Financial Services Forum – Scoring Goals in a Changing World

PLENARY 1 – LEADERSHIP

The 2014 Financial Services Forum served up some fine deliveries by former Australian cricketer and bowling legend Glenn McGrath. Glenn’s views on leadership in the context of changing team dynamics and the adaptable styles of different captains under which he served opened a window into life during Australian cricket’s heyday and provided food for thought for members of the audience. From a personal perspective, Glenn’s reflection on what it takes to be successful was summed up by his comment that “if you want to be like everyone else, do what everyone else does”.

Chris Cuffe further developed these concepts, reflecting on his time with Colonial First State and subsequent roles within the financial services industry – including his more recent philanthropic endeavours. The parallels between Chris and Glenn highlighted the common traits and acute awareness of their own personality dynamics (both positive and negative) that result in effective leadership. Chris left the audience members to reflect on whether they would define themselves as someone who makes things happen, watches what happens or wonders what happens.

PLENARY 2 – THE ECONOMIC AND INVESTMENT ENVIRONMENT

Plenary 2 featured an all-female panel with the line-up comprising Carol Austin (Contango Asset Management Limited), Deborah Ralston (Australian Centre for Financial Studies, Monash University) and Susan Thorp (Finance Discipline Group, UTS Business School) and focused on the many issues facing retirees in the post-retirement phase. The plenary sought to:

• set the scene for today’s retirees from an investment and economic perspective;
• examine the various risks/benefits that retirees face in the post-retirement phase; and
• tie the first two themes together by examining the behavioural issues of retirees.

Carol began by setting the scene about the world today and the framework within which we invest. She stated that we need to be mindful of the US economy when making investment decisions and that there is a headwind for the US economy that exposes it to cyclical downturns. Through this lens, the future picture for retirees – certainly in the short to medium term – looks grim with 0% interest rates in the US, bond yields at historical lows and no prospect of an immediate equity rally. Market volatility is going to be an ongoing feature of financial markets over the next three to five years – the ride will be bumpy.

She also noted that government policy, the commitment to it and feasibility are all factors that should be taken into account when analysing the economy.

Deborah’s brief was to discuss the risks associated with investment in the post-retirement phase and outline potential options that could be offered – not an easy brief! She began by noting that Australia has an excellent retirement system but that it falls down in the post-retirement space. In doing so, she introduced the concept of the ‘retirement trilemma’, in particular the need to have:

• access to good returns (with investment choice);
• protection from risk (market and longevity); and
• access to capital (both before and after death).

Another concept introduced was the maximising of ‘terminal wealth’ (assets at retirement), which was not easy when considering the risks posed by sequencing risk. Indeed, each individual’s position will not only depend on terminal wealth of superannuation, access to the age pension and private savings (including home ownership), but also health.

Because of this, Deborah argued that there is no perfect solution as everyone’s retirement needs will be different. This suggests an increasing demand for tailored solutions. To that end, there is a need for a product suite to manage:

• longevity risk – e.g. through annuities, pooled mortality risk etc.;
• liquidity risk – via equity release products;
• inflation risk – via inflation linked bonds; and
• health risk.

Susan Thorp capped the session off with what needs to be done to communicate effectively with pre and post-retirees. She shared some research which showed that younger people are far more pessimistic about their survival prospects when compared to those who are actually in retirement. As a result, people tend to underestimate retirement adequacy and plan badly. There is also a general lack of awareness of retirement products available and little understanding of the regulatory retirement governing such products.

The lack of awareness in retirement products was quite stark: Susan’s research showed that just under half of people had heard of an account-based pension (formerly known as allocated pensions) and less (just over a third) had heard of lifetime annuity products. Only one fifth of people surveyed understood that lifetime annuities offered a guaranteed income level!

Susan closed by encouraging the industry to talk about retirement adequacy in terms of income streams rather than wealth accumulation. People also need assistance to understand their options and the crucial information that will impact their retirement savings (particularly longevity!).

The Plenary concluded with a lively Q&A session ably facilitated by Naomi Edwards.

PLENARY 3 – FINANCIAL SYSTEM INQUIRY

The final session on day one was an interesting discussion on the Financial System Inquiry. Ian Harper provided an overview of the philosophies underpinning previous inquiries and flagged the importance of balancing competition with stability, and raised the danger of risks being forced elsewhere if the industry is required to hold too much capital. Rob Whelan raised the issue of affordability as ‘big data’ and other technological advances enable more accurate pricing of risk. Steven Münchenberg outlined the four main areas of the ABA submission, which included the transformational impact technology is having on the banking industry and the challenge regulating the industry in this uncertain environment. John Brogden wrapped up the session by discussing the purpose and future of superannuation, including how the flow of superannuation funds may change in the future via home loan securitisation with banks and the increase in funds invested overseas. Although there is no burning problem for the Inquiry to fix, there are plenty of interesting issues and challenges for the Inquiry to consider.

PLENARY 4 – ENTERPRISE RISK MANAGEMENT

The ERM Plenary Session was held bright and early on the Tuesday morning with a diverse range of industries and perspectives.

Qantas pilot and Actuary Mark Thorpe shared his view on risk from 30,000 feet. Key messages were: “Safety before Schedule” and how embedded with pride this is at Qantas; how real the inherent risk is but how it has been increasingly mitigated over the 103 years of flight to the extent that commercial airline transport is an incredibly safe form of transport per km travelled; how this is due in large part to learning from experience; building in reliability and redundancy with systems; benefiting from technological advances to improve automation and instrumentation; and the importance of regular training and checking including simulating emergencies.

Jacqui Colwell, Chief Risk Officer of Personal Banking at NAB brought us back to earth with the parallel that banks
are about keeping customer’s money safe. Jacqui explored past failing in risk culture at banks including Barclays, JP Morgan, HBOS and RBS, looked at what is different post GFC and discussed what’s been learned and adopted by banks on ERM. The biggest changes have been around greater emphasis on setting and implementing risk appetite, risk management being integral to the strategy, and realising that good risk management is not about risk avoidance – it’s about taking opportunities with better risk controls. Jacqui also explored the practical outworkings of current risks in banking. A major one is the growing demand from customers for digital access as smartphone use grows by over 50% p.a.

David Parsons, Manager of Sydney Water’s Emergency Management Program illustrated how organisational culture and beliefs create risks. He shared many examples of disasters where this happened including the London Underground, the Challenger and Columbia shuttle explosions, Hurricane Katrina and Hillsborough Stadium. The key messages were to ensure your organisation makes decisions based on its values rather than the literal interpretation of its rules and that you need to understand how decisions by individuals might be taken in a group and/or high stress environment. One outcome is a preference for strong procedural guidelines rather than absolutely strict rules, to facilitate a sensible risk decision at a time of great stress and to reduce the likelihood of a dangerous outcome.

PLENARY 5 – DIGITAL ECONOMY AND BIG DATA

The conference concluded with a ‘wider fields’ view of the digital economy and big data. Tim Trumper opened our minds to how the revolution in analytics and insights is changing our world, while Norman Swan probed the implications for our health system and society. Ramneek Gupta and Duncan West explored key practical considerations and hurdles when transitioning to a data centric culture, and considered the role that the actuarial profession could / should play.

CONCURRENT SESSIONS

There were some great concurrent sessions over the two days and many thanks should go to the presenters and the various Chairs who were involved in these. On the first day, sessions focused on the latest developments in superannuation and investments, including solving the post-retirement challenge, opportunities for Australia in the ‘Asian Century’ and what proved to be a fascinating debate on retail versus industry funds ‘in a MySuper world’. Insurance was also well represented with topics covering risk culture, capital management and some well- timed reflection on the recent issues the industry has been facing and an exploration of the potential paths forward.

There were more highly informative and insightful concurrent sessions on the second day including those on the emerging fields of risk management and big data, and how organisations are utilising the latest approaches to better understand their customers and develop innovative business models. Sovereign risk, operational risk modelling and the lessons claims management teams should take from social workers were also covered.

FSF2014 was a great success. The Organising Committee extends sincere thanks to our sponsors, supporting partners and the Institute.

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