Focus on governance, people and cost drives better member outcomes: Bill McNabb, ASFA Conference
Vanguard | 16 November 2018
Speaking at the Association of Superannuation Funds (ASFA) conference yesterday in Adelaide, Bill McNabb, former Vanguard CEO and outgoing Chairman, shared his views on how superannuation funds could best serve their members through good governance, great people, and cost management.
Speaking to an audience of hundreds of superannuation professionals at the association’s annual conference, Mr. McNabb said that pension reform was one of the key regulatory changes the United Stated faced in the ten years following the Global Financial Crisis.
“Pension reform actually began just before the crisis hit, almost in anticipation of it in many ways, and it was a result of the journey the US had been on, much like Australia, towards self-provisioning becoming the core of our system.
“The change began in the early 80s moving from traditional pension schemes and contributions to defined contribution - the 401K plan.
“That system continues to thrive...but we often refer back to the Australia as having the best overall system. We think the compulsory nature of super and the simplicity of the system has a lot of advantages.”
McNabb spoke about four areas that generated a lot of attention in regards to pension reform - which were coverage, the optimal savings rate, total cost and the complexity of the system.
“As regulations evolved, coverage never really got taken care of. We do not have a compulsory system, and as a result roughly 40 per cent of the population are solely reliant on social security.
“The savings rate did get addressed, but in a different way to how it’s addressed here. When pension reform began, the savings rate averaged about 9 per cent - interesting how closely this matched Australia’s compulsory number.
“Regulators and industry participants however, did not believe that 9 per cent was sufficient, and when we looked out at lower investment return environments we saw a high probability that a number of our investors would not have sufficient savings to last them through a robust retirement. So our goal was to influence moving that number closer to 15 per cent.
“What happened in the US was referred to as Auto Step-up, where company 401K plans were allowed to step up their member savings rates on an annual basis, until you got to either the legal limit or until they opted out, and this mechanism was extraordinarily powerful in driving savings rates given we know from behavioural finance studies that most people don’t opt out.”
Taking on the role of CEO just prior to the GFC, McNabb shared how the challenges of that period drove a comprehensive review of Vanguard’s business and purpose, leading to some very fundamental conclusions which shaped the organisations global focus.
“The importance of the retirement market was a major focus - we had to figure out and provide greater clarity around total cost, and we had to have the best default options in the business.
“Second we had to have a continued focus on cost, because it’s not our money. And for that scale was really important.”
“The third was the provision of low cost advice, which we feel going forward is going to be a game changer in the retirement space, both in the broad retail market and particularly in defined contribution schemes”.
Wrapping up, McNabb noted that attracting top talent, being proactive in the face of change and having clear principles was fundamental to an organisations continued success.
“A lot of Vanguard’s success today comes down to us being proactive about some of the regulatory changes we underwent, which we actually think have helped define us over the past decade.
“We have found that attracting smart, capable people with good values to the industry is the single most important thing in responding to all the regulatory, socioeconomic, geopolitical and macroeconomic change.
“We were founded on some very basic principles which we remain true to today - we are a fiduciary first and foremost; market returns are not controllable, costs are; and always having the mindset that we manage other people’s money - these are principles that continue to guide us.”
As announced earlier this month, Vanguard President and CEO Tim Buckley will assume the role of Chairman, succeeding Bill McNabb, from 1 January 2019.
Bill McNabb joined Vanguard in June 1986. He was named CEO in August 2008 and was elected Chairman in December 2009. Long active in the investment management industry, Mr. McNabb served as Chairman and Vice-Chairman of the Investment Company Institute, and was previously a member of its board of governors.
With more than AUD $7.3 trillion in assets under management as of 30 September 2018, including more than AUD $1.3 trillion in ETFs, Vanguard is one of the world’s largest global investment management companies. In Australia, Vanguard has been serving financial advisers, retail clients and institutional investors for more than 20 years.
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