The fallacy of the inactive fund member

In contract law, it is regular practice to define the meaning of words up front to minimise the opportunity for deliberate or involuntary misinterpretation of the agreement.

The scant attention paid to this in the general course of business means that a universal data set can provide multiple takes on the state of play of the sector, the organisations and people within it, their customers and even the impact of government policies and regulations governing it.

As an example, I draw on a simple word used widely in the superannuation (pension fund) section. That word is ‘active’ as it applies to fund members.

The recent Australian Government Protect Your Super (PYS) legislation, designed to protect low balance accounts from fee and insurance premium erosion*, has provided with a functional definition, which include the criterion that no contribution or rollover has been received in the past 16 months. If that is the case, the account is exempted for the purposes of this legislation if the account meets other criteria, including that the member changed their investment options and/or their insurance coverage within the period.

However, from the perspective of understanding where superannuation sits in the mindset and financial priorities for members, this definition of ‘inactive’ is of little value.

To make this argument, let me rewind the clock a little. As far as I can tell, there have been three interpretations of this in the quarter century or so of Australian superannuation as we know it today:

  1. The administrator view - for whom ‘active’ classifies an account (not a member) with a pulse. If the account is open, even if there has been zero activity on it, the member who owns it is ‘active’. This is useless, but unfortunately is still distorting industry data, insights and policy;

  2. The transactional view - defined essentially by whether the account owner has conducted any transactions, including passively receiving employer contributions mandated by Australia workplace law. This is captured in the PYS legislation ; and

  3. The behavioural view - the most generous perspective, which considers any interaction by a person with their fund, including web visits, phone calls and so on.

The problem with these markedly different definitions is that they influence the way in which boards and management shape fund strategy, distort the way regulators report on and oversee industry dynamics and misinform policymakers on causes and effects of legislation and regulation, notwithstanding the PYS definition. This makes evidence-based strategy and policy making almost impossible and certainly inconsistent.

Even regular conversations about community engagement with the sector are made more difficult (engagement is another word I have a real issue with, but that’s for another day). The question is how does this manifest?

Superannuation funds regularly report to the industry regulator, APRA, on the proportion of active members in their fund. According to APRA’s annual industry snapshot published as at 30 June 2018, there were nearly 26 million superannuation accounts, of which 68% were classified ‘active’ in data provided by funds. Given the number of accounts is almost double the 13 million working Australians^, including those collecting superannuation pensions, the proportion of active accounts is seriously inflated.

This is an outcome from many funds doing a cut and paste of administration data or, worse, relying on an external administrator to report on their behalf. Consequently, many are still reporting more than 90% of their membership as active.

With a ratio of more than two accounts per working Australian, everyone knows a significant proportion of these accounts are never touched, never looked at and, most likely, are held by people unaware they have them.

So to the transactional view, which has been given some definition by the PYS legislation. It is a refinement of the administrative view, but is fundamentally flawed, as it still defined by account activity rather than human interactions with funds. Legislators and regulators are constrained by the account-based configuration of the management of fund members.

This leads to a substantial number of funds still struggle to create a consolidated single member view. They are finding it even more difficult to accurately track and report true retention performance, especially as members retire and transition to a new product, new member number and, in some instances, to a new administration platform. It’s possible to do it, but requires investment in more data analytics fire power than it should and many institutions have insufficient scale to make the investment, or are simply blind to the need to do it. A single member number or identifier for life is still unrealised across the industry.

From a member experience perspective, both the administration and transactional views are merely factors within more human-centred and useful behavioural insights, which embrace the idea that non-transactional interactions with the fund are at least as important as defining people’s prioritisation of their super and their connection with it. This is particularly true for younger members who have much more pressing financial priorities than funding retirement.

While I welcome the recognition in the PYS legislation that changing investment options or insurance signals that a member considers their account active, this still reflects tunnel vision in defining an active member.

Results that I am familiar with, stemming from the implementation of behavioural segmentation, confirm that interactions often considered as intangibles, such as web visits, member-initiated phone calls and responses to campaigns, provide a much richer array of insights into members. Consequently, it enables predictive modelling and tailoring of messages and enriches insights into propensities such as the likelihood of member defection to other funds and their appetite for value-add services such as financial advice.

More fluid work and career dynamics, as well as the changing social and demographic landscape, mean that defection triggers and risks and opportunities to adjust investment and contributions strategies manifest far more frequently for almost every fund member. Smart fund analysts and strategists must identify multiple indicators of these events across a broad set of data points and set up appropriate interventions. Many of these data points are non-transactional and may even reside outside the organisation.

While it’s great that we have legislation which nudges thinking about what defines an active member, it’s a far from reliable view of whether fund members consider themselves as actively engaged with their fund or, for more importantly, whether their fund is actively engaged with them.

The question is: how should smart fund strategists define ‘active member’ in order to improve outcomes for both funds and their members?

* For more information on this, click here see this fact sheet from super fund, Equip.

^ Australian Bureau of Statistics, 6202.0 - Labour Force, Australia, Jun 2019.