Super funds to reach $1trillion barrier by 2040

KPMG

Review shows need for sector to move focus from accumulation phase to retirement system.

Australia may have at least two super funds with over $1trillion in assets each in less than 20 years – while the size of the nation’s retirement savings pool almost trebles to $8.6trn.

KPMG’s annual Super Insights review of the sector, published today, looks ahead to 2040 and sees – based on the momentum of recent years – AustralianSuper and Australian Retirement Trust (ART) dominating the industry, each quintupling in size from $200billion in 2021.

In the present day, KPMG’s review, which analyses the most currently available APRA and ATO data, reports that the total value of funds rose in the 12 months to 30 June 2021 from $2.4trn to $2.8trn, while continued merger activity cut the number of APRA-regulated funds from 154 to 144. The market is already concentrated, as 13 funds with net assets above $50bn now hold 75 percent of the total net assets (excluding SMSFs) and 78 percent of members.

The review shows it was a mixed year for the sector, with a 5 percent fall in member numbers from 22 million to 20.8 million (excluding SMSFs) due to the first stage of closure for Eligible Rollover Funds (ERFs), and the ongoing impact of the Superannuation Early Release Payments. But this was countered by recoveries in share markets and an increase in contribution levels of 13 percent from members and 8 percent from employers.

Retail super funds led the way here with a 44 percent rise in the average member contribution; and industry funds seeing a 19 percent increase. The combination of positive net cash flows and higher net returns, on average, across industry funds saw them overtaking the SMSF cohort in assets held for the first time. Across the industry the average net cashflow ratio increased from 1.13 percent to 1.4 percent while the number of funds in net outflow fell from 50 out of 83 in 2019/20 to 38 out of 75 in 2020/21.

The average account balance across all funds (excluding SMSFs) was $93,165, ranging from an average of $75,397 in the industry fund sector to $226,714 across corporate funds.

The report emphasises how the Australian super fund sector needs to move its focus from the great success of the accumulation phase to a retirement system.

Linda Elkins, KPMG National Sector Leader, Asset and Wealth Management, said: “While our review shows that results for the super industry this year were quite strong, it’s now time for funds to shift the conversation from accumulation to retirement. The Your Future, Your Super legislation – in particular stapling and the Annual Performance Test – will continue to put pressure on a segment of the sector and result in further consolidation, while continuing funds need to look forward to meeting their current and future member needs.

“In the context of inflows which are no longer driven by default arrangements, retaining scale will be about attraction and retention of members. With around 20 percent of total member benefits now in the retirement phase, the requirements of the Retirement Incomes Covenant formalise the need for funds to develop strategies and products for members approaching and in retirement. These need to be delivered in the context of increased regulatory scrutiny and the overarching requirement to act in members’ best financial interests. To succeed, funds will need to increase their access to data for identification and analysis purposes.”

The report identifies some key drivers of change for the sector

  • Regulatory change and scrutiny – the last 2-3 years has seen over 180 recommendations, first made in the Murray Review and Haynes Reports, enacted into law. These have been aimed at enhancing the robustness, transparency and maturity of the sector, driven largely by consumer and regulatory expectations. These changes have set new standards in terms of funds’ decision-making frameworks, accountability and transparency.
  • Demographic changes – using ABS population projections, total pension payments are expected to be approximately $137bn in 2040, compared to approximately $46bn in 2021, although new workforce entrants will mean that the industry is not expected to move into a net outflow position. As the number of Australians in the retirement phase grows, and now with the enactment of a Retirement Income Covenant, KPMG expects to see the development of broader base retirement offerings.
  • Consolidation – regulatory pressure (APRA has confirmed it is seeking greater powers to force mergers) and the need for scale are continuing the drive for funds to merge. While 38 merger announcements were made in the 9 years between 2011 and 2019, the pace increased with 17 announcements made across 2020 and 2021. Although only two mergers have been announced in 2022 so far, many more are under discussion. We will see the continued move to a handful of mega-funds in the next two decades.
  • Shifting consumer expectations & digital and value chain disruption – members now expect to be able to access information and help as they want it, and ideally for this to be ‘personalised’. But the level of digital maturity varies significantly between funds – almost half do not currently use member data to deliver personalised experiences. They will need to better understand their members to meet their trustee obligations and especially to deliver advice efficiently.

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