The Australian super system is consolidating at the top end. In 2017, according to the regulator, the Australian Prudential Regulation Authority (APRA), the 20 largest super funds controlled nearly two-thirds (65.2 per cent) of all super money held by the about 220 funds that are considered “large”, up from 62.8 per cent a year ago, and 58 per cent three years earlier.
Why are some super funds struggling when funds are pouring into them all the time?
With about A$375 million a day flowing into Australia’s superannuation funds – a net A$100 million after payouts – most people would assume the A$2.7 trillion system is in the rudest health. That isn’t necessarily the case, however.
The largest fund, industry fund AustralianSuper, holds more than A$125 billion in funds under management; it is rivalled only by the federal government’s sovereign wealth fund, the Future Fund, as the nation’s biggest pension fund.
The largest retail fund, Colonial First State FirstChoice Superannuation Trust, comes second, heading for A$70 billion. Six other funds clock in above A$50 billion.
In super, size is the new black – and the big are getting bigger.
Size matters in super
“Some funds are getting the lion’s share of the cash flow into superannuation,” says Steve Freeborn, head of client relationships at superannuation and insurance firm Rice Warner.
“The very large funds are increasingly winning more ‘choice’ members and more of their members are consolidating their superannuation accounts.”
Choice members actively make investment decisions in their superannuation accounts, rather than opting for the fund’s default investment option. Many have multiple superannuation accounts with different funds and are increasingly choosing to combine their multiple accounts and consolidate them into one.
This is demonstrated by choice members having a significantly larger share of wallet – the proportion of superannuation assets that a member holds in one single fund.
These very large funds provide a wider range of services and have large marketing budgets and growing brand awareness. They are winning business from smaller funds, says Freeborn.
The inevitable result is that even in a growing industry, some smaller funds are going backwards – because inflows are not evenly distributed.
In the year to June 2016, says Freeborn, 46 per cent of superannuation funds experienced net negative member benefit flow, defined as cash flow before investment returns and insurance. He says many funds are sub-scale, with few prospects for growth.
“It’s not simply a scale game, but generally speaking, if you have less than A$1 billion of assets, or less than 100,000 members, you’re on a noticeably steeper part of the cost curve,” says Freeborn.
He says small funds find it hard to compete with the larger funds when they don’t have the scale to drive costs down to the same extent nor the resources to provide the same services.
Regulator pressure on super funds
At the same time, APRA is upping the ante in terms of assessing fund viability. Since the government’s 2012 Stronger Super reforms were enacted, APRA has assessed funds mainly through its scale test, which requires all trustees to sign-off on an annual review stating they are satisfied the fund delivers appropriate value to its members and can continue to do so.
The regulator now proposes enhancing its member outcomes test, to make fund boards even more accountable.
This will hold trustees to higher standards for how they make decisions about spending members’ money on fund operations, including how they review whether it’s in members’ best interests for the fund to continue to exist.
Related-party deals in superannuation
There is also greater scrutiny on any related-party deals, a crackdown on the credibility of funds’ business planning, and harsher criticism of poorly justified marketing, travel and other spending.
APRA deputy chair Helen Rowell wrote to funds in August 2017 flagging the changes. By December, the regulator had already identified 28 funds at risk of not complying with the new member outcomes test.
It has issued a number of warnings that funds without a sustainable long-term business plan based on realistic assumptions will be under pressure to find a merger partner or face losing their default licence.
The regulator is also looking closely at average cash flow over the last three years, and classifying a poor-performing fund as one that has declining cash flow, as measured by the comparison of the most recent year’s cash flow against the average over the last three years, says Freeborn.
“APRA’s interpretation of that is, if you have declining cash flow, that’s a potential issue for you, because you’re going to be needing to pay out member benefits at a faster rate than you’re attracting contributions from roll-ins.”
Smaller super funds face pressure to merge
Freeborn says smaller funds would have to be looking at all of their options: for example, merging, outsourcing functions, defraying fixed costs by administering someone else’s fund, or co-operating.
“If they want to stay independent, every fund has to assess for itself whether it considers it is achieving scale, and whether it is acting in its members’ best interests. That’s an individual assessment that each trustee and trustee director needs to make, and they’re free to interpret these tests as they see fit,” he says.
Linda Vickers, chief executive officer of the A$4.5 billion Queensland-based industry fund BUSSQ, says a super fund’s viability is not so much a matter of size or scale, it’s about “being able to offer your members the services they need at a fair cost, that does not unfairly impact their retirement benefit.”
Vickers believes being smaller makes BUSSQ better at dealing with members’ money than larger funds.
“Many big funds seem to waste members’ money, but when you have a limited budget you need to be smarter in what you spend it on to get the best return on investment.”
She says this keeps members at the centre of all decision-making.
Smaller funds can be nimbler, and react quicker to changes in member sentiment and needs or changes in legislation.
“For instance, we’ve been able to bring to market quickly things like a retirement reward and pension bonus to reward members in retirement, aged care advice to assist members and their families navigate the financial complexity of planning to enter aged care, a first home super saver scheme solution package, and last year, we established a response solutions team to help members who are in financial distress.”
That is why BUSSQ is one of the funds that welcomes APRA’s heightened focus on the member outcome test.
“If we’re delivering superior member outcomes, it doesn’t matter what size we are,” Vickers says.
