Month: May 2020

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

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.

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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

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

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:

  1. compulsory contributions to superannuation
  2. our cultural obsession with owning a home
  3. 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

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:

  1. The age pension becoming less sustainable for future Governments,
  2. Home ownership continuing to concentrate towards the older or wealthier,
  3. 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

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/