From accumulation to retirement – the super industry’s new focus

The super industry has been very successful in the last three decades in building up assets for fund members but as an increasing number reach retirement, the focus of the sector needs to change.

This is why we have titled this year’s report in our annual Super Insights series, From accumulation to retirement: why it’s time to shift the conversation.  

Around 20 percent of total member benefits within APRA-regulated funds – the focus of the Super Insights review – are already in the retirement phase. This is nearer 27 percent if we include exempt public sector funds and SMSFs. With the enactment of the Retirement Incomes Covenant, funds need to develop strategies and products to support members’ financial security after they finish work.

These need to be delivered in the context of increased regulatory scrutiny; the last 2-3 years has seen over 180 recommendations, first made in the Murray Review and Haynes Reports, enacted into law. These changes have set new standards in terms of funds’ decision-making frameworks, accountability, and transparency.

There is an overarching requirement to act in members’ best financial interests. To succeed in retention and growth of this segment of members, funds will need to increase their access to data for identification and analysis purposes and to appropriately tailor their products and services to their members and member cohorts.

However, the level of digital maturity varies significantly between funds – almost half do not currently use member data to deliver personalised experiences. Going forward, they will need to better understand their members to meet their trustee obligations and to deliver their products, services and advice appropriately and efficiently.

This is especially important as the pandemic has fundamentally changed the way that most members interact with their fund. Online portals and apps were the big winners of the disruption cause by COVID, with customer expectations now much higher around the speed and level of personalisation from financial services providers, including super funds.

In terms of this year’s results, recoveries in markets as well as an increase in contribution levels – a 13 percent increase from members and 8 percent from employers – led to some funds bouncing back from the prior year’s flat performance. Our review, which analyses the most currently available APRA and ATO data, reported that the total value of funds rose in the 12 months to 30 June 2021 from $2.4trn to $2.8trn.

Continued merger activity cut the number of APRA-regulated funds from 154 to 144. The market is already concentrated as 13 ‘mega’ funds with net assets above $50bn at 30 June 2021 held 75 percent of the total net assets (excluding SMSFs) and 78 percent of members.

This trend is set to continue. APRA’s MySuper Heatmap and Annual Performance Test, as well as the need for scale and to combine key skills/offerings to meet rising demands is driving funds to seek partners. While 32 merger announcements were made in the 9 years between 2011 and 2019, the pace increased with 17 announcements made across 2020 and 2021.

Although only two mergers have been announced in 2022 so far, many more are under discussion.

Looking into the future, we see merger activity continuing at a steady pace, with smaller funds merging into larger funds as well as mergers between the larger, mega funds – as with QSuper and Sunsuper’s recent merger to form the Australian Retirement Trust (ART).

Even without further mergers, projections for the current mega funds based on recent cashflows and projected earnings suggest that, by 2040, Australia may have two funds – AustralianSuper and ART – reaching the $1trillion asset value mark, each quintupling in size from a base of $200bn in 2021. Meanwhile, the nation’s savings are expected to almost triple to $8.6trn, a sign of the ongoing health of the superannuation system.

Whether the market will be represented only by a select group of mega funds in 2040 or whether there will still be some smaller, niche funds who are servicing specific sectors of the market, is yet to be seen. Based on the average level of member contribution as a measure of the level of member engagement achieved by funds, we’re currently seeing a number of smaller and medium sized funds doing well.

Demographic changes show the scale of the challenge. Using ABS population projections, total pension payments are expected to be approximately $137bn in 2040, compared to approximately $46bn in 2021, although new workforce entrants will mean that the industry is not expected to move into a net outflow position.

As the number of Australians in the retirement phase grows, and with the Retirement Income Covenant setting clear requirements, KPMG expects to see the development of broader base retirement offerings. That is the next stage for the Australian super sector.

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