Two-speed super fund split to accelerate into major rationalisation over next ten years

Paul Howes, Partner, Head of Wealth Management
Paul Howes, Partner, Head of Wealth & Asset Management
Adam Gee, Partner, Superannuation Advisory

The next decade will see a major rationalisation of Australia’s superannuation sector – with the number of funds in Australia being cut in half.

But this is a natural evolution from the current market situation which is already seeing a two-speed divide between larger and smaller funds, KPMG’s second annual Super Insights Report, released today, reveals.

The corporate fund sector is likely to face the greatest consolidation pressures, while the industry and public sector funds are expected to see a 50 percent reduction in fund numbers and we expect this to be slightly less in retail. By contrast we see the SMSF sector continuing to expand.

Based on our analysis, we also foresee increasingly divergent paths for industry and retail funds. We predict that industry funds are likely to become diversified financial institutions offering non-superannuation products, aged care and broader banking solutions while retail funds could move in the opposite direction, with a number considering the long term viability of their wealth businesses.

It seems likely the Royal Commission (RC) scrutiny on banks vertically-integrated wealth businesses will see greater pressure placed on some sectors of the industry.

But we must hope that nothing happens which would run counter to the interest of fund members – and possibly prejudice the ability of funds to meet the new ‘member outcomes’ requirements. Our study shows that many funds may struggle to meet many of the metrics outlined by APRA within the member outcomes test.

In terms of the ‘here and now’ things are looking pretty good. Our report which is based on 2016/17 APRA figures, found that the average fund grew Assets Under Management (AUM) by 9.3 percent in 2016/17, and by 15.6 percent in terms of contributions. This was a strong turn-around from 2015/16.

While employer contribution growth remained relatively stagnant at 4.8 percent, personal after-tax contributions increased very substantially, by 47.8 percent.

Funds delivered strong investment returns to members in an ever more competitive fee landscape – but there continues to be an ongoing issue regarding operating expense increases, as these rose a further 6.7 percent, posing a significant challenge to the sector.

But the growing split between larger and smaller funds is clear. Bigger funds had materially higher increases in Assets Under Management (AUM) and greater contribution flows last year than smaller funds – some of which experienced net outflows for the first time, through leaner contributions and greater transfers out.

Membership continues to decline on a total system basis, with the average fund losing 1.0 percent of accounts However, strong growth in retirement products continued in 2016/17, emphasising the importance of competitive retirement income products to retain members. Other market issues we see include:

  • Insurance – the ISWG’s proposed code is likely to be implemented by most funds, requiring many to re-configure their insurance designs.
  • Member engagement – the broader use of data analytics and segmentation models is becoming more prevalent across progressive funds.
  • Technology and data – continues to be critical to the delivery of a superannuation fund’s outcomes. The integration of underlying platforms to deliver a wide range of data points continues to be a challenge.
  • Responsible investing – there is greater investor push for ethical investments, with many funds utilising broad screening of their investment universe to select appropriate assets.
  • Scale and member outcomes – the new ‘member outcomes’ legislation is likely to have a significant impact on the ongoing viability of funds, particularly those that do not provide strong outcomes for members.

KPMG believes 2018 will represent a regulatory watershed for the sector, with both the Productivity Commission’s (PC) review into the efficiency of the system and the RC set to spark a further set of policy changes.

Should the PC recommend a limitation of existing default awards then this could spell the death knell for many smaller funds. While rationalisation has happened very slowly to date, we firmly believe the pace will quicken sharply in the next few years.

We had hoped  the government’s move last year to enshrine the purpose of super into legislation would act as an important anchor for the development of future reform.

But it now seems unlikely that there will be any immediate end to the regulatory changes – and we need to be careful that complexity and unnecessary costs which undermine member confidence and act as obstacles to innovation are not the result.

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