Whichever way you assess the size of the superannuation (super) sector, either as a whole or the size of the funds within the sector, one thing is undeniable – it’s only getting larger. The question is, does continued growth of the sector, and the super funds within it, help or harm the sector? And when should we expect it to end, if at all? Chant West's IAN FRYER writes.
A key factor behind the sustained growth of the super sector is the continuation of Superannuation Guarantee (SG) contributions. Compulsory super contributions continue unabated each quarter, particularly as the industry heads towards a compulsory contribution rate of 12 per cent by 1 July 2025.
While the level of personal contributions fell substantially in 2021, total SG contributions only decreased by 10 per cent. In a year where large amounts of people were not working for the whole year, SG contributions still held up very well.
For the foreseeable future, the super pool will only keep growing. Of course, as more people enter retirement there will be more outflows and eventually the pool of funds will level off. But that is still many years away.
We have seen merger activity ramp up significantly in recent years as super funds seek greater scale. Benefits of scale include access to a broader set of investment opportunities, particularly in unlisted asset classes such as private equity, infrastructure and unlisted property. Scale also enables funds to access investments more directly and provides greater bargaining power with external investment managers in fee negotiations, both of which lower overall investment fees. It also enables funds to provide better engagement with members to help them get the most from their super, especially through digital means, and it makes lower administration fees more possible.
The Your Future Your Super (YFYS) performance test has fast-tracked the trend towards mega funds. Out of the 13 funds that failed last year, all but three of the funds have now either merged with another fund or are in the process of merging.
One landmark merger in recent years was that of VicSuper and First State Super in July 2020. Before this time, mergers had typically been a large fund merging with a small fund, or two small funds merging to form a larger offering. But in this case, it was two sizeable funds.
Since then, there have been three more instances of large funds coming together; IOOF/Insignia purchased the large super business of MLC, followed by QSuper and Sunsuper merging to form Australian Retirement Trust and most recently, the announcement of the upcoming merger of BT Super into Mercer. It’s possible we’ll see several more mergers of a larger size in coming years as funds seek greater scale.
Amid the long-term trend towards mega funds in the super sector, we will see an increase in the number of funds that bring investment management in-house. There are still some funds that maintain a largely outsourced model for asset management, but most larger funds have adopted a hybrid model of managing some assets in-house while still outsourcing the management of other assets.
It is hard to know how much further the move to in-house asset management will go, but as super funds continue to gain greater scale, they are more likely to have the resources to undertake significant asset management decisions internally, especially if they believe they can deliver similar or better results at a lower cost.
Not surprisingly, we can also expect a significant increase in a focus on ESG considerations. Responsible investment is an influential factor in investment markets, helping to shape asset valuations, risk and ultimately long-term outcomes. There is not a super fund in Australia that has not considered the implications of the REST Super case – where a 23-year-old took the fund to court over lack of information about climate change risk. Combined with APRA’s guidance document released last year on what funds need to be doing about climate change, this highlights the need for funds to focus more on ESG. That momentum will only increase.
Indeed, recognising the growing importance of responsible investment, Chant West this year launched its inaugural Responsible Investment Award, where we looked at how funds are incorporating responsible investment considerations into their core portfolios through investment decision-making, asset ownership, stewardship, reporting and transparency to members.
There is no doubt Europe is way ahead of the curve compared to Australia when it comes to ESG. However, we can expect to see a greater effort and increased resources from super funds when it comes to ESG management, beyond just providing a standalone ESG investment option for members. It’s about holistically incorporating ESG and sustainability into core portfolios and being good corporate citizens.
While we’ve just celebrated 30 years since the introduction of SG, the super system is still evolving and is yet to reach maturity. This in itself will drive change in how the system responds to meet the evolving needs of Australians. However, it’s worth remembering that the Australian super saving system is close to the world’s best as far as the accumulation phase is concerned, though there’s work required to deliver a world-leading pension system.
The Retirement Covenant will drive funds to develop products and guidance to deliver best practice retirement solutions that help their members invest and draw down their pension account appropriately, providing an income and reducing financial stress in their retirement years.