COVID era disrupts and challenges super funds

The COVID-19 crisis has added even more complexity to a rapidly-changing super fund sector and has disrupted established market trends. Everything has been thrown into the air.

KPMG’s fourth annual Super Insights report analyses the most current available APRA and ATO data as at 30 June 2019, covering the whole sector, although it concentrates on trends in APRA-regulated funds, which represented $1.7trn in assets under management (AUM) at the end of financial year 2019.

The study shows that, even ahead of the COVID-19 era, low wage growth, reduced contribution caps, and an ageing population were already putting many funds’ cashflows under pressure, with more than 40% of funds in a net outflow position over the year. The number of funds fell as the pace of merger activity increased and the number of member accounts fell slightly, as funds braced for the impact of the new Protecting Your Super regulations.

The impact of the Hayne Commission was also evident, as the retail fund sector lost ground, with an $8bn increase in rollovers out. Conversely rollovers into the industry fund sector increased by $7bn and going into 2020 the industry fund sector was poised to overtake the SMSF funds as the biggest sector in the market. But this has now been stopped by the COVID-19 crisis.

Given the particular challenges now facing the industry funds – in particular resulting from allocations to illiquid assets and the expected increase in benefit payments under the government’s early release scheme – we now predict that SMSFs will again move significantly ahead of the other sectors.

There are some surprising developments identified by the Super Insights report. For instance, at the end of 2019 APRA released its inaugural MySuper Product Heatmap which, for the first time, publicly called out the products the regulator had found wanting.

It was widely expected that this would drive consolidation at the ‘tail’ end of the market, amongst the seventy sub-$10bn funds, but our study finds that in reality, many of these smaller funds have stacked up well against the Heatmap metrics and are continuing to attract new members.

Instead the greatest merger activity has been at the larger end, driving the rise of the so-called ‘mega’ fund and opening up a void between these funds and the ‘tail’. The top 10 funds, all above $50bn, are unchanged from the prior year and now represent, in total, approximately $1trn in AUM and approximately 60% of the APRA-regulated market.

We expect to see further mergers of funds/providers in the $50bn+ space, creating an increasing number of mega funds in the future and a wider gap between these funds and the rest of the sector.

At the other end of the market, largely in the sub-$30bn space, we expect to see more mergers both of medium sized funds, and smaller funds. In the latter case strategic mergers will improve capabilities and provide sustainable metrics, for example by diversifying their membership.

Challenges for funds abound. Although the regulators will return to their pre-COVID-19 supervisory focus when Australia comes out of the pandemic, this will be into an economy that has been shaken. Funds’ balances have fallen on the back of market shocks on listed and unlisted assets rivalling those of the GFC.

Further, they are facing unprecedented calls on benefits and will suffer reduced contribution flows through increased unemployment. Some funds that were valued at sub-$50bn pre-COVID-19 may come out of the crisis as sub-$30bn funds and some may decide to leave the field altogether.

The remaining funds are likely to face a more engaged membership with higher service expectations and a new set of needs. Like the post GFC era, members previously close to retirement may no longer be able to do so and will be looking for security of income once they finish work. Younger members, who have seen significant reductions in their balance, will need advice on how to rebuild their retirement savings.

The international lockdowns and domestic work from home instructions have posed unprecedented challenges on the sector’s operational capacity and capabilities such as:

  • Triggering funds’ business continuity plans – including the need to equip each fund’s workforce to work from home over remote access.
  • Challenges posed by global outsource models as off-shore providers go into lockdown, impacting their ability to provide services to Australian customers.
  • Exponential increases in calls to funds’ call centres, not just as a result of the market downturn but spiking to new levels as a result of member enquiries regarding the early release measure and on insurance cover.
  • Exponential demand on processing centres to process switches and early release of super requests received via the ATO.
  • The need to assess and model the impacts the crisis may have on the fund’s assets and liquidity.
  • The need to respond to this modelling by reviewing asset allocations and implementing out of cycle valuations of unlisted assets.
  • Readiness to activate illiquid funds redemption processes – which are outside business as usual processes.
  • Responding to the Regulators’ calls to accelerate remediation programs to get monies back to members’ funds and/or into their bank accounts.

For the rest of this year, we estimate that the COVID-19 impact on salaries and wages for employees is likely to lead to reduced Super Guarantee contributions of around $0.7bn per month. This will impact flows to the superannuation sector as a whole but particularly be felt by funds whose memberships are concentrated in industries suffering the greatest impact on employment.

The funds that succeed in navigating the immediate challenges caused by COVID-19 will be those which have the established governance practices that allow them to be quick in implementing change, making appropriate decisions which are targeted to achieving the right and equitable outcomes for their members.

Longer term, the winners in the post COVID-19 world will be the funds which are clear about the member cohorts they serve, that capture the default contribution flows and solve for retirement.

Read the full report.

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One thought on “COVID era disrupts and challenges super funds

  1. Such an insightful article Linda and David – thank you. I would also like to add an observations we have noticed working with asset managers and supers in our Environmental Social and Governance (ESG)/Sustainable Finance service line. Those super funds that have ESG focused mandates for their asset managers have proved to be successful during the downturn with mounting evidence that ESG shares and bonds have done better than rivals this year. ESG focused investments (especially in technology and healthcare) have outperformed in the first months of the year. More can be read here if you are interested: https://newsroom.kpmg.com.au/covid-19-killed-responsible-investment/

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