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KPMG report predicts dramatic super fund rationalisation in next 10 years

Dramatic super fund rationalisation in next 10 years

The number of super funds in Australia will be halved in the coming decade – and the sector is already seeing a two-speed divide between larger and smaller funds, KPMG’s second annual ‘Super Insights Report’ shows.

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KPMG also predicts that industry funds are likely to become diversified financial institutions offering non-superannuation products, aged care and broader banking solutions while retail funds could move in the opposite direction, with a number considering the long term viability of their wealth businesses.

The report, based on 2016/17 APRA figures, found that the average fund grew Assets Under Management (AUM) by 9.3 percent in 2016/17, and by 15.6 percent in terms of contributions, which was a strong turn-around from 2015/16. While employer contribution growth remained relatively stagnant at 4.8 percent, personal after-tax contributions increased substantially, by 47.8 percent.

Funds delivered strong investment returns to members in an ever more competitive fee landscape – but there continues to be an ongoing issue regarding operating expense increases, as these rose a further 6.7 percent, posing a significant challenge to the sector.

Larger funds had materially higher increases in AUM and greater contribution flows last year than smaller funds – some of which experienced net outflows for the first time, through leaner contributions and greater transfers out. Membership continued to decline on a total system basis, with the average fund losing 1.0 percent of accounts, however, strong growth in retirement products continued in 2016/17, emphasising the importance of competitive retirement income products to retain members.

Tasplan was Australia’s fastest growing fund by AUM increase thanks to its merger with RBF during the year, and AON by member growth. Australian Super remains the country’s biggest fund on an AUM basis.

Paul Howes, KPMG Head of Asset and Wealth Management, said: “Our analysis shows an increasingly two-tiered super fund industry in Australia – not so much between retail and industry funds but by larger and smaller funds. The Productivity Commission’s (PC) review into the efficiency of the system will place significant challenges on smaller funds – and should it recommend a limitation of existing default awards then this could spell the end for many small funds. While rationalisation has happened very slowly, we believe the pace will quicken sharply in the next few years.”

“The corporate fund sector is likely to face the greatest consolidation pressures, while the industry and public sector funds are expected to see a 50 percent reduction in fund numbers and we expect this to be slightly less in retail. By contrast we see the SMSF sector continuing to expand,” he added.

KPMG estimates for consolidation of funds

 

Fund type Current 2023 2028
Corporate 26 18 6
Industry 40 35 18
Public Sector 37 33 16
Retail 125 106 68
Total APRA regulated 238 192 108
SMSFs 598,596 741,200 886,900

KPMG believes 2018 will be a key year for the sector, with the PC Inquiry and the Royal Commission (RC) set to spark a further set of policy changes.

Adam Gee, KPMG Superannuation Advisory Partner said: “In our inaugural report last year we hoped that the Government’s move to enshrine the purpose of super into legislation would act as an important anchor for the development of future reform. It now seems unlikely that there will be any immediate end to the regulatory changes – we need to be careful that complexity and unnecessary costs which undermine member confidence and act as obstacles to innovation are not the result.”

“It seems likely that the RC scrutiny on banks’ vertically-integrated wealth businesses will see greater pressure placed on some sectors of the industry – we must hope that nothing happens which would run counter to the interest of fund members – and possibly prejudice the ability of funds to meet the new ‘member outcomes’ requirements.”

In this year’s Super Insights Dashboard, which accompanies the report, KPMG assesses APRA’s metrics for its member outcomes legislation – such as operating costs, net cash-flows, rollover ratios and member movements.

Adam Gee said: “Our analysis shows that many funds may struggle to meet many of the metrics outlined by APRA within the member outcomes test and our online tool allows funds to clearly benchmark their performance to their competitors.”

In addition to the increased regulatory focus, KPMG details several other themes likely to be pertinent to the sector throughout 2018/19:

  • Insurance – the ISWG’s proposed code is likely to be implemented by most funds, requiring many to re-configure their insurance designs.
  • Member engagement – the broader use of data analytics and segmentation models is becoming more prevalent across progressive funds.
  • Technology and data – continues to be critical to the delivery of a superannuation fund’s outcomes. The integration of underlying platforms to deliver a wide range of data points continues to be a challenge.
  • Digital innovation – innovative solutions to drive greater efficiencies and to tailor the experiences of super fund members could create challenges for smaller funds lacking the ability to invest in these technologies.
  • Responsible investing – there is greater investor push for ethical investments, with many funds utilising broad screening of their investment universe to select appropriate assets.
  • Scale and member outcomes – the new ‘member outcomes’ legislation is likely to have a significant impact on the ongoing viability of funds, particularly those that do not provide strong outcomes for members.

Adam Gee said: “Insurance is still very topical – our own report for the Insurance in Superannuation Working Group found recently that default insurance remains reasonably priced and erodes retirement savings by only about 6 percent on average – which does not seem excessive given a lifetime of insurance cover within super. While we encourage funds to sign up for the ISWG code, we hope that policymakers introduce only carefully-targeted remedial measures for those affected groups of members.”

For further information

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au

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