Merger activity in the superannuation sector continued to increase during the 12 months to June 2020, accelerating a trend towards 'mega funds', KPMG's annual Super Insights report shows. More than three-quarters of Assets Under Management (76 percent) and member accounts (77 percent) will be managed by the top 12 funds, all with AUM over $50bn, once currently-announced mergers have been finalised.
- Early Release Scheme, and Protecting Your Super regulations contribute to 12 percent fall in the number of member accounts
- Net cashflows fall by 30 percent and number of funds in net outflow rises to 61 percent
KPMG's report analyses the most current available APRA and ATO data, covering the whole sector but concentrates on trends in APRA-regulated funds, which represented $2.4trn in AUM. These fell in number from 171 to 154 in 2019/20.
The market falls as a result of Covid-19 resulted in the sector overall delivering a flat (net of tax and fees) return of -0.4 percent over the year, or -0.9 percent excluding SMSFs. Corporate funds and SMSFs were the only sectors achieving positive returns with the public sector funds delivering flat returns on average and industry funds outperforming retail. The report showed however, that during the six months from July-Dec 2020, the sector revived, making an average of 6 percent returns.
More people moving into retirement, and low investment returns, plus the impact of the Early Release Scheme and the Protecting Your Super transfers all contributed to a 12 percent fall in the number of member accounts, and no growth of Assets Under Management (AUM) in 2019/20. Net cash flows fell by 30 percent, from $30.5bn to $21.2bn. Overall, 61 percent of the funds/providers were in net outflow over the year.
Heavier outflow particularly impacted the industry funds, with pension payments from those funds increasing by 14 percent and the number of industry funds in net outflow rising from 7 to 19 in 2019/20. However, inflows to industry funds from retail funds continued, albeit at a reduced pace from previous years.
Linda Elkins, KPMG National Sector Leader, Asset & Wealth Management, said: "Covid-19 may only have been around for the last four months of the 2019/20 year, but the figures in our report show just what an impact it had. The good news is that in the next six months, the sector revived, with the help of JobKeeper and other support packages which kept member and employer contribution levels up."
"The stand-out issue in the industry is consolidation. We see an increase in ongoing merger activity - which kept up during Covid but will now accelerate, mostly in the industry funds sector. Over the next few years we will see an increase in scale of the 'mega' funds (over $100bn) and a widening gap between the 'sub-mega' funds (over $50bn) and those lower down.
"As for the retail funds, the main issue for them will be transformation through restructure - with the separation of wealth businesses from the major banks and the requirement that superannuation trustees cannot perform other roles. But all funds need to address how they are going to centre their operating models around members, with greater engagement and expectations of online services."
The overall fund composition of the sector as at 30 June 2020 was
| Corporate | 2.3% |
| Industry | 29.6% |
| Public Sector | 13.1% |
| Retail | 24.5% |
| SMSFs | 30.5% |
KPMG projections in the report show that by 30 June 2021, industry funds will have overtaken SMSFs and, by 2025, will represent 36 percent of the market.
The report says that seven mergers have been announced since 30 June 2020 and many more are in discussions. when the current merger activity completes, based on 30 June 2020 data, 76 percent of AUM and 77 percent of member accounts will be managed by the top 12 funds / providers with AUM >$50bn and 47 percent of AUM and 43 percent of member accounts will be managed by 5 $100 billion + 'mega funds' [QSuper/Sunsuper/PostSuper, AustralianSuper, IOOF & MLC, Aware Super, AMP]
Linda Elkins said: "The Your Future, Your Super package will further shape the reforms envisaged in the Royal Commission report. The potential effect of stapling a member to their existing super fund is expected to provide some funds a significant challenge attracting new members. For many funds, meeting rising member expectations will lead to increased costs and the challenge is to find more sustainable ways to operate."
"These increasing expectations, and the challenging regulatory environment - such as the ongoing impact of APRA's MySuper Product Heatmap - will continue to drive mergers, as we see from current market discussions. Whilst developments in products and service offerings are not isolated to funds with scale - some smaller funds have shown that they can be innovative - they are more common in the larger funds. These developments are transforming the nature of funds' businesses and bringing with them new operating challenges."
"Having said that, there is definitely still a place for new entrants. We have witnessed new participants to the industry at multiple points throughout the value chain - having genuine impact on operational efficiencies, administration and technology platforms, in addition to new funds entering the market."
- Mergers - we see maturing regulatory & Government settings, business model sustainability, separation and integration, globalisation, and rising member expectations as key drivers of change for superfund mergers and business model transformation. The pace of change - with continuing fund consolidation and retail fund transformation - continues to grow.
- Governance, risk and controls during a merger transition - trustee directors and fund executives need to actively manage the risks associated with fund mergers. Good governance activities must be conducted pre and post-merger, as well as during the merger.
- Member Centric Operating Models - funds have a broad array of areas to consider when developing their future operating models, from regulatory changes to digital experience for members and opportunities to leverage automation, as well as the role of the trustee. Funds need to move to a a Member Centric Operating Model, can better meet increasing member expectations and the evolving needs of their member base.
- Retirement - the need for development in the retirement space is well recognised, with the Government announcing a string of measures to encourage activity. However, the industry has struggled to respond with any major change. Funds need to address how they can move forward in this space.
- Insurance in Super - Insurance in super continues to be subject to impactful regulatory change. Uplifts to data and reporting as part of APRA's broader Superannuation Data Transformation project - particularly new reporting standard SRS251 - will provide significant benefits to funds once initial challenges are overcome.
- A climate of risk and opportunity - a recent case has highlighted legal exposure in relation to how trustees manage climate related risks. There are developments driving the "act now" expectations of the community and regulators as well as the difficulties faced by trustees in operationalising climate-related risks.
- Regulatory change - several elements of regulatory change are due for implementation in 2021 - key recommendations from the Financial Services Royal Commission, the new Design & Distribution Obligations, the Your Future, Your Super reforms, the uplift in reporting under APRA's Superannuation Data Transformation project and the changes under RG97.
- Risk and regulation - there will be no reprieve for Chief Risk and Compliance Officers in 2021 as the push to lift governance, culture, remuneration and accountability standards across the industry continues.
- Member Outcomes - There were a number of challenges for many funds and providers completing the first iteration of the member outcomes framework. Funds will now embark on the next round of the requirements.
- General v personal advice - where to draw the line. The High Court decision in Westpac/BT and the new anti-hawking laws will impact member acquisition, engagement and retention strategies. Trustees should revisit their interactive contact points with new and existing members across all channels against these new developments in the law
- Data Protection & Privacy - the use of third-party arrangements gives rise to additional challenges for superannuation funds in an environment highly regulated for privacy. There are key areas for considerations by funds when managing members' personal information
- Tax - 82 of largest superannuation funds have now been issued Streamlined Assurance Reports (STARs) by the ATO, allowing us to understand common areas that received lower assurance ratings. Tax governance and risk management, tax issues flagged to market and technology: data and automation are areas of growing importance to funds.
