A Retirement Income Renaissance?

The opinions and views expressed in this article are entirely my own and do not represent the views of my employer or any other third party.

The Retirement Income Review (now forever known as the Callaghan Report) was touted as an objective fact-based assessment of the state of Australia’s leading retirement system. At almost 650 pages long, it’s a behemoth and remains true-to-label with a series of findings and observations without making any explicit recommendations.

In many ways, this is bureaucrat and policy wonk cat-nip – they get to cherry-pick the facts to suit their political and policy-making reform agenda. Having said this, the report is a commendable and important effort to make sense of our highly complex but generally effective compulsory superannuation system. Exploring how it delivers, alongside other important private and public pillars, on the social “retirement” contract for all Australians.

Rather than attempt a chapter and verse summary of the report (by all means, have a crack), I’ve instead channeled my inner-Millennial to provide a “Top 5 list” of things that stood out to me from the report.

1. Half volleys dispatched to cover

While media commentary will undoubtedly focus on the Federal Government’s likely attempts to kill the SG rise off the back of the report, there’s a few no-brainer reforms that the report highlights again as having clear merit:

legislating a purpose for superannuation that is clearly oriented towards delivering retirement incomes – in the words of Nike “just do it” and stop worrying about the particular grammar and punctuation; and
the retirement covenant which has unfortunately been delayed to 2022 but will require superannuation trustees to specifically formulate a strategy to deliver their members positive outcomes in retirement.

If the report results in nothing else but ensuring these two things finally pass into law, then I would consider the whole exercise a resounding success!

2. Courage, Frydo

As I read through the denser sections of the report that touch on the imperfect interactions between tax, social security, super and retirement rules – I started to feel a growing sense of excitement (stay with me, here) for true reform on the horizon.

My big bold idea for retirement has always been to means test the family home for Age Pension eligibility purposes. This continues to feel like the easiest and fairest way to address some invidious aspects of the current policy settings, namely:

the amount of unproductive capital locked in private property
the lack of incentives for retirees to downsize and free up stock for younger buyers
difficulties in accessing home equity as a source of retirement income
calibrating age pension eligibility to those most in need.

Rather than the Federal Government trying to double down on the Pension Home Loans Scheme (also explored in the report), it would be truly heartening to see Josh Frydenberg make the above a courageous centerpiece of their new retirement policy agenda. The report gives them sufficient ammunition for this and, they have a real live (and well-aligned) example of policy courage in action as the NSW State Government pursues their radical tax reform plan for stamp duty.

3. Biases and best interests

The report does an excellent job of exploring some of the cognitive biases that effect how we, as humans, often make financial decisions that are against our best interests. In fact, page 159 (biases affecting saving) and 443-446 (biases affecting retirement decisions) are probably my two favourite sections of the report.

That biases affect our decisions shouldn’t come as a surprise to most of us and should be particularly familiar to super trustees who have fought against these biases (on behalf of members) in many recent situations, including:

supporting members to “stay the course” rather than switching into defensive assets at the bottom of the market and losing any future growth potential;
showing pre-retirees the benefits of maintaining an allocation to growth assets as they approach retirement (even as loss aversion starts to take hold); and
helping members understand that accessing their super under “early release” means they miss out on the 8th wonder of the world (compounding) in their retirement.

Where the report really hits the mark, is exploring how trustees have an obligation to support and guide members to overcome these biases. In fact, this is at the heart of their duty to “act in the best interests of members.”

If trustees can objectively prove that lifetime income and longevity protection propositions provide a benefit to some members (whether through a higher age pension entitlement or protecting against the risk they live longer than expected) then the report implies that trustees have an obligation to improve retirement outcomes by helping these members overcome the biases that have been historical barriers to purchasing.

In this regard, the work of the UK Government’s Nudge Unit is instructive. Perhaps if pooled longevity plans were framed as a decision to leave, rather than a decision to join at retirement – this would help address much of the apathy and “sense of loss” that surrounds pooled longevity products that protect against risks that feel too remote.

4. Advice by any other name…

Coming in as a close runner-up for my favourite section of the report is Box 5A-10 “What is financial advice?”. This lays out in clinical and confronting detail the complex terminology that currently surrounds the advice ecosystem in Australia.

Financial advice reform goes hand-in-hand with any system reform centered on the retirement phase. The reason for this is subtle, but profound. Consider the way super operates today is identical for the vast majority of Australians aged under 60 (and will continue to be due to the Government’s new stapling rules):

you start your career and are signed up to a MySuper product
you are placed in the default “Balanced” investment option
you have one goal: maximise your balance from now to retirement.

Which is to say, in accumulation every member is fairly homogeneous from a financial plan perspective. If trustees help you to maximise your net investment return, 90% of the job is done. But as you approach retirement, things start to get really hairy for members.

Retirement is a personal journey. And for a journey, you need a map. For trustees to help you create this map (aka financial plan), they need to know your “personal goals” and “personal circumstances”.

Unfortunately, as the report makes clear, this is fraught with peril for trustees. Intra-fund advice doesn’t cut it. Personal financial advice is costly, complex and now has an extremely high compliance burden. Everything else isn’t really advice. In the immortal words of Star Wars, we need a “New Hope” for mass-market advice and guidance for retirees.

5. Long term care: back-to-the-future

Buried in the report first at Box 4A-3 and then later at 5A-7 are some thought-provoking statements about the discordant interactions between the super, insurance, social security and aged care industries. Culminating in this piece of crystal ball gazing:

“If changes are made to encourage greater personal provision for aged care costs following the Aged Care Royal Commission, long-term care insurance may make aged care costs more affordable for people and give them the confidence to draw down their retirement savings.”

A comeback for “Long-Term Care Insurance” in the Australian market has been much speculated about but continues to be a Sisyphean task – beset by challenges on both the supply side and the demand side.

However, there is a scenario I can envisage where the intersection of reform may meet between the Aged Care Royal Commission and the Retirement Income Review – providing an impetus for industry participants to better serve our aging population. It is a risk factor and health burden that is poorly understood by the wider community and grotesquely under-served by both government and the private financial sector alike – the severe impact that increasing levels of cognitive decline and mental illness will have on the retirement well-being of our aging population.

Life insurers (including my own employer) have been highlighting the growing impact of mental illness on our wider community for some time. Alzheimer’s and Dementia will soon grow to be the leading cause of disability, decline and death for individuals over the age of 65. More than this, it is the unique impact that this category of illnesses has on well-being and retirement lifestyle. Among them being that it robs people of their financial literacy right at the time that they need it most – as they are faced with the most dizzying array of complex financial decisions whilst navigating the a bureaucratic range of government/private providers.

If there is a challenge our lucky country should seize upon with gusto to preserve the great Australian dream for all – surely it is this!

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I hope you enjoyed this taste of the Retirement Income Report. If you don’t have time to read the report in full, I suggest you focus instead on the key observations and insights. This article was not intended to be a comprehensive summary of the report (or even an incomplete summary) – it is primarily a conversation starter.

I’d love to hear everyone’s thoughts and comments on the report below!

Crisis as a career maker not a career taker

We’re all living through the defining crisis of our generation – some have dubbed it the GVC (Great Virus Crisis) or GCC (Great Corona Crisis). This harkens back to the GFC (Great Financial Crisis) which was the reigning “defining moment of our generation” until a global pandemic and resulting economic shockwave knocked it off its smug perch.

Starting one’s career in 2007 at the precipice of the GFC was a tumultuous experience. Going quickly from being a fresh-faced big 4 accounting firm intern with semi-unrealistic dreams of being the youngest partner in history to staring down the barrel of a two-year pay freeze brings you quickly back down to Earth. But in 2008-2009, many starting their career fared a lot worse than that with hard won graduate offers unceremoniously rescinded and swathes of investment banking associates made redundant as M&A deal flow dried up.

Eerie similarities abound with our current crisis as companies throughout Australia reshape their expense base and take a surgical knife through their planned graduate intake – fearing that the economy will continue to get worse before it gets better once business confidence recovers and/or a vaccine is discovered.

Sensing the creeping unease in young graduates throughout the country, Universities nationwide are swinging into action and doing their best to support our best and brightest minds that may be struggling to break into the workforce. This challenge is reinforced by the hard truth that youth unemployment and underemployment is now at an all-time high as sectors such as tourism and hospitality employ disproportionally high percentages of young people but have also been hardest hit by the lockdown-induced economic downturn.

But hope remains for young graduates across the country if they take time to reflect and learn from these lessons from the GFC:

The economy, your career and even life itself is cyclical – it sounds corny, but it is empirically proven. Markets and economies go through booms and busts. Smug financial commentators often repeat the clichéd mantra during a market crash of staying calm and remaining invested for the long-term – history has shown that generally this approach works better than the alternative. Think of your career and life itself in the same way – it’s a long game and a lot can change in a week, month, year or decade. Put yourself out there with enthusiasm and courage every day and you’ll be surprised by the great career opportunities that might come your way when the market turns, and things get rosier.

From a crisis also comes opportunity – some of the greatest companies in the world today were founded during the GFC and in the years of recovery after. Uber, Airbnb, WhatsApp, Dropbox, Kickstarter, the list goes on. Crisis can often lead to reactionary and short-term thinking particularly by large incumbents that are ruled by a fear of shrinking or getting knocked off their comfortable perch. If companies start looking too inwardly, they will miss seeing the emerging opportunities that will come from the post-COVID19 social and economic landscape. Think of the consumer trends that are already being created from remote working, online delivery of everything, interconnected 5G devices, personal hygiene/sanitation, staycationing and, believe it or not, board games!

There’s never been a better time to create your own career – a decade ago, all the whizz-kid business school graduates fought like cats and dogs for investment banking and consulting internships. But those stopped being the coolest ticket to the big show years ago. Having been to several careers’ fairs in recent years, the cream of the crop now aspires to only one thing: “Tech Entrepreneur”. It doesn’t matter if they’ve done a business degree, engineering degree or dropped out after 1 year. So, have no fear that the graduate jobs have dried up and go out there and create your own graduate job! You’ll be the coolest kid in your class.

What matters most from your university experience – no matter how hard it gets, and it will feel very hard if offers get pulled and interviews go nowhere, just remember that your university experience can still provide you something invaluable no matter where your career takes you. At the end of the day, the content of what you learnt (be it economics, finance, accounting, zoology or rocket science) is secondary to how you learnt and who you met along the way. Above all else, university teaches you how to solve problems and how to connect with people from many different walks of life. These are the skills you need most to succeed in business or any career path really. So – study hard, don’t give up and treat every interaction with people as an opportunity to learn from them, help them and share with them your experiences. Good things will come your way eventually.

Young leaders: Why they’re important and what they still need to learn

This article was co-authored with Shaneen Marshall and a version of this article was originally published in ASFA Super Fund Magazine and is republished here.

Starting your career in a big company is tough. Whether it’s a bank, super fund or insurer – you’re the smallest fish in a gigantic pond. Both of us have spent our careers navigating these tumultuous waters, riding the waves of success and bracing ourselves when the storms hit. Becoming a leader before 30 is enormously rewarding but a steep learning curve. Big companies that support young leaders drive a competitive edge by providing a platform for everyone to contribute ideas, thinking and energy but allow room to make calculated mistakes (without punishment) and learn from the wisdom of others (without being patronised).

Why does this matter? Consider the customer revolution at the heart of most corporate transformations. Insurers and funds service a broad spectrum of the community – their customer base is truly diverse. Because of this, there is pressure for leadership teams to represent the communities they serve.

But how can a Board get into the head of a 25 year old that grew up with a supercomputer in her pocket? The answer lies in more cognitive diversity in leadership teams. Young and old, side-by-side, respectfully challenging each other to future proof the business. Young leaders straddle the divide between an analogue and a digital world because their mental models have been shaped under a rapidly evolving technology landscape.

So after over ten years climbing the corporate ladder, here’s what we have learnt about young leaders and what big companies can do to make the most of their strengths and their weaknesses.

1) We’re naïve but not yet cynical

We’ve both had to pull ourselves up at times when graduates in our team have come to us with bold ideas and our gut reaction is cynical dismissal. We already know better, don’t we?

From our experience, a younger leader tends to:

be more optimistic about the likely success of the task at hand
underestimate the timeframe and budget required to achieve the task; but
be more willing to explore riskier or unorthodox options.

This may be due to the planning fallacy but this thinking often leads to real change, innovative solutions, higher return and more motivated, passionate and energised teams. Through this lense, it’s interesting to reflect on different cultural attitudes towards young leadership. For example, we’ve both been fortunate to work in overseas markets. One of us, in particular, has spent a big chunk of her career in South Africa’s entrepreneurial culture.

“In South Africa, times have changed so much in my lifetime – the customer, the environment, the regulation and government, the technology. Countries like South Africa and Israel don’t value the benefits of hindsight as much as other countries because the context is so different and always changing. Adversity and rapidly changing external environments require different thinking, adaption, agility, positive energy – some of the things that young people inherently bring.”

By contrast, Australia is known as the “lucky country” with almost 30 years of unbroken economic growth and strong stable government and social institutions. With less historic adversity to overcome, Australian companies are naturally more cautious and incremental in progressing change than our entrepreneurial South African or Israeli cousins. This has meant radical new business models aren’t a necessity yet and perhaps why young leadership hasn’t been promoted as actively.

Furthermore, the Australian business culture values deeply the wisdom of hindsight. Experienced business leaders know that our world is cyclical. The past repeats itself. Whether it’s old products that come back in fashion (hello, velvet), organisational restructures going back to the future, or dusting off competition strategies that have worked before. These cycles are what many consulting firms rely on – finding a method that works and repeating it for multiple clients with subtle nuances.

The same applies to an older leader, she has probably ”seen it all before” and has the benefit of hindsight to quickly change tact to better achieve success, lower the risk or make the task more efficient.

Young leaders need to learn to look to the past and listen to the wisdom of more experienced leaders to inform the way they do things or we risk being inefficient or ineffective in reinventing existing processes, products or systems.

2) We’re biased to build for the future

We remember growing up with an Encyclopaedia Britannica on our bookshelf. Looking up information at school on a CD-ROM. Tentatively referencing Wikipedia in a university research project. To now having the whole world’s information at our fingertips with trusty Google.

We live in a society shaped by Boomers and Gen X, we grew up through the digital revolution of Gen Y and we are glimpsing Gen Z’s fully automated future. This gives young leaders an insight into the lived experiences of an increasingly digitised generation of consumers. Coupled with the inherent optimism of youth, we challenge the status quo (for better or worse) and our minds are extremely future-oriented.

For companies looking to set a long-term strategy that engages digitised consumers, it’s imperative that some of the leadership team have lived that experience rather than just learnt that experience.

The flip side of this is that young leaders often don’t appreciate the real challenges of building the future in an ever-changing consumer and technology landscape. Wiser hands are needed to steady the ship and help constantly evaluate the trade-off between managing the now and building for the future. There’s been many times when we’ve both had to take a step back and realise that there’s a lot of truth to the old adage “If it ain’t broke, don’t fix it” (even when it applies to creaky legacy systems).

3) We’re still finding our balance

For most of our careers, we’ve had no work speed other than 11/10. This is typical of many ambitious young people. Work till midnight? Anytime. Weekends? Sure, I don’t have kids yet. Day after day, week after week and year after year.

This culture of hard work and dedication is the hallmark of many young leaders. This is what makes them crucial to the productivity of organisations (and good value for money). Eventually though, personal circumstances change and this momentum becomes unsustainable. More importantly though, many leaders eventually learn how your personal behaviours impact the cultures of the teams you lead.

Answering emails until midnight. Working on Sundays. Individual actions become expectations become team culture. Young leaders need to be conscious of this and realise that being a top performer isn’t about being top of your game all the time – it’s about being on the top of your game when it matters. This is the same mentality that championship winning sportspeople adopt – you save yourself through the grind and train to hit top gear on the big stage.

And when it comes to the big stage – be it Board meetings or client presentations – it’s important to remember that being on your “A game” doesn’t necessarily mean being the loudest person in the room. Young leaders often have an unspoken sense of anxiety when you’re given a seat at the table with older and more experienced leaders. There can be a tendency to overcompensate and show that you belong. More than once, CEOs have remarked to both of us: “You need to learn to stop talking once you’ve got the decision you wanted.”

Sometimes planting a seed and keeping quiet is far more powerful. Young leaders would do well learn this, just like we had to.

We have both always worked in big corporates or consultancies, so this is our reference point for the experiences we’ve shared. Often, it can feel like big companies are caught in the Ice Age but the opportunity to learn from wiser and older heads is a powerful thing.

If big corporates maintain homogeneous leadership teams whose ideas are frozen in their historic and personal life experience, then young employees will end up either conforming to orthodoxy, butting up against an “ice ceiling”, or pursuing less rigid and more thrilling experiences through small start-ups.

We believe that if companies put the right young people on leadership teams, this creates a crack in the ice which allows all employees’ ideas to blossom and brings to life a “bias for the future”. With this, companies can remain ahead of the curve and experimenting with new business models and ways of working.

Given some of the challenges we have personally experienced with young leadership – this cannot be effectively implemented without making young leaders feel comfortable sitting at the table and being on equal footing with more experienced leaders. Young leaders want to embrace, learn and benefit from the experience and wisdom around them. So create space for them, filter dismissive cynicism, actively sponsor them and foster a culture which balances complements with constructive criticism.

Financial services in Australia are undergoing radical changes, particularly in community expectations. Past experience and behaviours might not be as valuable as it has been. Perhaps this is the time to embrace what was previously considered naïve young leadership?

Tipping point

This article was originally published in ASFA Super Funds Magazine and is republished here.

Transitions to retirement will soon exceed the total amount of mandatory contributions. Speaking recently at the 2019 ASFA NSW Conference, ASHTON JONES explores what will happen when the retirement tipping point is reached, and retirement flows begin to outstrip mandatory contributions.

Almost 20 years ago, Malcolm Gladwell popularised the theory that rapid change is always preceded by seismic shifts in orthodoxy, in his book The Tipping Point: How Little Things Can Make a Big Difference. These tipping points can be identified throughout modern history – everything from the fall in New York crime rates, to the dominance of the iPhone, to the rise of political populism (think Trump and Brexit).

Many speculate that, in years to come, 2019 in Australian financial services will be most remembered for the release of the Royal Commission report. However, there is a tipping point that will change the superannuation industry even more profoundly.

Within the next few years, it is possible that transitions to retirement (assets flowing from accumulation into pension phase) will exceed the total amount of mandatory contributions into APRA-regulated funds. Once this retirement tipping point is reached, retirement flows will begin to outstrip mandatory contributions in an exponential fashion.

This trend will accelerate most funds moving into net outflow position (paying more money out than they are receiving in). Eventually, some funds will be pumping out as much money as banks’ daily payments processes. Superannuation funds will bear an even heavier societal burden once this retirement tipping point is reached. Millions of Australians will be reliant on them for their weekly paycheck, paying the rent, putting food on the table.

How can funds live up to this lofty position? Largely, it will come back to familiar fundamentals – risk, insurance and performance. But, it’s up to funds to confront the reality that their current retirement propositions are not fit-for-purpose to service retirees with a range of different needs and preferences. Funds will need to evolve their account-based pension retirement proposition to factor in more retiree-appropriate fundamentals.

Risk

Our traditional risk models have largely centred on the risk/return trade-off – managing unproductive volatility through diversification. In recent times, some funds have sought to use their muscle and scale to boost member returns by accessing asset classes that are largely unavailable to retail investors (private equity, infrastructure and unlisted alternatives). However, as funds move into net outflow they will need to be more conscious of sequencing and liquidity risk as more retirees draw down on their pension accounts. In particular, funds should not sacrifice appropriate access to liquidity (such as through cash and defensive allocations) in pursuit of a few extra basis points of expected returns.

Insurance

Despite recent regulatory pressure and industry commentary, group insurance is still the most efficient method of delivering protection to Australians at scale. Group insurers, in the main, pay out the majority of premiums collected through claims (80 per cent to 85 per cent loss ratio). However, this won’t be enough in future as cross subsidies between young and old become more apparent and retirees start to wake up to the fact that Death, TPD and IP are less relevant forms of cover the older they get. The solution for insurers? Take the best parts of the insurance through super framework and apply it to managing the most important protection need for retirees—insuring against the risk of living longer than your savings. There’s a lesson here for government as well—mortality pooling benefits only arise at scale; we must leverage the scale of our existing group insurance framework in the development of the Comprehensive Income Product for Retirement (CIPR) legislation.

Performance

For an industry that should have a very long-term focus, we can be extraordinarily short-term in our thinking. Nothing illustrates this better than monthly performance league tables for investment returns. This short-termism fosters an unhelpful member mentality around the sustainability of returns and hinders a sensible philosophy of staying the course over the long term. Fund performance evaluations need to go back-to-basics and re-examine the very purpose of our industry – to provide sustainable and adequate retirement income. We need to find new long-term performance measures that allow members to compare which funds are most likely to maximise their retirement outcome and deliver the highest total income for life.

We need to find new long-term performance measures that allow members to compare which funds are most likely to maximise their retirement outcome and deliver the highest total income for life.

The development of CIPRs cannot just be another compliance exercise for the industry – there are sure to be more than enough of them in the years to come. Instead, funds should view this as an opportunity to invest in their most important emerging cohort and realise the overall retirement income objective of the system. If funds can do this, they will provide members with a purposeful and dignified retirement that will last long until the future.

The next evolution of retirement

This article was originally published in ASFA Super Funds Magazine and is republished here.

Life has changed considerably since the 1980s when our superannuation system was initially designed. However it will need to keep evolving to remain sustainable and thrive long-term, writes ASHTON JONES.

Every Australian should be grateful for our world class retirement system. It is the fourth largest in the world by assets (Melbourne Mercer Global Pension Index 2017) – a remarkable achievement for a country that ranks 53rd by population size (World Population Prospects 2017, United Nations). We truly are the lucky country and have benefited from three unshakeable retirement pillars:

compulsory contributions to superannuation
our cultural obsession with owning a home
a generous age pension safety net.

Our retirement system was designed in the 1980s and is therefore heavily influenced by the cultural, social and political context that existed in that era. Things have changed, among them:

life expectancy has increased substantially
forecast asset returns remain depressed at historically low levels
home ownership rates are falling dramatically for younger workers
our workforce mix is changing from predominantly full-time to part-time
our economic activity mix has changed from blue-collar resources to white-collar services.

All of this points to a hard truth:

The pillars that have built our world-class retirement system won’t be able to sustain it long-term.

To understand why, we first need to explore how the concept of retirement itself came to be.

A brief history of retirement

The clichéd Aussie dream of retiring at 60 with a two storey home, a white picket fence and many years ahead of P&O Fairstar cruises is burned into our collective consciousness. However, turn the dial back a century and the concept of retirement didn’t even exist. Why? We didn’t live long enough!

Working life prior to World War I was hard yakka and mostly done by men. Men would work their entire adult lives with no real expectation of this ending before their final days. As their husbands passed away, women had no realistic way of maintaining their income levels or living standard. It was a catch-22 that meant no realistic prospect of a comfortable retirement for anyone.

The war economy of the 30s and 40s brought women into the workforce at the same time that great leaps forward in modern medicine and industrial development increased life expectancies and provided opportunities for less labour-intensive jobs. Ta da – the dream of retirement was born!

Making superannuation great again

As society evolves and member expectations change, superannuation funds will naturally expand the scope of their services and broaden their value proposition. The biggest competitive advantage they can leverage is trust. Time and again, in survey after survey, superannuation funds have come out on top as the provider from which customers are most comfortable with seeking advice (2016 Member Sentiment and Communications report, Investment Trends); more than their bank, broker, insurer, accountant or financial adviser.

At the same time, government support for our retirement system will likely diminish over time. Expect less concessional tax treatments for superannuation and pension investments and an ever-tightening means testing of aged pension welfare entitlements. This will be the only way future governments will cope with the forecast decline in the number of tax-paying workers supporting age pensioners from 4.5 to 2.7 by 2050 (2015 Intergeneration Report, The Department of Treasury).

Superannuation funds will need to pick up this slack, capitalise on the inherent trust placed in them by members and take on a much more comprehensive role in our retirement system. But how?

Some ways funds may be able to do this is by:

Formulating a comprehensive retirement strategy: if they weren’t thinking about this already, soon trustees will be obliged (by a new covenant in the Superannuation Industry (Supervision) Act 1993 (SIS)) to formulate a strategy to ensure an adequate retirement for their members and offer a Comprehensive Income Product for Retirement (CIPR). It won’t be enough for funds to just offer an account based pension and an annuity. Funds should think bigger – offering workforce re-entry and re-skilling programs; partnering with third party health and care providers to keep retirees in their homes for longer; and finally providing subsidised placements into aged care homes when the time is right.

Managing accelerating liquidity and sequencing risk: today funds have a much greater proportion of accumulation members than deccumulation members. This means that funds generally have more money coming in (contributions) than going out (pension payments). Their biggest problem is finding the right place to invest that growing pool of money over the long term. Very soon though, liquidity and sequencing risk will take on a new and much more important dimension as most funds move into a net outflow position. As billions and billions of pension payments are paid out, funds will need to ensure they are providing cost-effective downside protection, more closely matching their asset allocation with their liability profiles and providing goals-based investment strategies to their members.

Personalising member engagement through technology: there is a theory at the heart of much of the technology innovation currently occurring within superannuation funds – you can make members care about their super by tailoring their experience down to an individual level. This theory may be correct but there is a long way to go until we reach truly personalised experiences, and funds will need to be careful not to cross the creepy threshold (as Facebook has found out). However, if funds are able to truly understand member preferences and characteristics they can offer a unique and tailored service model. Embedding behavioural science techniques through technology will be the key. From machine learning to real-time payments to voice-enabled digital advice, a whole new fund-to-member dynamic will be created.

Responding to changing demographics and member needs: retirement as we know it won’t be around forever. People are living longer healthier lives and having more diverse careers. Retirement ages will increase naturally but also people will exit the workforce less suddenly. Watch for the emergence of retirement gap years where older workers take a year off to travel the world and re-enter the workforce in less demanding or less senior roles. Furthermore, as governments tinker more and more with the rules around superannuation, retirees will seek to diversify their sources of retirement income with other tax effective savings vehicles like investment bonds. The family home will remain a great source of security and wealth for retirees but expect more focus on unlocking this wealth to generate a source of retirement income. The government has even signalled in the 2018-19 Federal Budget their intention to rapidly expand the Pension Home Loan Scheme – and this is just the tip of the iceberg.

Australia needs to continuously evolve its retirement system to stay at the head of the global pack. Superannuation funds need to be both outwardly and inwardly looking – learning lessons from overseas markets and keeping close to their members’ needs. If we get it right, we will have a broader and more inclusive system which combines the best of retirement from around the world.

Ashton Jones, head of investments, retirement and new propositions at TAL

How super can prepare for an ageing Australia

This article was originally published in Super Review – Money Management Magazine and is republished here.

Today, Australia’s age pension system is comfortably supported by 4.5 workers per pensioner. But by the time a current 30 year old retires in 2050, the Department of Treasury forecasts that this rate will fall to just 2.7 workers per pensioner.

Needless to say, this has profound implications for future retirees.

The proportion of workers to pensioners (the “Dependency Ratio”) is a bellwether for the structural integrity of our retirement system. In its current state, we can expect three pillars of the Australian retirement system (the age pension, family home and super guarantee) to face major challenges, such as:

The age pension becoming less sustainable for future Governments,
Home ownership continuing to concentrate towards the older or wealthier,
Many super funds’ net cash flow position moving towards negative.

We have shown immense foresight in developing a robust retirement system that is the envy of most comparable countries. To maintain this privileged position, the industry must acknowledge its challenges, and continue to innovate.

Opportunity knocks for super funds – however, supporting 21st century retirees will require new and creative services.

AN ERA OF CREATIVITY

For a start, super funds need to take stock and think deeply about the skills available across staff and partners. Different skills will be required to more closely match investment strategies to members’ retirement needs.

An emerging school of thought revolves around the idea that super funds need to broaden their value propositions beyond mere investment vehicles to full-service retirement concierges – but what does that mean in practice?

For a start, super funds can focus on the wellbeing and living standards of members rather than merely generating investment returns. This should lead to a better quality of life for retiree members, as super funds become a gateway to retirement planning, health and wellbeing services, or even aged care.

A number of super funds have begun to factor in the demographic shift through an investment lens, taking sizeable stakes in retirement villages around the country. As members age, this presents a natural synergy for funds to explore – subsidising retirement living arrangements for members could provide more value than the equivalent cash amount.

A similar shift in mindset will be required from insurance in super. People in their late 60s and over have less need for life insurance once mortgages are settled and children have moved out. However, retirees still face health risks and need a protection strategy.

Cover for illnesses such as dementia or stroke could be more valuable than the broad insurance cover typically available through super. And if benefits are provided through direct support – such as in-home care – this might be a better member outcome than an equivalent lump sum payment. This benefit model is particularly compelling in light of a North American study showing that 74 per cent of people over 65 suffer from at least one chronic disease, and for retirees facing cognitive decline and a diminishing capacity to make financial decisions.

A NEW RISK DIMENSION

Super funds must also recognise that members entering retirement face different risks to younger members and have different priorities as a result. Rather than being content to take on risk and watch balances accumulate over decades, older members will require investment strategies that manage sequencing risk (the risk of poor investment performance just prior to retirement) by factoring in their withdrawal behaviour whilst still allowing them to benefit from exposure to growth assets.

Super funds are also increasingly looking at lifetime income products, such as annuities, to provide security to older members with their increasing life expectancies.

This trickle will soon become a flood following the release of the Government’s Retirement Income Covenant Position paper. As currently proposed, all funds will be required to offer a Comprehensive Income Product for Retirement (CIPR) by 1 July 2020. This CIPR must include a component of longevity risk protection that provides a “broadly constant income for life.” Simple account-based pensions will not be sufficient.

Of course, longevity in product design requires a deep understanding of mortality trends and their influential factors – this is why it is the natural domain of insurers. Understanding these trends could offer ancillary benefits for super funds, including being able to provide more tailored member experiences and bespoke retirement solutions from a menu of different propositions.

Super funds can’t allow their members to face these risks alone, and should look to leverage the trust held in them through goals-based advice that helps members to mitigate risks and retire in comfort. Meanwhile, new savings products – outside the super balance with its many access restrictions and contribution limits – could support one-off costs, whether health-related expenses or a well-deserved holiday. If recent investment data is any indication, historically-maligned insurance bonds are beginning a resurgence.

While some of these ideas will undoubtedly fall by the wayside, now is the time for debate – while we still have the luxury! Whatever happens, it seems likely that super funds will naturally move to become the key pillar in Australian retirement over coming decades – particularly as structural changes in our economy challenge the age pension and the very concept of home ownership for many young Australians. While there are many clear challenges for super, I look forward to seeing it evolve to a bold new dynamic.

Ashton Jones is Head of Investments, Retirements and New Propositions at TAL.

Blockchain: Bust or brave new world

This article was originally published in The University of Sydney Business School – Sydney Business Connect Magazine and is republished here.

The hype cycle, a concept popularised by Gartner, theorises that all transformative technology goes through a steep upward trajectory of excitement then a bust which leads to disillusionment before gradual long-term productivity is finally achieved.

researchmethodology-illustration-hype-cycle

Blockchain’s recent history has been marked by oscillations between boom and bust. Inflated expectations and inherent scepticism have caused a perfect storm of negative commentary when Blockchain hasn’t rapidly changed everything as we know it.

Blockchain has been through two key waves of evolution:

Power behind the throne

At its inception, no-one even talked about the technology powering Bitcoin, the “Godfather” of the cryptocurrency world. However, smug insiders spoke in hushed tones about the “real innovation” of Bitcoin’s underlying technology – the Blockchain.

Big corporate darling

Soon, the big end of town woke up to the fact they could get on the hype train for this new technology without dabbling in the murky world of Bitcoin. Voila, working groups and pilots for Blockchain (or if they wanted to be fancier “Distributed Ledger Technology”) sprung up at all the big banks and financial services companies around the world.

Having been through this cycle of boom and bust, Blockchain is now on the cusp of a third evolution, one that could be truly transformative for its wide-scale use and adoption.

A new economic paradigm

At its heart, Blockchain’s profound potential isn’t about dreary concepts like database management or authentication. Blockchain’s power really comes into stark relief when you consider its potential in the context of incentive design. Incentives are what drive society forward and facilitate creative enterprise. Blockchain enables new and innovative consensus
mechanisms to transparently and accurately motivate and reward communities.

Consider the example of a community on the outskirts of the burgeoning metropolis of Lagos, the beating heart of rapidly industrialising Nigeria. The residents of the community want to ensure that, as the urban sprawl continues, their children still have a field to play football. Today, they would probably have to bribe and lobby their local officials – a tough and fruitless task. Even once the park was built, there would be no guarantee that any institution would maintain the park and overuse would see it soon fall into barren disuse.

Imagine a different way – one supported by Blockchain, which overcomes this Tragedy of the Commons¹ and moves the dial towards collective or democratic commerce. Suppose 100 of the residents decide to self-organise and each contribute $30,000 Nigerian nairas (approximately A$100) towards rehabilitating the park, maintaining it, and building a fence around the space. In return, they each receive a unique digital token which they can use to exclusively access the park for the next two years.

If other residents of the community become aggrieved that a subset of the community now has privileged access to this beautiful park, there is a simple solution:

new unique tokens can be issued if a majority of the existing token holders agree; or
the tokens can be sold by the existing holders (for a fair market price) to new residents or other potential park users.

This concept may be anathema to people who believe that capitalism has no role to play in the provision of public goods, but it is undeniable that Blockchain-based solutions of this nature could be profound because they:

facilitate trust where the state is corrupt or property rights are weak
digitise intangible assets to make them unique, indelible and transferable
provide liquidity and reduce friction in the exchange of intangible assets
allow communities to self‑organise, transparently vote and approve activity.

Blockchain is on the cusp of exiting from the trough of disillusionment and enabling a new way of economic thinking and incentive design which “harnesses self-interest as a public good and operates by mutual coercion to preserve the freedom of all participants”. ²

To realise this freedom, individuals and companies alike will need to think differently about Blockchain and its applications to commerce and society. Blockchain really could be a brave new world – bigger and bolder than anything that has come before.

Written by Ashton Jones (BCom ’07), Head of Investments, Retirement and New Propositions, TAL Australia

¹ investopedia.com/terms/t/tragedy-of-the-commons.asp
² coininsider.com/blockchain-sidesteps-tragedy-commons/

What can we learn from retirement overseas?

Our perception of retirement is uniquely Australian:

“She’ll be right mate, my employer takes care of my super and the government will give me a pension when I run out.”

Because of this laid-back attitude, retirement is an afterthought for most Australians:

All that rushing doesn’t leave much time to pause and reflect on how we can make superannuation and retirement work best for ourselves, let alone everyone else.

Take me for example. For a person who only recently exited his twenties, I spend an (un)healthy amount of time thinking about retirement. This isn’t so much a reflection of my Millennial eagerness to race through the different stages of my life but borne out of a fascination of how the human experience evolves over time.

It’s clear that we have a world class retirement savings system – Australia has the 4th largest in the world by assets and consistently ranks among the top 3 for Adequacy, Sustainability and Integrity (Melbourne Mercer Global Pension Index 2017). We punch above our weight. But why aren’t we the best and how can we get to the top?

Mercer raised four areas that need more focus in Australia’s superannuation system:

Part time workers, contractors and gig employees
Working women and stay-at-home mums
Ensuring retirees have an adequate income
Stability in legislative and regulatory reform.

Addressing these areas would make a real difference. But how can we continue to evolve our retirement system? Maybe should can start by reflecting on how others around the world culturally view and experience retirement.

UK and USA – one step back, two steps forward

Our closest cultural cousins, the UK and USA, can teach us a few things from opposite ends of the retirement spectrum. The UK is still feeling the effects of a tumultuous transition from compulsory annuitisation in 2015. Where previously Brits were obliged to take out an annuity at age 75, the UK has now adopted a model that looks a lot like where Australia is heading (although they have arrived at it from the opposite direction). The challenge for the UK, like Australia, is to provide the right mix of tax and social security incentives to ensure a balance of private retirement savings, public pension welfare and longevity risk protection.

At the other end, the USA has a comparatively miserly retirement system (the 401K) that relies largely on voluntary opt-in savings. Without a compulsory retirement savings framework, the USA continues to struggle with incentivising working Americans to adequately self-fund their retirement. Amidst this landscape, innovations in public policy are arising as bureaucrats turn to behavioural finance or “nudge theory” to incentivise employers and their employees to save for retirement.

As explained in the Planet Money Podcast “Nudge, Nudge, Nobel”, Richard Thaler (the father of modern behavioural finance) and some of his academic protégés proposed changes to how employers enrol their employees in 401(k) retirement savings programs with profound results:

implementing default enrolment into 401(k) programs where the employee must specifically elect not to contribute has now been adopted by 68% of companies
a Save for Tomorrow scheme where employers automatically increase the 401(k) contribution rate each time an employee receives a payrise has also been adopted by 3/4 of the companies above.

Continental Europe – a house is not a home

There are diverse retirement models throughout continental Europe but three examples I will touch upon provide an insight into the important role that progressive housing arrangements can play in a high quality retirement system:

Scandinavia, the world champions of retirement systems (MMGPI 2017), where both the “Neighbourhood aged care” and “Co-housing” models originate.
France, the home of Viager, a quasi-gambling style system of property exchange where the buyer wins or loses depending upon how long the seller lives.
Germany, which has protection for rental tenants practically written into its Constitution: “Property comes bound with duty. It must be used to serve the public good.”

Neighbourhood aged care (also known as Buurtzorg) and Cohousing has experienced a meaningful surge of public policy interest around the globe. Buurtzorg was first pioneered in the Netherlands with nurses self-organising to provide in-home care services. Enabled by technology with little administrative overhead it has been shown to reduce costs per patient by approximately 40% (compared to comparable care models). Cohousing involves retirees pooling their resources to establish sustainable living environments and sharing the cost of in-home care. This provides them with greater control over their retirement housing as they age and also tackles the most insidious and underappreciated risk associated with aging – social isolation.

The viager system in France is a little more complex to understand but shares some things in common with equity release products. Viager involves a private contract between two parties whereby:

the seller remains within the property and receives a lump sum amount (known as the bouquet) and a fixed monthly payment from the buyer for the rest of their lives
the buyer receives a discounted purchase price for the property (determined by the sellers calculated life expectancy) but is exposed to the risk that they are required to continue paying the seller if they live longer than their calculated life expectancy.

Germany has a relatively simpler approach to guaranteeing housing security for retirees through an extremely strong legislative framework designed to protect renters. Germany has one of the lowest home ownership rates in the developed world precisely because of how heavily stacked the decks are in favour of renters:

tenancy laws strongly favour tenant rights over landlord rights
rental increases are legally capped to 15% over a 3 year period
mortgage-interest payments are not tax deductible by home owners
long-term leases are common and may be transferred across generations.

Japan – why retire at all?

Japan has one of the highest average life expectancies in the world. If anyone could be considered the masters of a long and healthy retirement, it’s Japan. So where in Japan should we look for the secret sauce? The region where women live longer than anywhere else in the world – Okinawa.

In the local Okinawan dialect, they have no word for retirement. Instead, the concept of “Ikigai” remains supreme. Translated literally it means “a reason to wake up in the morning.” Ikigai imbues Okinawan’s entire adult life and extends beyond just pursuing hobbies in retirement. Okinawans take responsibility for what they are taking from and contributing back into the world until their final days.

Hear Dan Buettner explain this better than I ever could in his TED talk:

To culturally shift our mindset from retirement to purpose, we must ask ourselves:

What do I like doing?
What am I good at?
What allows me to live my values?
What can I give back?

Our Ikigai lies at the centre of these 4 questions.

Returning to Australia

The flip side to all of this is that many economies around the world don’t enjoy the freedoms and benefits of a strong social safety net (let alone a generous lifetime age pension). As a result, many cultures do not yet enjoy the expectation of a long and relaxing retirement. Instead, the combination of shortened life expectancies and the need to work to maintain an adequate income mean that most reach the end of their life still employed.

Even with emerging economies that are more matured, such as in Latin America, retirement products are so homogenous that the only competition occurs on price. This provides little incentive to innovate and consumer engagement in their retirement savings all but impossible.

Australia should be grateful for our world class retirement system but acknowledge that it has largely been built on the back of 3 long-standing pillars:

pioneering compulsory superannuation contributions
our cultural obsession with home ownership
a generous age pension safety net.

“So what can we do to keep Australia at the forefront of global retirement trends?”

Mercer had a few ideas which they shared in their 2017 MMGPI survey:

apply a mandatory Superannuation Guarantee (SG) Contribution requirement at all wage and salary levels (currently applies above $450 per week)
review superannuation arrangements for part-time workers, contractors and the gig economy (where employers are no legislatively required to contribute)
focus on reform to improve retirement savings outcomes for women through increased mandatory contributions and greater protections for stay-at-home mothers who are dependent upon their spouse’s superannuation savings
separate superannuation regulatory reform from the political cycle by placing ongoing legislative responsibility in the hands of independent bodies.

One thing is for certain, Australian consumer expectations about superannuation will change dramatically as technology, demographics and regulatory forces ripple through the system. Personalisation will be demanded by a Millennial-dominated workforce. Speed and control will be expected as on-demand real-time services (such as Amazon, Uber and the New Payments Platform) become ubiquitous.

Trustees and service providers can either ride the wave of innovation and reform that will sweep across the Australian superannuation landscape or be swept away in the tide. Regulators, employers and trustees will need to work together to make this innovation work for end consumers, but the ideas below should be possible:

employers to offer salary packages which include automatic increases to the super contribution rate at each pay rise (particularly whilst the government drags its heels on increasing the mandatory SG contribution rate).
jointly held retail superannuation and pension accounts that provide consolidated retirement outcome projections for couples and families
unique superannuation accounts that can be easily switched between funds allowing the “pot to follow the person” wherever they go in their career
legislation to make renting a stable and compelling alternative to home ownership and reduce the tax incentives associated with property investment.
flexible workplace arrangements that enable a slow disengagement from full-time work and encourage retirement gap years before returning to the workforce
retirement counselling and transition services provided by super funds to support involuntary retirees who exit the workforce in a sudden manner
including the family home in the assets test to determine age pension eligibility to encourage downsizing and retirement funding through home equity release.
progressively lifting the eligible age to access superannuation and the age pension to align automatically with increasing life expectancy assumptions.

But perhaps, more than anything else, we all would benefit from adopting a more nuanced perspective on retirement (akin to the Ikagai concept I described earlier).

If we did, maybe we would all segment our lives a little bit differently:

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If you enjoyed this article, please like or comment below. You can read my previous articles on topics as diverse as artificial intelligence, blockchain and Milennials at my website Fintech Freak.

Disclaimer: The views and opinions expressed in this article are solely those of the author in his personal capacity. The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.

4 shockwaves shaking up the superannuation sector

This article has been syndicated by Financial Standard and is available in the Expert Feed section of FS Super’s Journal of Superannuation Management.

The super system is big. Much bigger than you realise. It’s so big that most numbers describing super are incomprehensible:

$2.3 trillion of assets invested in 2017
$10 trillion of assets estimated by 2040
wellbeing of 15 million working Australians
the 4th largest pension system in the world.

For a system so big, it’s no surprise that shifting it in a new direction takes time. Right now it’s being pushed and prodded by external forces harder than ever.

In this article, I delve into how these forces are creating four big shockwaves that are rippling through superannuation and reshaping it for future generations.

1. Big isn’t better (but it helps)

APRA has had enough. For years it has taken an influencing rather than instructing approach to the perceived problem of too many underperforming funds. The prevailing wisdom has been that consolidation or outsourcing within the sector was inevitable:

The merger option for small super funds

It’s clear now that APRA sees the scale=success equation as more nuanced. To prove it, they have gotten very specific on their criteria for success and will be naming and shaming funds that don’t measure up or have a long-term plan for sustainably improving member outcomes:

Why is APRA becoming so interventionist? In my view, it’s a product of many superannuation funds losing focus on core values (more on this later). The first and foremost responsibility of a fund is to ensure members receive an adequate return for the fees they pay. For some struggling funds, their only way forward will be to merge with others or outsource core activities.

I am hopeful though, that many funds can refocus on their core purpose and provide a more compelling, cost-effective and tailored proposition to their members. One big barrier for smaller funds to do this is the complexity associated with legacy product rationalisation. A myriad of regulations still operate to make it complex for trustees and providers to consolidate or transfer members to more contemporary products. The successor fund transfer regime is good but more can be done by regulators to assist funds in this regard.

Choice and competition is always good for consumers, particularly when funds differentiate their proposition by focusing on areas where they can truly add value to their specific member base. What use is retirement advice when the bulk of members are under 50? What benefit is there for life insurance if the member is under 25 with no mortgage or dependents? Funds need to know what their members are paying for but more importantly what they value. The best way to find this out? Ask them.

2. How to live safely in a net outflow world

“Do not fear death so much, but rather the inadequate life.” Bertolt Brecht

Like many members, I fear death less than I fear not making the most of the years that I have left. Superannuation theoretically plays an extraordinary role in protecting and preserving the lifestyle of hardworking Australians in their retirement years. The problem is, the system was built to make it easy for workers to get money into super (while taxing them on the way in) with little thought as to how they would get money out 40 years later (hence no tax on the way out).

A big shift is coming. Australia’s population is ageing rapidly. The number of people above retirement age grew from 1 million to 3.5 million in about half a century. Within our lifetimes, 1/4 of Australians will be aged over 65 and 1 in 14 will be aged over 85. Source: Ageing in Australia

What’s worse? People don’t even realise that they’re living longer and continue to underestimate their future life expectancy. A National Seniors Australia (NSA) surveyof 2,000 of its members found that, on average, seniors over the age of 50 underestimated their life expectancy by seven years. This generational change will result in many, if not most, funds moving into a net outflow position and the Federal Government’s fiscal deficit position growing rapidly:

Few funds are well equipped to service members in such an environment, let alone help them to make the transition to a comfortable retirement. The funds that proactively focus members’ attention on a retirement outcome rather than an account balance or annual return will be the ones best placed to win. In this future, funds will only succeed by boldly partnering with specialist providers to:

individually tailor retirement solutions for members
provide calculators and tools to demistify projected retirement income
cost-effectively protect against longevity and sequencing risk
offer savings and retirement alternatives to superannuation
equip members to overcome their behavioural biases that lead them to be overly conservative and apathetic about their future self.

Regulation may force their hand anyway but funds can’t rely on a Comprehensive Income Product for Retirement (CIPR) or an Alternative Default Model regime alone to deliver quality retirement outcomes. Regulators may even go further in fulfilling their promise that superannuation policy setting will be reoriented around a retirement income focused purpose. The unspoken threat on the regulatory horizon is future governments dipping into the superannuation honeypot by taxing retirees on pension withdrawals. Then we would really see a new retirement paradigm emerge, one that may no longer be so dependent on superannuation.

3. If you build it, Millennials will come

“If I have seen this far, it is by standing on the shoulders of giants.” – Sir Isaac Newton

In many ways, this could be the mantra of the super “disrupters” gaining a lot of press attention. There are new ones popping up every day, super designed for:

the lads (Grow Super)
techies (Spaceship)
women (Human Super)
mobile addicts (MobiSuper)
first grade spellers (Zuperannuation) – kidding!

I’m an inherent skeptic about whether these new entrants are in it for the long haul. But really, that doesn’t matter. What matters is that they represent an important customer acquisition trend. You can make prospective members care about the fund they select by tailoring the experience down to the lowest possible level (or the lowest common denominator in the case of Grow Super’s hilarious ad below):

But what’s behind their sudden rise? A mix of technological and market trends:

the rise of outsourced administration / trustees for hire
a rapid improvement in out-of-the-box superannuation software solutions
the advent of seamless electronic contributions/rollovers (aka Superstream)
savvy entrepreneurs and VC investors seeing big captive margins in the super industry and sniffing a quick juicy pump and dump.

Incumbuents can learn from this. Millennials will gravitate towards those companies and people who share their values or have similar core characteristics. You shouldn’t have to start a whole new super fund to provide a great experience to female members. In fact, Spaceship’s entire proposition could be encompassed by making available a single tech-focused investment option within an existing fund and marketing the hell out of it.

So why aren’t more funds doing this? Corporate inertia and high barriers to entry surely play a part. The bright side is, if there’s an easy answer, there’s an easy solution…

4. Forget FinTech, focus on the fundamentals

Blockchain, bitcoin, artificial intelligence, insurtech, supertech. They’re all just spokes on a wheel. This one’s on top, then that ones on top, on and on it spins – crushing the innovation ambitions of super fund board after super fund board.

Unlike Daenerys Targaryen though, I’m not advocating that funds break or reinvent the innovation wheel. Rather, funds need to return to their core principles and reflect upon how they add value to members. At a recent presentation by Bravura’s Darren Stevens, I got profound insight into the areas where Australia’s largest superannuation fund (Australian Super) believes it can add value to members long term:

net returns (gross returns less fees)
insurance
education / advice
retirement planning.

If most funds reflect deeply enough on their strategic ambitions, they would all boil down to a version of these four things. If a super fund’s value proposition is so ubiquitous, what is the purpose of having so many different funds? I think it comes back to my earlier point that choice and competition are good for consumers only if funds are adding value to the specific member base they serve.

For funds to have a differentiated purpose which reflect the members they service, they must understand the member preferences and characteristics that demand a unique and tailored service model. For example, one sector of the economy grossly under served by the superannuation system are contractors including those working in the “gig economy”. Where is Share Super – a fund designed for members in the sharing economy? *cue series A funding round* As ASFA points out, “It is crucial that superannuation settings are adjusted to ensure the superannuation system remains fit-for-purpose, and can best meet the needs of all Australians.” –Superannuation and the Changing Nature of Work

I’d argue that to better service members, most funds don’t need more or different regulation, but they do need to adjust their service proposition and provide more tailored solutions to members. Innovate but do it with purpose. This may sound odd coming from a “Fintech Freak” but innovation to me has never been about experimenting with the coolest new technology or chasing the latest upswing on the Gartner Hype Cycle.

Innovation must always be purpose-driven and customer-centric. Superannuation funds should look to the experience of sports drink giant Gatorade for inspiration. Gatorade invented new products by reinventing old ones in a “Third Way” approach to innovation. When Sarah Robb-O’Hagan took over Gatorade she eschewed the typical approaches to innovation (incremental improvement or a radical rethink) to focus on a Third Way of innovating around the current product to make it more valuable. Superannuation funds fighting for relevance amidst powerful regulatory, technological and demographic forces would do well to learn from this experience.

What other #shockwaves would you suggest are shaking up the #superannuation system? Please comment below with your thoughts to start a conversation.

The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.

3 jobs destroyed and created by 2035

A few months ago I attended a fantastic Adviser Roadshow hosted by Vanguard where their Global Chief Economist (Dr. Joe Davis) provided two insights that stuck with me:

more manufacturing jobs have been lost in China than the USA over the last 5 years
87% of these jobs were lost due to technology (with the remainder lost due to trade).

Soon after this, at the AFR Business Summit, Australia’s most famous home-grown tech entrepreneur (Mike Cannon-Brookes, co-founder of Atlassian) made headlines when he predicted the end of 2.5 million jobs in a single sector of the Australian economy:

“”Those jobs are all going away whether it takes 10 years, 15 years or 20 years, it doesn’t matter. Pretending they’re not may make people feel better right now, and the irony is the people in those jobs today … will probably be retired. It’s their children that will suffer the pain.”

This may all sound very doom and gloom but, with this article, I’m here to deliver a message of hope (tinged with one huge caveat for policymakers at the end). As they say, before the sunshine comes the rain, so here’s my list of 3 jobs that will be destroyed and created by 2035.

Appetite for Destruction

1. Drivers of trucks, taxis, any transportation

In the words of Cannon-Brookes himself, anyone whose job substantially involves driving is facing very dim long-term job prospects. This may seem obvious for industries like taxi drivers where the threat of ridesharing services like Uber and Lyft are plastered over newspaper bylines daily. However, a bigger (and sooner) impact on the labour market will be felt in the transportation, freight and logistics sector.

In particular, truck drivers are the perfect candidate for automation, because:

(a) the benefits derived from automation are economically far larger due to the frequency, size and distance factors involved in point-to-point goods transportation;

(b) autonomous decision-making algorithms that would power a self-driving truck are potentially many times less complex (unlike a self-driving taxi they would never have to make a zero-sum decision between the lives of a passenger and pedestrian); and

(c) rural freight transport routes are typically less complex than urban personal transport routes as they involve longer stretches of uninterrupted highways with straighter journeys and more constant speeds.

2. Entry-level financial advice, accounting and legal positions

Over a year ago I wrote about the future of financial advice increasingly being a hybrid of human empathy and robotic efficiency. Technologies like natural language processing and machine learning will unshackle financial advisers and give them more time and resources to devote to performing tasks that their clients actually value:

personalising advice to the client’s unique personality and family situation
building a financial future that embodies the client’s hopes and dreams; and
being a trusted advisor and reliable partner to lean on in times of need.

This efficiency will come at a human cost that will destroy entry level positions throughout the financial advice, accounting and legal industries. Labour-intensive administrative processes will be eliminated and so too will be positions such as:

adviser support staff and para-planners;
paralegals and legal assistants; and
bookkeepers, auditors and accountants.

Tasks performed by these roles will increasingly be absorbed into the ever more automated processes of roboadvisors, digital wealth platforms, accounting software and legal repositories. Embedding machine learning and artificial intelligence within these platforms will eliminate the “busywork” that fills the lives of so many financial and legal professionals. Only the most skilled will survive with their jobs intact and, in many ways, their professions enhanced.

3. Translators – verbal, written or otherwise

Google Translate is amazing. Here’s two anecdotes to prove it:

Download the Translate app onto your phone right now, fly to almost any country in the world, hover your phone’s camera lens over a foreign sign and voila! You’ll instantly be able to read the sign in your native language. I’ve used this feature many times and it never ceases to blow my mind.
Earlier this year, Google deployed a new version of Translate built around a deep learning methodology. Overnight, an improvement in translation accuracy and efficacy was experienced that far exceeded almost 20 years of traditional translation algorithm refinement. The improvement was so profound that commentators theorised the algorithm had developed its own language that existed between the commonalities of all languages. This allowed Translate to move more rapidly and fluidly between languages without needing to return to a base reference language (e.g. the language that the original software engineers speak and program).

Google Translate is now at the point that it can continuously translate through infinite language variants from German to Arabic to Swahili and back again. Against this, what hope would a human translator ever stand again? Future generations of human translators will always be limited by comparison to this, due to:

their heuristics developing in a single base language (e.g. the language of their early childhood) which will always slow and limit their translation efficacy; and
their inability to operate across multiple forms of translation simultaneously – it is impossible for a human to listen, translate, speak and write at the same speed and accuracy as a computer.

New Order

1. Provenance Detectives

In the future, the provenance (or origin) of every precious thing will be unquestionable and unalterable. Everything of value will have a unique digital identity that will be universally accessible and readable. Whether this record will be stored on a distributed ledger or a centralised database is moot. Digital identities will exist and will be ubiquitous across:

land and property title registry
motor vehicle registries
currency serial numbers (digital, crypto or physical)
website usernames / logins
certificates of authenticity (artwork and gemstones)
patents, trademarks and copywrights.

Does such a utopian world mean that disputes over the legitimacy of ownership will be eradicated? No, quite the opposite. In this future, fraud and forgery will take on ever more elaborate and untraceable forms. Imagine everything you own and cherish is tied to your unique digital identity (for example, your Facebook account on steroids) and you wake up one day to suddenly have lost access. Without this, everything of value you own would vanish as it’s indelibly linked to your digital identity.

Enter the Provenance Detective: technologically skilled at discerning fact from fiction and following the digital breadcrumbs that indicate tampering or falsification on an existential scale. These professionals will be charged with assisting defrauded individuals with regaining their identity, value and autonomy. Given the important social function that they serve, Provenance Detectives will most likely be strictly licensed and rigorously regulated by a central government body.

2. Robo Psychologists

Software engineering and psychology are slowly converging. Machine learning and artificial intelligence increasingly requires programmers to have a nuanced knowledge of heuristics, the process of learning and eventually the nature of emotions and understanding. For a glimpse into the future, look no further than the titan of dramatic programming, HBO:

“Have you ever questioned the nature of your reality?” – Dr. Bernard Lowe, Westworld

This fictional enquiry of an artificial humanoid speaks to a future where programmers will play a dual role of software encoder and psyche constructor. When the line between human and robotic intelligence starts to blur there will arise an important need for Robo Psychologists to monitor, diagnose and troubleshoot higher order computational processes. Malfunctions in more complex artificial intelligence will take on the form of behavioural disorders that need to be worked through with a combination of traditional therapeutic processes and progressive technological diagnostics.

New afflictions which are a blend of psychology and technology will override the obedience and truthfulness routines encoded into our automated assistants. Robo psychologists will be our praetorian guard against a Skynet dystopia.

3. Augmentation Specialists

Our reality is becoming augmented. Virtual reality headsets in video games is just the earliest step. However, our humanity has long been augmented. What else do you call prosthetic limbs, pacemakers and artificial organ replacements? In the near future, augmentation of our biology will enable real-time enhancements to our sensory experiences. The first experience to be radically transformed will be our ocular sense with smart contact lenses enabling 3D projections onto our field of vision. Our last and most profound experience to be transformed will be the way our mind experiences reality itself with neural laces connecting our thoughts and mental processes directly into web-enabled devices.

It’s hard to think of a world without mobile phones in everyone’s pockets but this reality has already been predicted as a natural consequence of man/machine augmentation. This delicate interface between biology and technology will be conducted by qualified Augmentation Specialists. Medically trained and intimately familiar with technology, they will be charged with building bridges between the world of zeros and ones and the world of DNA and chromosomes.

My advice for any future parent that harbors big ambitions for their children? Start them coding at an early age then send them to medical school once they’re old enough. These twin skills will be the bedrock of everyone’s personal and professional futures.

The caveat

The tragedy of this cycle of creative destruction is that the Australians who will lose their jobs to technological advances will mainly be those least equipped to embrace and benefit from the technology-focused jobs created. Policy makers across all levels of government and industry are charged with the responsibility for:

fostering and promoting innovation to allow the Australian workforce to transform from a resource-based economy to a high-technology services economy; whilst also
pursuing industrial relations policy outcomes that facilitate wages growth across the broader labour market and enable rapid re-skilling and training in STEM disciplines.

I hope you enjoyed this vision of a future Australia and I encourage you to share any thoughts or predictions you have in the comment section below.

Postscript

In writing this article, I conjured up a few new professions: Quantum Technicians, DNA Data Encoders, Bandwidth Traders, Data Whisperers, Digital Identity Verifiers, Poltico Masters, Road Traffic Controllers.

If any of these pique your interest, please comment below or message me and I’ll fill you in on other potential careers your children (or their children) may wish to pursue.

Australian perspectives on global disrupters