Super funds performing strongly but will shrink in number over next five years

Paul Howes, Partner, Head of Wealth Management
Paul Howes, Partner, National Sector Leader, Asset & Wealth Management

Given all the coverage of the Royal Commission’s criticisms of the financial services sector, you might be forgiven for thinking the superannuation sector is in a bad way.

Far from it. As KPMG’s third annual Super Insights 2019 report reveals, the overall performance of the super industry is strong, with the APRA-regulated sector (industry and retail funds) growing by 10.3 percent in 2018 and the Self-Managed Superannuation Fund sector growing by 6.4 percent.

Our review also concludes increased regulatory and competitive pressures leading to more fund mergers is likely to be a strong feature of the next few years – trends that will significantly reshape the structure of the market.

We are talking big numbers. KPMG’s report, based on 2017/18 figures from the Australian Prudential Regulatory Authority, finds the APRA-regulated sector ended the year with assets under management (AUM) of $1.8tn, while the SMSF sector closed at almost $750bn.

To put this in context, the total assets supporting the superannuation sector closed 2018 at almost $2.72tn, some 39 percent higher than the entire market capitalisation of the Australian share market.

Industry funds did not only escape with less Royal Commission criticism than their retail counterparts – but they are strengthening in members, assets and cashflow at the expense of retail funds.

Even before the impact of the Royal Commission, the Industry Fund sector enjoyed an uplift in new membership, with this sector actually increasing total membership over 2018 by 1.39 percent.  This occurred while the Retail (bank-owned) Fund sector’s membership declined 5.2 percent.

This has also resulted in a substantially faster AUM growth rate within the Industry Fund sector, which grew by 16.3 percent, compared to the Retail Fund sector growth of 5.9 percent. It is likely that the trends identified in our review will continue, driving materially different growth rates across these sectors.

The Public Sector showed reasonable AUM growth of 11.2 percent, whilst Corporate Funds continued to struggle with assets declining by 4.5 percent, mainly due to a number of mergers during the year.

In terms of AUM growth, assets across the super industry are expected to grow, although more slowly  than in prior years given the potential for an ongoing low return environment and increasing outflows due to the ageing population and recent policy changes.

By 2029, we predict the total super asset pool is projected to reach $5.4tn. Growth in Industry Fund assets is likely to accelerate relative to other sectors, with employers and members leaving the Retail Fund sector and transferring their assets to industry funds post Royal Commission.

The mergers issue is growing in pace and prominence.  We also see an acceleration in mergers in the overall sector – last year we predicted that the number of funds would halve over the next decade, but we now believe this will be nearer to five years than ten. Greater regulatory obligations, plus issues such as a continued increases in operating costs, and ongoing uplift in churn out of funds placing further pressure on many fund’s business models, is driving consolidation.

KPMG maintains the expectation Industry Funds will overtake SMSFs in FY20, holding the largest share of the market at just over $2t in assets by June 2029. We expect both Retail and Public Sector fund assets to experience growth at half the rate of industry funds, with these sectors projected to reach $1.2t and $0.9t respectively in 10 years. Lagging well behind the other segments, the Corporate Fund sector is expected to experience the slowest growth rates, maintaining assets at around $56 billion by 2029.

From a cashflow perspective, the majority of the Top 10 performers are from the Industry Fund sector.  AustralianSuper maintained the strongest net cashflow position, with $8.0b in net flows, followed closely by Sunsuper, HostPlus and Equipsuper, with both Sunsuper and Equipsuper achieving large inflows through merger activity during the year. By contrast, nine of the bottom 10 funds in terms of net cashflow emanated from the Retail Fund sector.

In terms of consolidation pressures, our report identifies the recent Protecting Your Super Package bill as a particular motivator for funds to consider their strategic options to ensure they remain viable into the future. The collective impact of the removal of low balance inactive accounts, the ban on exit fees and the capping of administration and investment fees, together with the continued downward trend in membership and the unyielding growth in outflows, is expected to put upward pressure on fund operating costs (particularly for funds operating on a member fee only basis).

A review of the potential impact has already prompted trustees to consider revising their operating models and, in some instances, considering an exit from the system through a fund merger. The member outcomes assessment introduced by APRA and coming into effect in January next year has also put a spotlight on strategic planning practices, holding trustees more accountable to delivering value to members

Our report also notes that the finalisation of Superannuation Prudential Standard 515 – Member Outcomes, will have a material impact on the manner in which trustees assess the success of the performance of their fund, from a member lens and will provide additional power for APRA to drive fund consolidation.

There is no room for complacency, including in the industry sector. During 2019, it is incumbent on all trustees of all funds to review their operations, business models and product portfolios. We believe that in all sectors, significant opportunities exist for funds to develop innovative retirement products to suit the needs of a variety of members.

We are concerned that the potential changes to the advice landscape, including the additional educational requirements proposed by FASEA, the removal of commissions and banning of advice fees being charged on MySuper products will potentially impact the number of members that receive advice.

This may have the impact of reducing the demand for pension products going forward and may result in more individuals taking lump sums out of the superannuation systems, which may put more pressure on the social security system, which is unlikely to be a sustainable long-term position for the Federal Government.

Our message to funds is to review their advice models to ensure that they can continue to deliver advice to members in an efficient, affordable and compliant manner to facilitate the continued growth of the retirement income product market.

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