Small things are often beautiful, but in the superannuation business it can cost members plenty.

The latest annual performance data compiled by the Australian Prudential Regulation Authority shows that if you were a member of a super fund that had more than $10 billion under management last year then you were more likely to garner a top quartile return for your retirement nest egg.

While there were many small super funds that generated top returns, the APRA data indicates that most are battling to overcome higher unit costs to stay competitive with the big players.

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Of the 300 or so superannuation providers measured by APRA, only 40 generated average net returns of 12 per cent or better on their investment products in 2014.

The six largest industry funds by membership and assets – AustralianSuper, HOSTPLUS, HESTA, REST, Cbus and UniSuper – were among the best performers across the super industry.

A clutch of small funds including legalsuper and Energy Super also made it into the top quartile, but most did not.

Data collated by APRA in the past decade indicates that a long-term performance gap is now entrenched in the superannuation industry, with big funds more likely to outperform smaller rivals over time.

Big funds do better on MySuper

The data released this week measures the performance of funds across all superannuation products in the market, but they are more or less consistent with performance statistics for default superannuation products, known as MySuper accounts.

In this segment of the market, which covers most Australian superannuation members, research shows that big super funds are outperforming most small providers on fees and net returns by a significant margin.

Research published by Chant West shows that the 16 largest MySuper funds with more than $10 billion of assets are charging on average around 0.86 per cent in fees, while those with less than $5 billion of assets are levying average fees above one per cent.

This points to a cost advantage that is likely to widen as big funds expand their memberships and asset bases through mergers.

Chant West head of research Ian Fryer believes that big funds are likely to continue to outperform smaller funds in the default market.

“In the superannuation industry there is a strong argument that scale can provide lower fees, better services and potentially superior returns,” he said.

Lower fees, more diversification

There is also a qualitative aspect to comparing fees of large and small super funds.

Rice Warner consultant Nathan Bonarius observes that even though small funds are more likely to charge higher fees they are less able than big funds to provide MySuper account holders with access to a diverse range of assets.

“Larger funds tend to have lower fees but they also have access to more investment classes that smaller funds cannot offer,” he said.

“For these reasons you could expect the investment returns of large funds to be better.”

Mr Fryer said big funds tend to offer more to members at a lower cost.

“In return for lower investment fees members get more asset diversification and more sophisticated investment products than they would through smaller funds,” he said.

The following table shows that the country’s 10 largest super funds were also more likely to be ranked higher in terms of the value they provided members for the fees they charge.

It shows that big funds have the resources to invest around one third of their MySuper resources in big ticket unlisted assets such as infrastructure.

Such investments diversify the asset base of MySuper accounts, thereby mitigating the historical nexus between the performance of default funds and the sharemarket.

Consolidation to continue

The number of superannuation providers in Australia has reduced in the past decade as merger and acquisition activity in the industry has accelerated.

APRA has a stated policy of promoting industry consolidation and requires trustees of all super funds each year to demonstrate that the size of their business does not disadvantage members in terms of fees and investment performance.

Industry sources told The New Daily that pressure from the regulator on some funds to consider mergers is “sometimes considerable”.

Mr Bonarius believes the merger trend shows few signs of abating.

“I think the industry is consolidating quickly,” he said.

“Consolidation will continue to be a big factor in the super market for some time.”

Mr Fryer also sees more mergers on the horizon, but noted that efficient small funds such as Auscoal and legalsuper were likely to continue as stand-alone players because they had unique service offers targeted at defined memberships.