Sitting in the gleaming Deloitte offices with its spectacular views of Sydney harbour and the opera house, Trevor Matthews looks happy to be back in his home city. His globetrotting has seen him spend time in Melbourne, three years in Canada, a further three years in Japan, and equivalent time in Edinburgh at Standard Life, and then stints with Friends Provident and then Aviva, returning to Sydney when it was time for his sons to go to senior school.
It is a career that has seen him shape markets around the world, exporting Australian solutions to new markets.
He traded a role at Manulife in Japan for Standard Life in the summer of 2004 and recalls a UK market based on products designed with upfront commission payments that required 25 years before they became profitable.
“The platform idea had been in Australia for a long time, around 10 years, and so it felt like a natural progression. There were a couple already in the UK but we were one of the first at Standard Life,” he says.
Impressed by FNZ CEO Adrian Durham, he introduced the firm’s platform software at several companies, including Friends Provident and Aviva as well as Standard Life.
Now the wheel has turned full circle, with Matthews back in Sydney joining the APAC board of FNZ and becoming non-executive chairman of the APAC region of the company in 2019, following the departure of Nick Sherry, former senator of Tasmania, from the role.
His passion for the platform approach of FNZ is apparent as he describes the reduction in cost the organisation has achieved as it has grown in scale, which has come down from 32 basis points in the first deals he did to between five and seven basis points now.
Pot debate
With his experience in both Australia and UK, how does Matthews think a pot-follows-member or pot-for-life model will impact incumbent providers in the UK market? “We haven’t had a drama about it over here. Companies run their offering. The employers are attached to the super fund and the members come into the fund and bring other pots with them. Won’t providers be quite happy with that?” he says.
“Funds here are big and they are good – I have no complaints about them. When I was in the UK, some of my colleagues and consultants came over to look at the Australian system, and quite rightly they were very critical of the charges and fees. We have made a big effort here over the last couple of decades to get those fees down. That was driven by the industry (not-for-profit) funds, and the regulator has done a good job forcing fees down.”
Matthews points to the painful history the Australian system went through with its Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. Known as the Banking Royal Commission, it ran from 2018 to 2019 and uncovered widespread misconduct and malpractice within the financial services industry, including the superannuation sector. In particular, some providers were found to have charged superannuation savers for financial advice that they hadn’t received. That led to a significant upscaling of the regulatory interventions by the Australian Prudential Regulation Authority (APRA), which regulates the Australian financial services industry.
“APRA has taken an increasing interest in superannuation because it has become so important to society and our financial system. The Royal Commission was a lightning rod for some nasty abuses in the system, and that has helped it change for the better,” says Matthews.
Engagement and decumulation appear to be two challenges that neither the UK nor Australia have managed to crack yet.
“The big funds have got a challenge here – how do they digitize, how do they get that member engagement,” says Matthews.
Investment scrutiny
With much of the pressure on schemes to improve coming from the regulator rather than competitive tendering run by employee benefits consultants, the Australian system has seen some very strong interventions by APRA. Arguably the most challenging element of this is the investment performance testing, which requires funds that have rolling underperformance of 0.5 per cent a year below their benchmark for a period of eight years to write to members and tell them they have failed the test. If they fail the test in the following year, the fund is blocked from accepting new default members, effectively forcing it to seek a suitor for a market exit.
This certainly takes poor performers out of the market, but does Matthews think it promotes a herding mentality?
“I’ve sat around a table with people who have said they are on the list, and asked what they do. So they hug the index. So there is definitely a downside. But on the other hand it has shaken up the whole system, and on balance it is probably a good thing.
“It has got trustees much more focused and energised on investment performance. The trustee system is run on English trust law that was very old and sleepy. Now they are much more worried about their personal liabilities and that is a good thing,” says Matthews.
Table talk
Australian schemes are required to furnish APRA with reams of statistics relating to costs, charges, asset allocation and performance, much of which is turned into league tables that are a commonplace amongst the nation’s personal finance coverage. So does Matthews think this league table approach has supported engagement with pensions amongst the general public?
“Not that much, in my view. It has certainly increased engagement by trustees and boards of directors. But I am sceptical that it has really cut through to the public. Take my son, who comes to Trinity (his employer), and goes into the fund that they recommend, and there’s no real drama about it.”
While league tables may not have caught the imagination of end users, Matthews does think Australian super savers are more engaged than their UK counterparts, although this is principally down to the length of time the system has been in place there.
“People have grown up with the system and when they get to the point that their fund is a year’s salary they are starting to take an interest,” he says.
Retirement challenge
“The big drama we now face in Australia is the retirement phase because we don’t have a powerful force of employee benefits consultants, and we certainly don’t have enough financial advisers,” he says.
The Australian system is if anything more complicated than the UK’s, where the flat-rate state pension is largely reducing the risk of means testing impacting the incentive to save, aside from the emerging case of those set to be renting in retirement.
He points to the ‘dreadful’ means testing interaction between Australia’s Age Pension and private provision. Not only is Age Pension reduced the more private super has been accrued, losing Age Pension altogether means the loss of a health benefit card, which brings free health services. Qualifying for Age Pension requires complex documentation, further exacerbating the challenges and complexities middle income retirees face.
National investment
Matthews sees parallels with the UK, and he says he is suspicious that the Australian government wants to mandate that supers invest in the domestic economy, something they already do to a far greater extent when compared to UK pension schemes.
“After Covid, we’re all worrying about supply chains, bringing manufacturing back onshore, and research, development and innovation. There’s a bubbling noise here that industry funds should be doing more to support Australia. A sort of nationalism,” says Matthews. “We haven’t had investment requirements like that for 40 or 50 years.”
Cruel observation
And given the UK government’s clear interest in implementing facets of the Australian system, against a context of huge complexity in bringing these changes to fruition, what is Matthews’ perception as to how this project could play out?
“My observation, cruel as it may be, is you’ve got a lot of very, very smart people, with a lot of experience in the UK.
“And I’ve experienced this – if you come in a room with a new idea, they’ll say, ‘yeah, that’s pretty good’. And then they will talk about it, and talk about it, and talk about it, and refine it, and refine it, and refine it and it takes a long time to get it done. It finally gets done and works very well. But, it’s not [an environment that is] conducive to trying things. At least that was my experience all those years ago,” he says.
