Sub-scale superannuation funds may find themselves in the midst of an existential crisis with research from the prudential regulator finding over half of small and medium funds covered in the MySuper and Choice heatmaps have declining sustainability metrics.
APRA measured the sustainability of 78 responsible superannuation entities (RSEs) based on total accounts growth rate, net cashflow ratio and net rollover ratio over the three years to 30 June, 2021.
There were 24 out of 47 ‘small’ RSEs (under $10 billion in funds under management) that declined on all three metrics. They are responsible for $84.7 billion in net assets and 1.1 million member accounts.
For ‘medium’-sized RSEs ($10 billion to $50 billion), 11 out of 18 had a similar decline, but only three of 13 ‘large’ RSEs funds (over $50 billion FUM) declined on all metrics.
APRA’s analysis was shared earlier this week at Investment Magazine’s Chair Forum, where executive board member Margaret Cole said the research presented “hard evidence” proving lack of scale not only hinders performance but undermines the ability of funds to deliver member outcomes.
“Not only will members typically receive the benefit of lower fees, but larger funds with economies of scale will likely provide better long-term retirement outcomes.”
But there are some smaller funds “bucking” the sustainability trend.
“These funds generally provided specialised offerings, such as environmental, social, governance (ESG) focused products,” Cole continued. “The small funds that are performing best typically have developed a point of difference that distinguishes them in the market.”
Finding a dance partner
Commenting on the findings from the ‘Sustainability of member outcomes’ paper, Cole said it proves that “size matters” when it comes to boosting financial outcomes for super members.
“While bigger isn’t always better, increased scale makes it easier for trustees to build an efficient and resilient business model that delivers strong financial outcomes for members.”
Mergers have delivered combined fee savings to approximately 350,000 member accounts, with estimated total savings of $21 million per annum.
Simplification programs undertaken by four RSE licensees have delivered fee savings to approximately 780,000 member accounts, with estimated total savings of almost $16 million per annum.
MySuper fee savings (both administration fees and total fees) are higher for mergers involving large RSEs, particularly administration fees.
Members in ‘large’ funds received benefits from lower fees and are more likely to have better long-term retirement outcomes.
Administration fee savings are nearly 2.5 times greater for mergers involving large RSEs compared to other mergers ($48 per member account for mergers involving ‘large’ RSEs compared to $20 for other mergers).
Of the 19 MySuper products that closed since APRA’s first heatmap in 2019, 15 have merged and four closed due to trustees consolidating their product offerings.