individual members”.

The report states the rapid growth of the super industry, increasing regulation and mergers in the sector have produced a situation where some funds are struggling to cope with the demands of member servicing.

It says that the pressure on funds is set to increase as more attention has to be paid to retirement income strategies.

The report comes at a time when Financial Services Minister Stephen Jones and financial regulators APRA and ASIC have been urging the super industry to lift its game in terms of member servicing and complaints handling.

Regulators have also taken action against some major super funds including AustralianSuper and Cbus.

The report says the increase in complaints made to the Australian Financial Complaints Authority from super fund members should be seen as a sign of deeper problems in the sector.

“Failures in member servicing stand as an indication that something is not quite right,” it says.

The report expresses concerns that poor administration services are causing problems with delays in handling claims and servicing members.

Financial Services Minister Stephen Jones. Picture: John Appleyard

“Super started out as something of a cottage industry that then expanded quickly and is now struggling with legacy issues and processes,” it says.

The authors said that in canvassing executives in the sector for their report, there was “almost universal agreement there were problems in administration”.

But they argue that the issue should be recognised as a broader industry problem which needs addressing, rather than just having funds rapped over the knuckles by policy makers and regulators for their shortcomings.

“We suggest the appropriate interpretation of the situation is that ‘super funds are struggling with operational support infrastructure that is unsuitable for large financial organisations’.”

It says that “upgrading operational infrastructure in the industry will be challenging and is likely to involve considerable cost and time”.

The report calls for greater recognition of the problem “and more focus on ensuring that super funds are working towards addressing any issues, rather than assuming the underlying problems can be easily addressed and that ‘super funds are failing their members’”.

The report expresses concerns that the string of mergers in recent years in the superannuation sector has led to back office problems for funds with “systems which have been cobbled together following mergers”.

The report also warns of concentration risk with few companies servicing the industry’s back office needs in areas of custody, member administration, life insurance and cloud services.

Insiders have expressed concern about the decreasing number of companies preparing to handle super fund administration given the costs involved.

The administrator sector is dominated by Link, now MUFG, which the report estimates manages some $825bn in member funds, and Mercer, which it says manages around $354bn.

Other super fund service providers include Bravura Systems and IRESS, which the Conexus report says “are key to some industry participants”.

“There is significant reliance on these service providers to have their systems and processes in order and to interface effectively with the operations of super funds,” it says. “Problems with a major provider of member administration services, including software provision, could affect a significant part of the industry and adversely affect members.”

Originally published as An age-old structure is unsuitable for the super industry, Conexus report finds