To gain a greater understanding of the attitudes towards the current and future market for providers of employer-funded superannuation and risk products in the New Zealand industry.
Establish current market understanding and influences.
Identify future market growth opportunities and threats.
Provide insight on the potential impact of competitive, legislative and economic factors on the short and long term viability of group super/risk products.
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METHODOLOGY
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Selected industry players and influencers were contacted by letter introducing the study and followed up by telephone or face to face for a 1-1.5 hour duration interview.
In-depth interviews were conducted with a total of N=14 key players and influencers in the industry, comprising:
Opinions of the three to five year economic outlook for New Zealand are varied, although the majority are neutral ("wait and see") or negative.
Those who are more positive cite:
Generally strong business confidence
A growing economy
An improving savings market
Increasing consumer wealth
Fundamentally strong economic indicators
Inflation under control
"The economy is in good shape and all of the commentators would suggest that it’s on a growth path at the moment"
Those who are more negative point to:
The past and future impact of Asian economic downturns on the New Zealand economy
Ongoing and consistent change in legislation and government policies affecting the business community, resulting in uncertainty and an inability to plan long term
Idealistic government policies undermining business sector confidence for the short to medium term
"I think a bit longer term there is the prospect of a recession, outside the 3-5 years, in ten years. Economists say that the Asian economy has hit another wall because they failed to solve fundamental issues in their society, and at the moment we are on the roller coaster"
"I have some grave concerns… we need to do some things to get business moving"
"The next one to two years I see as being reasonably robust. But one or two years after that a bit of a question mark over the global growth situation"
Overall, respondents feel that government policy has the potential to swing the balance of the economic outlook either positively or negatively. Continuous change in the governing party, and consequently their policy direction, is very destabilising for business sector confidence and economic growth. There is also some uncertainty over upcoming legislative changes in areas such as the Employment Contracts Act.
"Trends are negative (Labour Govt) policy direction since the election and prior has been taking us backwards"
THE IMPACT ON THE GROUP SUPERANNUATION/RISK MARKET
As the diagram below indicates, a key driver of the market performance of group super and risk products is interest from the employer/business community in providing benefit based packages to employees.
Whether or not a business is interested in providing group benefits is a factor of four key areas:
Economic growth – A positive business community, competing for skilled labour in a global sense, is more willing to invest and spend on their people/staff.
Corporate culture – Some businesses have a legacy or psyche that is fundamentally more ‘philanthropic’; they support employer-funded superannuation/risk as a matter of principal; this attitude can also be due to international standards.
Legislation – There are many aspects of legislation which can affect the market, most importantly taxation. In addition, labour market legislation, compliance issues and New Zealand Superannuation have a significant impact.
Employee demand – An increasingly wealthy consumer will be looking to save and invest their money for the future; there is however a strong need for more education on the need for savings for retirement.
In summary, economic factors have an indirect influence on the future potential of the group superannuation and risk product market. Positive growing businesses that are making profits will have the money available to invest in their employees and retention of key staff. Increasing competition in the labour market will drive a move towards packaged remuneration or benefit based versus salary only remuneration. This gives both employers and employees more control.
The key driver of the market however is legislation which has a direct influence on employer interest in supporting group superannuation and risk products. Legislation such as the Securities Act, Employment Relations Bill, taxation and New Zealand Superannuation all contribute to the cost/benefit and perceived ‘hassle’ of providing group benefits. Changes to legislation have a significant impact on making these products attractive or unattractive to the business community.
Overall most respondents describe the group superannuation market as static – the money that is in the market already is simply moving around from one product to another, and growth in funds is moving more into private superannuation and other investment options such as Unit Trusts. However, industry commentators do believe the market should grow, and that there is significant potential to increase the provision of group superannuation for the benefit of both businesses and their staff.
"95% of Australian employees have company driven super, about 50% in the UK and the US, about 17% in New Zealand… it’s working everywhere else so why isn’t it working here?"
Overall, individually sponsored schemes are seen to be declining in number, but not in terms of asset value or membership.
"The market for individually sponsored schemes has been progressively declining in terms of the number of schemes, but the number of members under administration continues to grow"
On the downside, these schemes have heavy compliance and administrative costs, with staff time and cost tied up in trustee responsibilities. There is also a lack of choice and flexibility for different risk profiles and individuals.
"They’re dead in the water"
"The Securities Act compliance regime has turned a lot of employers off superannuation and in a lot of cases actually accelerated the demise of a lot of the stand alone ones"
In the long term, it is felt that individually sponsored schemes will continue to rationalise. However, there is still room for these schemes among larger corporates who are looking for:
The benefit of their own tailored, "branded" scheme
Compliance with global mandates/schemes
A good training ground for staff in asset management – the development of ‘Board’ level skills
A constant, equitable return across all members
Master Trusts
There has been a steady migration of existing individually sponsored schemes to Master Trusts, as well as ‘new’ business. This growth is primarily due to:
More flexible products and managers
Cost efficiency
Accessibility for small to medium businesses and individuals
Portability of the investment
Transparency of fees
"Basically at the moment employees get a balanced fund or a balanced fund, or a balanced fund. Master Trusts offer a far greater range catering to a wider group of employees"
The Master Trust market is expected to continue to grow through:
More providers (although some of these will be buying into existing Trusts and branding their own products within those Trusts)
More sophisticated products
More contributions from existing members
More schemes
"Competition will actually grow the market"
THREATS AND OPPORTUNITIES
Threats
Key threats to growth of the group superannuation market are identified as follows:
Group superannuation products and legislation make it a complex, time consuming and an expensive benefit to provide to employees.
There is a poor understanding of the different products and their benefits.
A lack of an up-front or immediate benefit in terms of tax incentives or return make it a poor choice for some (wealthier) consumers relative to other investment options.
A decline in economic growth, business success and confidence will hurt the market – when money is scarce, salary-only is favoured over benefit-based packages
"Apart from the very large employers, it is prohibitively expensive for small to medium sized employers to provide a fund and so they’ve just thrown their hands up and said ‘that’s it, we’re not doing it"
There is a general feeling that the market is currently over supplied with savings options such as Unit Trusts, group investment funds, insurance bonds, offshore investments etc.
Most believe that savings products, particularly the longer term products, are not well understood by the consumer or businesses. The industry has a role to play in better marketing these products to communicate their features, benefits and suitability for different kinds of individuals and businesses.
"You can’t just say it’s all there so why don’t you come and buy it, it might not be what they want"
Opportunities
Some feel there is a major opportunity for a savings solution in the market – a one stop shop approach which provides a simple and easy to understand savings product, that is flexible enough to cater for short and long term savings goals. This product bundle, or solution, may also include risk as well as a savings and/or superannuation component.
"Service delivery needs to be more finely tuned to meet the needs of the business community. They’re looking for one person to deal with all their super, legal and actuarial issues, insurance, risk, administration, investments - one port of call for everything"
Master Trusts are a step in the right direction. They cater for businesses looking for group products which are more flexible and accessible. However there is an opportunity for more sophistication in packaging and bundling tailored products to the business market.
"… we all lead busy lives so why would I want to buy life insurance from Company A and Super from Company B, have a mortgage with Company C, income protection from Company D, etc., rather than having the whole thing put together"
"I don’t think anyone has got anywhere near the right answer in terms of the ultimate Master Trust, which should hopefully provide a complete and total financial services solution to an individual through one provider, which is not just their retirement and investment matters, but their day to day transactional business. That’s what people want and that’s where it will head eventually - I’m not sure how long it will take
to get there"
PRODUCT PROVISION AND DISTRIBUTION
Most respondents feel that new providers in the group superannuation market will be largely distributors, and not product providers or administrators. Technically, anyone with a distribution force to the business community has the opportunity to leverage existing relationships in selling group superannuation and other financial products to that market. This could include advisers such as accountants, financial planners, banks, payroll companies and even retailers e.g. Noel Leeming and stationery suppliers.
An increase in providers or distribution channels is seen to be a positive for the group superannuation market, as the increased sales/marketing should stimulate interest and influence demand. Consumer/business awareness of the products and benefits is likely to rise.
Some also see that there is still room for growth from within the industry, with some financial service providers having only "dabbled" in this area to date.
Independent Financial Advisers
Most believe there will be growth in independent financial advisers as a distribution channel in the group superannuation market. However, these advisers tend to be focused on individual and not group sales i.e. retail not wholesale products. They provide a cost effective and easy option for employers to deliver group benefits without significant time or cost investment, however their credibility and experience is essential. An employer will not be willing to promote/support access to their employees without the reassurance of credentials.
"I do see that market growing, employers don’t want to educate their members themselves so they will welcome someone doing that job for them as long as they see them as credible."
"Employers need to be careful and have tight controls."
Most believe that independent financial advisers will be targeting the high net worth individuals. Brokerage and trail commissions are an issue and mean that there is little room for commission from the average consumer. As such, these advisers are targeting a different kind of market and meeting a different need to traditional, broad based group superannuation products.
"The average employee who is going to earn $35,000 to $45,000 a year, he puts away 5% of his salary, that’s $2,000, so how are you going to charge him without cutting into his investment?"
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EDUCATION
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Education is critical in sustaining the viability of the superannuation market, and its future growth. The New Zealand consumer still tends to assume that the government will look after them in their retirement.
Respondents believe that education of the public on the importance of saving for their retirement is the responsibility of the government and the industry working together. At a government level, tax incentives and legislative compulsion could be used to motivate greater public savings.
From an industry perspective, better marketing of the products available and the relative benefits would help the public to better assess the value and suitability of options available for saving for retirement.
Some suggested that education is important from school level onwards, in order to change the underlying New Zealand psyche about superannuation and preparing for retirement.
Employers also play a role in educating their staff, but will need to see that there is a commercial benefit in supporting and encouraging their staff to save.
Generally, respondents feel that the Retirement Commissioner is doing a good job.
"...he has been very successful because out of something that is really boring he’s created a brand, an interest, independence..."
Most would agree that more funding from government and the industry is required for the Retirement Commissioner to make a bigger impact. To date the Commissioner’s activities have been successful in changing public awareness, but there is little indication that behaviour has actually changed. Based on his current funding, behavioural change may well take a long time to come into effect.
Voluntary industry funding of the Retirement Commissioner can be somewhat of a "double edged sword." Those who are funding can feel frustrated, as they would like to see the whole industry getting behind the Commissioner to drive the programme forward. On the other hand, those who are not contributing raise the issue of independence, with non-sponsors seeing the Commission as inequitable.
"Where is the big money, where are the other big players tipping their money in it as well and really making something of it?"
"The sponsoring organisations are competing with us on an unequal footing."
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THE GROUP RISK MARKET
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While the group risk market has been static for some years, like group superannuation, it is expected to grow. The new Employment Relations Bill could result in greater pressure from unions in wage negotiations. In this environment, it may be better for employers to provide benefit-based packages versus straight remuneration.
Risk products are also easier to understand and offer an immediate tangible benefit – they are seen to "have a better story to tell". Therefore, they could be an easier alternative to superannuation from the employer’s point of view.
"Employers under wage pressure from unions have said they don’t want to do it all in straight salary, they want some control and providing insurance to employees gives them that."
Because group risk products are cost effective to implement and manage, they provide a bigger benefit for the investment i.e. employers can deliver a real benefit to their staff to assist in employee relations and retention without high costs or involvement.
Most respondents feel that Master Trusts are not having a major impact on the risk market, as often the risk component in a group benefits package is separated out. In fact, those superannuation schemes which have been dissolved, or migrated to Master Trusts, often retain group risk as a separate component.
"It’s surprising the number of organisations who’ve cancelled their super schemes but maintained group life and disablement cover. Obviously you’re worth more dead or disabled than you are retired."
Group Risk products which are seen to have particularly strong potential in the future include:
Income protection
‘Key person’ insurance
Packages e.g. group life bundled up with income protection/disability/vehicle
"Employers who package life and salary continuance are to be commended... you’ve literally covered yourself for just about every eventuality... you could get a mortgage and use it to mitigate some of the risks your bank might otherwise sell you an additional policy on."
Threats to the Risk Market
Two key threats to the future potential of the risk market emerged in the research:
Globalisation – a move towards more central offshore sourcing of employee risk cover, particularly from larger multinational employers.
"It’s a small market and there’s not much room for others, especially as the multinationals start taking a global approach."
Competition – the group risk market is extremely competitive, and margins are low. Rationalisation will continue as it becomes harder and harder to make a profit.
"There’ll be a big reduction in the number of providers."
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CONCLUSIONS
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The diagram below details the underlying dynamics which have kept the group superannuation market on a static (at best) growth path.
First, superannuation is not core business for a commercial enterprise. These products are often time consuming, complex and expensive to set up and manage on an ongoing basis. Additionally, the government provides the public (or is seen to provide) a pension or superannuation when they retire. Because it is pinned at 65%, there is little motivation for the consumer to seriously consider the need to save for their retirement. At the end of the day, employers probably ask themselves why it is their responsibility to encourage superannuation savings, and more importantly, what exactly is the advantage to them in doing so.
The key issue for the future of the group superannuation market is to change employers’ attitudes to one of proactive and positive support of these products as a key part of retaining and valuing their employees. This will require a shift back from remuneration only to benefits based staff packages. Businesses however will need to have a commercial reason for doing so. As the diagram below indicates, changes are required in six areas to encourage this to happen.
Tax Changes
Key suggested changes on the taxation front include:
Lowering income tax rates or providing long term savings tax incentives to the consumer
Providing tax breaks on employer contributions to group schemes
Removing the inconsistency in tax treatment of different savings vehicles – setting a level playing field, and an equitable tax regime for super
Providing taxation incentives for locked in savings i.e. TET or EET not TTE
Economic Factors
Respondents would like to see sound and consistent economies policies in place. Most believe that in the long run, market forces will deliver increased savings and wealth if the economy is fundamentally strong. Ongoing economic growth underpins employers’ need to invest in their staff and compete for skilled labour.
"Employers need help and encouragement for their businesses to grow."
Legislation Changes
Most often mentioned changes required to legislation are as follows:
More relevant disclosure requirements
Reducing the level and eligibility of government superannuation
Getting rid of prospectus requirements
Lowering compliance costs for the provision of group superannuation
"The legislative environment has made superannuation extremely time consuming and very costly for employers... considerable damage has been done in the last five years since the introduction of more red tape, introducing prospectuses and investment statements for very, very simple superannuation schemes."
Industry Changes
Industry needs to better understand business needs, and deliver the products that meet those needs packaged as a solution.
The products are there, and some feel there are already too many of them – effective marketing is the issue.
Needs to be a focus on developing a strong annuity market.
Employee Demand
Demand from employees will come from informing and educating the public on the importance of saving for their retirement. They will probably also need ‘encouragement’ to change their behaviour through tax incentivising long term savings.
At the end of the day, most believe that there needs to be a fundamental change in the mindset of the New Zealand consumer about financial planning.
"It’s possible that employees could drive demand. If the Retirement Commissioner’s campaign continues we may see a groundswell of requests to employers from their staff."
"When investment markets perform well, people get excited."
Government Investment
Industry would like to see the government providing funding for the Retirement Commissioner to ensure that an unbiased, broad based and wide spread message continues to be delivered to the public.
Government investment is also required in terms of educating consumers and employers on the need for the business sector and individuals to save for, and protect, their future.
