Super sizing: the growth of cashed-up super funds

The numbers are likely to make anyone’s eyes water. Australia’s superannuation funds – led by the likes of AustralianSuper and Colonial First State – have about A$2.7 trillion in assets under management. That’s forecast to grow to about A$6 trillion in 2030.

Rice Warner actuary and super authority Michael Rice has predicted that four or five of the nation’s funds will each hit A$300 billion during the next five to 10 years, after which they could grow to between A$500 billion and A$1 trillion.

Such mega funds are a far cry from 1992, when then Prime Minister Paul Keating, arguably the father of Australia’s superannuation system, launched a humble compulsory employer contribution scheme with a view to shoring up the savings of retirees.

Following the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the expectation is that more rigorous regulation – including annual assessment of member outcomes, a focus on fees and costs, and a move to automatically transfer inactive super accounts to the Australian Taxation Office – will result in smaller funds becoming less viable. The upshot? The larger funds will grow even bigger.

AustralianSuper group executive, membership, Rose Kerlin says the recent legislative changes will help regulators to “weed out” the performers that are not acting in members’ best interests.

“In a mandated system like super, people should not be in poor-performing funds, and this is what will drive consolidation in the super sector.”

Kerlin says as this process progresses, “we will hopefully see a consolidated super sector where all funds offer products and services that deliver the best possible retirement outcome for their members”.

Expert super fund mergers

KPMG research in 2018 suggested Australia’s super  funds would halve in number during the next decade. However, the firm’s wealth management leader David Bardsley says ramped-up merger negotiations could bring this outcome forward.

He suggests that super entities’ trustees and shareholders are increasingly questioning whether members may do better in a larger entity with the scale, processes and functions to respond to more intense regulatory obligations.

Bardsley says that up to six years ago, 14 or 15 super funds received 85 per cent of net system inflow of funds; now 10 or 11 receive 80 per cent to 85 per cent of system inflow.

“The hypothesis that there will be a handful or maybe two handfuls of very large industry super and super fund managers in the market is fair and reasonable,” he says. 

Led by their perceived integrity and member focus, industry super funds are set to overtake self-managed super funds (SMSFs) as the dominant players by 2020, with industry funds holding A$800 billion and SMSFs A$795 billion, estimates Rice Warner.

Bernie Dean, CEO of Industry Super Australia, which represents 15 of Australia’s biggest industry funds, says following the Royal Commission, the group’s funds are experiencing a “huge migration” as people seek “a fund that puts their interests first”.

“It’s no secret that they have been experiencing significant inflows, not just in the last year, but the last three years,” he says.

At the same time, members and investors want results, says Dean. “The starting point has to be what sort of hip-pocket impact a switch will make on the punter.”

What about SMSFs?

Other big players, collectively, in the market are SMSFs. With the Productivity Commission recently reporting that SMSFs with less than A$500,000 tend to perform “significantly worse” than regular funds, some critics have questioned their role in an era of mega funds.

However, Jordan George, head of policy at the SMSF Association, “challenged those figures” given what it sees as poor-quality data and a methodology that “compares apples and oranges”.

He is adamant that SMSFs will continue to play an important role for people who want an extra level of control and transparency around their super investments.

It is widely felt that the major banks had become drunk on their power, leading to unethical practices. Dean is confident industry super funds will not make the same mistake.

“It gives them a lot closer feel and it gives them more choice as to how they invest and draw down on their super when they reach retirement. So that’s where SMSFs really have a role with the provision of choice as an alternative smaller-type vehicle.”

George agrees that a shake-out will continue in the superannuation market, with the Australian Prudential Regulation Authority and Australian Securities and Investments Commission putting the heat on trustees that they deem to be under performing.

“That all points in the direction that we’ll see the consolidation of funds and pressure on smaller funds that struggle to have scale and keep up with the performance of larger funds. In a way, I think there’ll be a less diverse sector than we have now,” he says.

Member benefits

In theory, the advantages of scale should drive lower fees and costs, better financial products and services and better investment outcomes. AustralianSuper’s growth has always been predicated on the belief that it only wants to be bigger if it means better member outcomes, says Kerlin.

“Scale enables us to keep costs down while also increasing services for members. Superannuation fund members rightly expect the same quality of service they get from the nation’s big consumer brands. We aim to deliver outstanding experiences targeted at that specific member’s point in their life.”

Bardsley warns that funds will still have to display skill to deliver on promises of scale. Some funds that began focusing on their internal investment management “journey” five to six years ago are now delivering good investment outcomes and lower investment management costs. “It comes down to the discipline in how that capability uplift is executed,” he says. “Some people do it very well, and others less well.”

A force for good

There is increasing discussion of the notion of super funds being a “force for good”. Industry Super Australia has advocated for funds to use their member clout to pressure businesses to focus not just on short-term share price or profit, but also on long-term sustainability, the idea being to transform corporate culture and promote investments in line with environmental, social and governance (ESG) standards.

Dean stresses that such campaigns are “always going to be done through a member-first lens”. However, he adds that embracing sustainable goals aligns with member interests “because if those things go wrong, it can undermine the value of that business over the long term, and that means lower returns for members”.

Kerlin says AustralianSuper’s primary focus is on a fiduciary duty to provide the best possible returns for members, but that as a long-term investor it also always thinks ahead about the risks and issues that can affect an investment’s growth prospects.

“There is a positive connection between better company performance on ESG issues and better investment outcomes for members, and because of this we actively exercise the rights and responsibilities that come with being a large asset owner,” she says. “ESG issues are always integrated into any investment decisions that we make.”

It is widely felt that the major banks had become drunk on their power, leading to unethical practices, Dean is confident industry super funds will not make the same mistake.

“When you talk to industry funds and not-for-profit funds, you’re struck by the seriousness of how they’re taking their new stature. There’s no hubris and there’s definitely no complacency.”

The SMSF Association believes the trustees of self-managed funds can also influence environmental and social goals.

“If people want an ethical focus, obviously it’s very easy for them to achieve that through an SMSF because it’s up to them as to what assets they hold,” George says.

Economic clout

Recent estimates suggest that about 4.5 per cent of Australia’s super is invested in infrastructure. Garry Weaven, the recently retired chair of global institutional funds manager IFM Investors, believes more funds could be directed to build infrastructure, water services, renewable energy projects and social housing, telling ABC News that “for a triple-bottom-line result in terms of great returns, that’s an absolute imperative for us”.

KPMG’s David Bardsley has no doubt Weaven’s wish will come true, noting that super funds are starting to discuss involvement in public private partnerships in a more meaningful way. 

“There are potential opportunities for these funds and the public and private sector to work more collaboratively,” he says, specifying hospital and aged-care projects as likely targets.

In an example of what may come, 2018 saw AustralianSuper teaming up with Transurban to buy 51 per cent of WestConnex, Australia’s largest ongoing road infrastructure project. AustralianSuper and IFM Investors have also invested in New South Wales poles and wires assets to help with electricity generation.

AustralianSuper’s Rose Kerlin says the fund has a long history of investing in infrastructure – ports, roads, airports and electricity distribution.

“By finding the best investable deals for our members, we will be able to continue to contribute to the Australian economy by a being a stable, long-term infrastructure partner,” she says.

Industry Super Australia’s Bernie Dean says: “The capacity of the national savings pool, regardless of which fund it sits in, is incredible.”

Industry Super Australia has identified potential investment in affordable housing and renewable energy as the key areas in which the savings of Australians could have “transformative impacts” on social and economic issues.

“We’re hoping that people can see the potential of this savings pool to not only boost economic activity, but also to strengthen the diversity of Australia’s economy,” Dean says.

A global vision for superannuation funds

Investing offshore

As super funds continue to mature and grow domestically, KPMG’s David Bardsley expects a restructure of their investment strategies to include more funding of offshore projects.

Historically, domestic investments have comprised about 60 per cent to 65 per cent of funds under management, he says. Now, he expects that figure to drop to 40 per cent to 45 per cent, as pressure grows to invest offshore.

“Certainly part of [their funds] will remain in the domestic market, but these larger, maturing investors don’t want to be overexposed domestically,” he says.