COVID-19 era disrupts and challenges super sector

COVID-19 era disrupts and challenges super sector

The COVID-19 crisis has added even more complexity to a rapidly-changing super fund sector and has significantly disrupted market trends, which were becoming established by the end of the 2019 financial year, KPMG’s annual Super Insights report finds.


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KPMG’s report analyses the most current available APRA and ATO data as at 30 June 2019, covering the whole sector but concentrates on trends in APRA-regulated funds, which represented $1.7trn in assets under management (AUM) as at 30 June 2019.

The study shows that low wage growth, reduced contribution caps, and an ageing population were already putting many funds’ cashflows under pressure, with more than 40 percent of funds in a net outflow position over the year. The number of funds fell as the pace of merger activity increased and the number of member accounts fell slightly, ahead of the impacts of Protecting Your Super measures.

The impact of the Hayne Commission was also evident, as the retail fund sector lost ground, with $8bn in increased rollovers out. Conversely rollovers into the industry fund sector increased by $7bn and going into 2020 the industry fund sector was poised to overtake the SMSF funds as the biggest sector in the market. But this has now been stopped by the COVID-19 crisis.

At the end of 2019 APRA released its inaugural MySuper Product Heatmap which, for the first time, publicly called out the products the regulator had found wanting. It was expected this would drive consolidation at the ‘tail’ end of the market, amongst the seventy sub-$10bn funds, but the KPMG report finds that in reality, many of these smaller funds have stacked up well against the Heatmap metrics and are continuing to attract new members. Instead the greatest merger activity has been at the larger end, driving the rise of the so-called ‘mega’ fund and opening up a void between these funds and the ‘tail’.

Linda Elkins, KPMG Head of Asset & Wealth Management, said: “The arrival of the COVID-19 era has thrown everything into the air in the super sector. For example, at the end of the 2019 financial year, we believed industry funds would overtake SMSFs as the biggest grouping, just as they had moved ahead of retail funds in the first three years of this study. But given the particular challenges now facing the industry funds – in particular resulting from allocations to illiquid assets and the expected increase in benefit payments under the early release scheme – we now predict that SMSFs will again move significantly ahead of the other sectors.”

“Although the regulators will return to their pre-COVID-19 supervisory focus when Australia comes out of the pandemic, this will be into an economy that has been shaken. Funds’ balances have fallen on the back of market shocks on listed and unlisted assets rivalling those of the GFC. Further, they are facing unprecedented calls on benefits and will suffer reduced contribution flows through increased unemployment. Some funds that were valued at sub-$50bn pre-COVID-19 may come out of COVID-19 as sub $30 billion funds and some may decide to leave the field altogether.”

“If the government and/or regulators decide that some funds should merge as a result of the impacts of COVID-19, they will need to identify a mechanism to achieve this. Receiving funds will need to act carefully and consider the cost and complexity, potentially making it difficult to satisfy the current requirements of acting in members’ best interests and achieving equivalent rights.”

“The remaining funds are likely to face a more engaged membership with higher service expectations and a new set of needs. Like the post GFC era, members previously close to retirement may no longer be able to do so and will be looking for security of income once they finish work. Younger members, who have seen significant reductions in their balance, will need advice on how to rebuild their retirement savings.”

“We predict increased regulatory pressure on funds to meet the needs of their members and increasing mergers at the larger end of the market, with a small number of ‘mega funds’ competing for the capabilities to deliver to these needs.”


Confirming the move to mega funds, the top 10 funds, all above $50bn, are unchanged from the prior year and now represent, in total, approximately $1trn in AUM and approximately 60 percent of the APRA-regulated market. Post COVID-19, KPMG expects to see further mergers of funds/providers in the $50 billion+ space, creating an increasing number of mega funds in the future and a wider gap between these funds and the rest of the sector.

At the other end of the market, largely in the sub-$30bn space as at 30 June 2019, KPMG expects to see merger and other activities, including:

  • Merger of medium sized funds – as at 30 June 2019 there were 5 funds in the $20bn–$30bn space, which could merge with each other or a number of smaller funds to make it to $50bn
  • Small funds undertaking strategic mergers which will improve capabilities and provide sustainable metrics, for example by diversifying their membership.

A tough rest of 2020

Looking ahead to the rest of 2020, and the impacts of the COVID-19 pandemic, KPMG estimates that the impact on salaries and wages for employees impacted by the change in trading conditions is likely to lead to reduced Super Guarantee contributions of around $0.7bn per month. This will impact flows to the superannuation sector as a whole but particularly be felt by funds whose memberships are concentrated in industries suffering the greatest impact on employment.

The Government has estimated that the early release measure may lead to an overall increase in superannuation fund outflows of approximately $27 bn. The longer term effects of this measure, coupled with a bear market, is that many Australian superannuants will be further behind their savings objective than previously predicted.

David Bardsley, KPMG Superannuation Advisory Partner said: “At a portfolio management level, we have already seen a strain on liquidity, with portfolio managers finding it hard to sell their fixed interest assets to any buyer other than the RBA. The RBA has commenced quantitative easing and has been actively buying Australian Commonwealth Government Bonds and Semi Government Securities.”

“However this is not creating the volumes that institutional fund managers need to de-risk and rebalance exposures and raise cash. As a result we have seen a significant increase in buy/sell spreads, making it much more costly to rebalance portfolios. The challenging liquidity conditions are expected to continue while governments work to contain the spread of COVID-19 and global economies can start to recover.”

The international lockdowns and domestic work from home instructions have posed unprecedented challenges on the sector’s operational capacity and capabilities such as:

  • Triggering funds’ business continuity plans - including the need to equip each fund’s workforce to work from home over remote access.
  • Challenges posed by global outsource models as off-shore providers go into lockdown, impacting their ability to provide services to Australian customers.
  • Exponential increases in calls to funds’ call centres, not just as a result of the market downturn but spiking to new levels as a result of member enquiries regarding the early release measure and on insurance cover.
  • Exponential demand on processing centres to process switches and early release of super requests received via the ATO.
  • The need to assess and model the impacts the crisis may have on the fund’s assets and liquidity.
  • The need to respond to this modelling by reviewing asset allocations and implementing out of cycle valuations of unlisted assets.
  • Readiness to activate illiquid funds redemption processes – which are outside business as usual processes.
  • Responding to the Regulators’ calls to accelerate remediation programs to get monies back to members’ funds and/or into their bank accounts.

Linda Elkins said: “Looking ahead, the funds that succeed in navigating the immediate challenges caused by COVID-19 will be those that have the established governance practices that allow them to be quick in implementing change, making appropriate decisions which are targeted to achieving the right and equitable outcomes for their members.

Longer term, the winners in the post COVID-19 world will be the funds which are clear about the member cohorts they serve, that capture the default contribution flows and solve for retirement.”

For further information

Ian Welch
KPMG Communications
0400 818 891

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