The Australian compulsory superannuation and retirement savings system is 25 years young, and as a sector it has a lot to be proud of.
With total assets invested as retirement benefits for Australians now exceeding $1.9tn (20 percent larger than the market capitalisation of the ASX) KPMG is confident the system is heading in the right direction.
Much like our own lives, 25 is often a key inflection point, and the super sector is seeing significant change – some being debated in the public arena such as the purpose of super, while other changes like advancement of core technology platforms and improvements to governance arrangements are happening quietly.
Today KPMG releases both a new report Super Insights examining the sector in 2017 and an accompanying interactive dashboard that enables detailed scrutiny of the last 10 years of APRA and ATO-published-statistics. There are some very interesting findings from both.
The headline observation is that industry funds have caught up with retail funds over the past decade, and now there is an even split between the two at the top end of Australia’s super system.
The last decade has shown a migration of market share from retail to industry funds with corresponding increase in Assets under Management (AUM) by industry funds. From 2004-2016, retail funds declined in market share from 43 percent to 29 percent – it is now virtually one third retail, one third industry/public sector and one-third Self Managed Super Fund (SMSF).
Industry funds are no longer the challenger – they are now the incumbents. Judged by both AUM and the number of accounts held by funds they are the equals of the retail funds, whose cash flows are relatively weaker and whose lead in number of members is falling.
But the second major theme is the growing gap between big and small – while large funds are getting larger, there are still too many smaller ones which need to be consolidated.
At a macro level, the sector is effectively reshaping from its traditional divide between retail, industry and corporate funds to a converging grouping based on the level of AUM and complexity of operating model and offerings. The large funds are supported by a big member base and strong Superannuation Guarantee (SG) inflows.
One positive finding for retail funds was they lead the way in closing the gender gap in post-retirement outcomes for women members, and this is to be applauded. The lifetime income penalty paid for a broken employment history ends up reflected in too many women’s super balances.
It is important to note that the current 9.5 percent compulsory employer contribution is not set to build sufficient assets to provide the 65 percent of working income considered adequate for retirement. But our analysis shows that, given the SG increases set to come in over the next 8 years, a person on average earning who starts their career after 2006 and worked for 40 years would retire with a balance of $545,000, a level agreed to be enough for a comfortable standard of living.
The super industry now needs to switch its attention from wealth accumulation. Overall the sector has not yet worked out its approach to an environment where more members become income recipient rather than fund contributors.
Funds will have multiple audiences, members will have higher ages and more funds will have outflows that exceed inflows. That is the next challenge.
One concrete action we would encourage more funds to consider is the idea of appointing a Chief Retirement Income Officer (CRIO) with responsibility for delivering retirement income to members while the Chief Investment Officer is free to concentrate on maximising investment returns. The CRIO can also steer funds through the anticipated changes to the Comprehensive Income Products for Retirement (CIPRs) regime – an important subject on which KPMG is this week making recommendations to government.
More generally we would urge policymakers not to float ideas, or worse introduce changes to tax and regulatory settings which erode member confidence. Let’s not damage a quarter-century Australian success story.
Some of the detailed findings include:
There is no single dominant player – AMP is biggest by market share, narrowly ahead from Australian Super though the latter has only just over half as many members.
Four of the biggest five funds are retail but over the top ten by AUM, the share is four retail, four industry and two public sector (judged by number of members, the proportion is 5-3-2.)
Among big retail funds only CBA has bucked trend by increasing both FUM and number of accounts – most have shrunk no of accounts – but bigger industry funds led by Australian Super have gained both FUM and number of accounts.
Larger funds have captured a bigger percentage of total net inflows – while retail and SMSFs continue to experience high payment demands from members.
Public sector funds had lowest expenses ratios – only 0.3 percent compared to 0.6 percent in retail/industry.
Asset allocation is still dominated by equities – 44 percent – but this has shrunk from 56 percent in 2010. Fixed income has risen from 20 percent to 24 percent followed by property, cash and ‘other investments’.
The top performing funds? By AUM it was NSW Fire Brigades Super; by number of members it was Australian Ethical Super, while 2016 best performer in net earnings was UniSuper.