The pace of mergers in the super sector will continue to rise over the next two years and the coming decade will see a 60 percent fall in the number of funds, a report, by KPMG published today, finds.
The report, Transformation in the Superannuation Industry, estimates that in five years’ time, the current 217 APRA-regulated funds will have shrunk to 138, with a faster pace in industry than retail.
The paper also shows there was a steep increase in the size of announced mergers in 2019 compared with a year earlier. In 2019, the average size of the fund being transferred was $22.3bn FUM compared to just $1.5bn the previous year. The number of members moving from smaller to larger funds was 2.1m in 2019 compared with 0.2m in 2018, while the size of the receiving fund was $57bn ($27bn in 2018).
Linda Elkins, KPMG Head of Wealth & Asset Management, said: “Over the past year we have seen merger activity ratchet up across all categories of funds in the sector. The greater pressures put on all funds by the Covid-19 pandemic will only increase this. Significantly, we are beginning to witness the announcement of larger-scale mergers in addition to the more common smaller fund consolidating into a larger fund. This demonstrates funds are becoming increasingly ambitious in their pursuit of scale, and, for many already large funds, targeting smaller sub-scale funds may not be the best mechanism to achieve a material outcome in regard to scale and its associated benefits.”
“An increasing number of Australia’s Superannuation Funds are going to achieve a scale over the coming years unprecedented in our economy, positioning a number of these funds as some of the largest globally. With this growth, comes significant implications and opportunities across our economy, political environment and the retirement outcomes of all Australians.”
The current 38 Industry funds will number 21 in five years’ time and just 12 by 2029. The existing 118 retail funds will have shrunk to 74 in five years and 52 within a decade.
The ongoing momentum of consolidation, combined with natural system maturity and growth will lead to a distinctly different industry landscape characterised by:
Significantly fewer institutional funds overall
The report also says the next 12-24 months will see a transition to a new Retail Wealth environment largely separated from the major banking institutions. Driven by the major players in the retail sector, significant transformations have been announced as these organisations look to separate the superannuation and wealth components of their businesses from core banking operations, improve trustee and governance arrangements, and simplify their business models.
The paper argues that the ‘tailwinds’ driving an acceleration of mergers are headed by greater regulatory pressure, scrutiny and oversight: – this includes issues such as:
Other issues include demographic shifts and changing customer preferences - members are demanding more personalised engagement and customised service through digital channels. There is heightened awareness of fund performance, or lack thereof, across the superannuation industry and a requirement to better understand and more meaningfully engage members and to develop and offer products tailored to distinct and evolving demographic cohorts. Funds often have to do ‘more with less’
David Bardsley, KPMG Superannuation Advisory Partner said: “Regulatory pressure, increased demand for more customised service, and increased need for investment to deliver higher member outcomes is putting a strain on business models across all sectors. This leads to greater pressure to manage costs; and revenue and fee model pressure. This is not going to stop which is why we see an acceleration of merger activity.”
“It is true that there are many challenges associated with choosing the right merger partner and then taking that from conception to completion – and for many funds it will be their first experience of doing so. There are risks involved, but there are also many risks of not doing so – including slower growth and poor member outcomes.”
“Committing to merger must follow rigorous assessment on member outcomes and robust due diligence and transition planning activity; the implications of getting it wrong at any stage of this journey will must be avoided. But we firmly believe more funds will initiate discussions over the next few years and see it through.”
©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.
Liability limited by a scheme approved under Professional Standards Legislation.
For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.