Superannuation funds industry bracing for consolidation

31 May 2020 3 min. read
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Australia’s superannuation funds industry should brace itself for a consolidation wave in the coming years, according to a new report from Melbourne-based management consultancy Right Lane.

Today, Australia counts just over 90 superannuation funds, but on the back of a number of pressures, that number is expected to drop to below 20, predicts Right Lane in its ‘2020 Industry Super Forces at Work’ report.

The optimum number is pegged by the consultancy at about 15 funds, explained Abhishek Chhikara, an associate principal at Right Lane. “An idealised structure for the superannuation system would have 3-5 generalist mega-funds and 7-10 specialised funds, with no fewer than 500,000 members.” 

In the pensions industry, size matters both in terms of costs and returns, as well as in terms of how well customers can be served. Over the eight years Right Lane has been conducting the research, the consulting firm found that funds with fewer than 500,000 members are generally not efficient, and conversely, that the largest funds in the sector enjoy a significant efficiency edge.

Superannuation funds industry bracing for consolidation

Notably, industry funds are outperforming retail funds on efficiency, with the median operating cost for an industry fund approximately half of the median cost for a retail fund.

Funds with higher than average costs per member have no other option but to pass on these costs to their retirees, said Chhikara. “Costs impact retirement incomes significantly – while investment returns come and go, costs stay forever.” 

As a result, under the current level of market fragmentation, those who join an average sub-scale fund at the start of their working lives could lose out up to $45,000 by the time they retire. The retirement age in Australia is 67 years for those born from 1 January 1957 onwards, and 65 years for those born before 1 July 1952.

Despite boasting the world’s third best pension and retirement system according to Mercer, the Australian superannuation system “must become more efficient. There are currently too many providers, many of whom are too small and don’t deliver enough value for members,” said Chhikara. 

While the underlying trends have been around for a while, the need for consolidation has been accelerated significantly by the Covid-19 outbreak. The pandemic-induced downturn has led to a steep fall in asset values and cashflows, exacerbated by the fact that billions of dollars have been withdrawn as part of the Federal Government’s measures to deal with the coronavirus crisis

And as unemployment inevitably will grow further in the months to come, funds need to prepare for an additional negative hit on their portfolio values and cashflows. Meaning that financially underperforming funds need to seriously consider “finding a big brother or sister” to merge with or face the prospect of extinction as “growth becomes more difficult and members continue to switch into larger funds.”