Superfund merger activity drives move to ‘mega-funds’

COVID-19 has impacted the super sector in many ways, but it has not stopped the inexorable move towards consolidation in the industry. It may even have accelerated the trend.

KPMG’s annual Super Insights 2021 report analyses the most current available APRA and ATO data, up to 30 June 2020 covering the whole sector but concentrating on trends in APRA-regulated funds, which represented $2.4trn in AUM. These fell in number from 171 to 154 in 2019/20.

The report shows the trend towards the emergence of ‘mega-funds’ is gathering pace. Once all the publicly announced mergers have been finalised, more than three-quarters of Assets Under Management (76 percent) and member accounts (77 percent) will be managed by the top 12 funds, all with AUM over $50bn. And there is more movement happening now in the market.

COVID-19, by stretching the finances of funds has increased the pressures on them, which is likely to see even more looking for partners to bolster their strength.

A combination of the Early Release Scheme (now closed); the Protecting Your Super regulations;  low investment returns and an increase in the number of people moving into retirement all contributed to a 12 percent fall in the number of member accounts and a flat-lining of assets under management

Significantly, net cash flows fell by 30 percent, from $30.5bn to $21.2bn, while the proportion of the funds in a net outflow position (i.e. more money going out than coming in) rose from 43 percent to 61 percent over the year. Heavier outflow particularly impacted the industry funds, with pension payments from those funds increasing by 14 percent and the number in net outflow rising from 7 to 19 in 2019/20. On the other hand, inflows to industry funds from retail funds continued, albeit at a reduced pace from previous years.

The market falls as a result of COVID-19 resulted in the sector overall delivering a flat (net of tax and fees) return of -0.4 percent over the year, or -0.9 percent excluding SMSFs. Corporate funds and SMSFs were the only sectors achieving positive returns with the public sector funds delivering flat returns on average and industry funds outperforming retail.

The report showed however, that during the six months from July-Dec 2020, the sector revived, making an average of 6 percent returns. Since then the situation has improved again with double-digit growth now being reported.

This resilience is partly thanks to JobKeeper and other support packages which kept member and employer contribution levels up during the toughest times. Thankfully we can all now look ahead, not back.

What is on the horizon?

The make-up of the sector will change over the next few years. Consolidation will see an increase in scale of the ‘mega’ funds (over $100bn) and a widening gap between the ‘sub-mega’ funds (over $50bn) and those lower down.  But there is definitely still a place for niche players and new entrants, which we have seen entering the market.

Currently, SMSFs represent 30.5 percent and industry funds 29.6 percent of the market. We see industry funds overtaking SMSFs by the end of this financial year and, by 2025, representing 36 percent of the market.

For retail funds, the main issue for them will be transformation through restructure – with the separation of wealth businesses from the major banks and the requirement that superannuation trustees cannot perform other roles.

But all funds need to address how they are going to centre their operating models around members, with greater engagement and expectations of online services, a trend which came to the fore during lockdowns.

Regulation is another key driver. First there was the APRA’s MySuper Product Heatmap, with its public ‘calling out’ of underperforming funds, which continues to have an impact.

And now the Your Future, Your Super package will further shape the reforms envisaged in the Royal Commission report. The potential effect of stapling a member to their existing super fund is expected to provide some funds a significant challenge attracting new members.

For many funds, meeting rising member expectations will lead to increased costs and the challenge is to find more sustainable ways to operate. Which adds to the drive to merge.

COVID-19 hit the super industry hard last year. But the longer-term trends in the sector are still clear and inevitable.

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