The number of superannuation funds is set to drop dramatically in the next five years with the biggest decline expected in the industry fund sector, according to research from KPMG.
The consultancy firm says industry fund numbers will drop from 38 to 21 by 2025, a decline of 48 per cent.
For the more numerous retail funds the decline will be 38 per cent, as mergers and closures see numbers drop from 118 to 74.
“By 2030 retail fund numbers will be down 66 per cent to 52,” KPMG said, as regulatory and economic pressures put mergers high on super trustee boards’ agendas.
Overall pooled fund numbers will drop from 217 to 85 in a decade.
“The pace of merger announcements in the superannuation industry has continued to rise – and it is estimated that over the next decade the current 217 APRA-regulated funds will have shrunk to 85, with a faster pace in industry than retail,” KPMGs report said.
Across the for-profit sector, change is under way with banks withdrawing from the wealth industry.
“Australia’s major retail banks and diversified wealth managers have all announced significant overhauls of their business models, including two major retail banks confirming the separation [or] sale of their superannuation and wealth management businesses,” KPMG said.
Funds have been under pressure from regulator APRA to merge to reduce costs for members and increase returns.
Late last year APRA released its ‘heat map’ which identified the worst performing funds out of 97 default funds examined for returns and costs.
Under-performing funds, including those on the table above, are under pressure to merge.
“There was a lot of red on the first heat map and merger pressure will be ramped up when the second heat map is produced in July,” David Knox, partner with super consultancy Mercer, told The New Daily.
Pressure would also be increased for mergers because of the COVID-19 shakeout.
“Post COVID-19 there will be pressure on member outcomes and issues like using more digital communications what will help members who want to change allocations quickly will be more important,” Mr Knox said.
“Some members wanted to move to cash during the initial market fall, and whether that is a good idea or not funds will have to be able to accommodate that better.”
Superannuation minister Jane Hume has pushed for mergers, saying that small funds with balances below $1 billion in particular were in her sights.
However, on Thursday she raised the issue of concentration, saying some funds were too exposed to particular industries and this had become obvious during the pandemic.
The hidden danger
“It’s a systemic risk and it’s been hiding in plain sight for 30 years, but it’s only just coming to the fore,” Hume told Bloomberg’s Inside Track webinar.
“Diversification of the asset base is not just the only important issue, it’s diversifying the membership base too,” Bloomberg reported Senator Hume as saying.
Funds in her sites on the issue were HostPlus and REST which cover hospitality and retail workers who lost jobs in massive numbers under the lockdown.
Both funds had to pay out over $1.2 billion to members taking advantage of the government’s early release scheme, according to APRA data.
There were concerns that would create a liquidity crisis in those funds, which did not eventuate. However, they did have to liquidate assets to make the unexpected payments, and the industry was vocal in its opposition to early withdrawals.
Overall, the pandemic had “re-framed the decision for fund mergers, and in fact in a lot of cases it’s made the decision more urgent, and potentially opened up the field too,” Senator Hume said.
APRA had “a shiny new set of teeth and I think they might be ready to bite” to force more mergers, she said.
Senator Hume described concerns over early withdrawals as “mountains made out of mole hills” and that members’ switching asset allocations had “a far greater effect on the superannuation funds than the early release scheme”.
The Senator’s view on the importance of member diversity was challenged by Mr Knox.
“There are other issues I would view more important than diversity of membership occupation,” he said.
Those include “demography, age, gender and whether members are workers, managers or owners”.
Other factors at play
Demographics, age and gender create different demands on funds, influencing what sort of allocations members need and when they will require pensions and lump-sum withdrawals.
“A great strength of the Australian superannuation system is its diversity, where different funds cater to the needs of their members with tailored investment strategies, insurance options and customer service,” said Julian Cabarrus external affairs director with the Association of Superannuation Funds of Australia.
“Some consolidation will continue to occur, however the focus must be on delivering outcomes for members over the long-term.
“The evidence is that the diverse Australian system is doing just that,” Mr Cabarrus said.
The New Daily is owned by Industry Super Holdings