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Super funds performing strongly but will shrink in number

Super funds performing well but will shrink in number

Industry funds are strengthening in members, assets and cashflow at the expense of retail funds, KPMG’s third annual ‘Super Insights’ report reveals.

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The overall performance of the superannuation industry is strong, with the APRA-regulated sector growing by 10.3 percent in 2018, despite the cloud of the Royal Commission, while the Self-Managed Superannuation Fund sector grew by 6.4 percent

Our review also indicates that increased regulatory and competitive pressures leading to more fund mergers is likely to be a strong feature of the next few years – trends which will significantly reshape the structure of the market.

KPMG’s report, based on 2017/18 figures from the Australian Prudential Regulatory Authority, finds that the APRA-regulated sector ended the year with assets under management (AUM) of $1.8tn, while the SMSF sector closed at almost $750bn. In total, the assets supporting the superannuation sector closed 2018 at almost $2.72tn, some 39 percent higher than the market capitalisation of the Australian share market.

Even before the impact of the Royal Commission, the Industry Fund sector enjoyed an uplift in new membership, with this sector actually increasing total membership over the year by 1.39 percent. This was largely at the expense of the Retail Fund sector, where membership declined 5.2 percent during 2018. This has also resulted in a substantially faster AUM growth rate within the Industry Fund sector, which grew by 16.3 percent, compared to the Retail Fund sector growth of 5.9 percent.

The Public Sector showed reasonable AUM growth of 11.2 percent, whilst Corporate Funds continued to struggle with assets declining by 4.5 percent, mainly due to a number of mergers during the year.

Paul Howes, KPMG Head of Asset & Wealth Management, said: “Despite the increased volatility in the market and greater competitive pressures, the superannuation industry continued to deliver strong outcomes for members overall. But with the Royal Commission Final Report released in the current financial year, it is likely that the trends identified in our review, particularly between the Retail and Industry Fund sectors, will be exacerbated, driving materially different growth rates across these sectors.

“We also see an acceleration in mergers in the sector – last year we predicted that the number of funds would halve over the next decade, but we now believe this will be nearer to five years than ten. Greater regulatory obligations, plus issues such as a continued increases in operating costs, and ongoing uplift in churn out of funds placing further pressure on many fund’s business models, is driving consolidation.”

From a cashflow perspective, the majority of the Top 10 performers are from the Industry Fund sector. AustralianSuper maintained the strongest net cashflow position, with $8.0b in net flows, followed closely by Sunsuper, HostPlus and Equipsuper, with both Sunsuper and Equipsuper achieving large inflows through merger activity during the year. By contrast, nine of the bottom 10 funds in terms of net cashflow emanated from the Retail Fund sector.

In terms of consolidation pressures, the report identifies the recent Protecting Your Super Package bill as a particular motivator for funds to consider their strategic options to ensure they remain viable into the future. The collective impact of the removal of low balance inactive accounts, the ban on exit fees and the capping of administration and investment fees, together with the continued downward trend in membership and the unyielding growth in outflows, is expected to put upward pressure on fund operating costs (particularly for funds operating on a member fee only basis).

A review of the potential impact has already prompted trustees to consider revising their operating models and, in some instances, considering an exit from the system through a fund merger. The member outcomes assessment introduced by APRA and coming into effect in January next year has also put a spotlight on strategic planning practices, holding trustees more accountable to delivering value to members

Our report also notes that the finalisation of Superannuation Prudential Standard 515 – Member Outcomes, will have a material impact on the manner in which trustees assess the success of the performance of their fund, from a member lens andwill provide additional power for APRA to drive fund consolidation.

Paul Howes added: ‘There is no room for complacency, including in the industry sector. During 2019, it is incumbent on all trustees of all funds to review their operations, business models and product portfolios. We believe that in all sectors, significant opportunities exist for funds to develop innovative retirement products to suit the needs of a variety of members.

“We are concerned that the potential changes to the advice landscape, including the additional educational requirements proposed by FASEA, the removal of commissions and banning of advice fees being charged on MySuper products will potentially impact the number of members that receive advice. This may have the impact of reducing the demand for pension products going forward and may result in more individuals taking lump sums out of the superannuation systems, which may put more pressure on the social security system, which is unlikely to be a sustainable long-term position for the Federal Government.

As such, KPMG believes funds will have to review their advice models to ensure that they can continue to deliver advice to members in an efficient, affordable and compliant manner to facilitate the continued growth of the retirement income product market.”  

In terms of AUM growth, assets across the super industry are expected to grow, although more slowly than in prior years given the potential for an ongoing low return environment and increasing outflows due to the ageing population and recent policy changes. By 2029, KPMG predicts the total super asset pool is projected to reach $5.4tn. Growth in Industry Fund assets is likely to accelerate relative to other sectors, with employers and members leaving the Retail Fund sector and transferring their assets to industry funds post Royal Commission.

KPMG maintains the expectation that Industry Funds will overtake SMSFs in FY20, holding the largest share of the market at just over $2t in assets by June 2029. We expect both Retail and Public Sector fund assets to experience growth at half the rate of industry funds, with these sectors projected to reach $1.2t and $0.9t respectively in 10 years. Lagging well behind the other segments, the Corporate Fund sector is expected to experience the slowest growth rates, maintaining assets at around $56 billion by 2029. 

For further information

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

© 2019 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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