Scott Lawrence and Geoff Warren.

The Australian superannuation industry is currently going through a wave of consolidation that is at least partly driven by a belief that larger scale is beneficial. But is this necessarily the case?

After examining this issue in a recent paper, we conclude that large fund size could be either beneficial or detrimental for super fund members. What matters is whether funds can execute effectively on their investment strategies and provision of services to members, whatever their size.

Large fund size has both advantages and disadvantages and gives rise to some significant challenges. It is not an automatic win.

We have no argument large size offers the potential to reduce cost ratios and hence fees. This occurs via replacing external investment managers with relatively less costly internal management teams, and economies of scale in some administration functions.

Expanded operational scope

Alternatively, large size might be used to expand the scope of operations. It hence may not appear in lower fees, but rather greater functionality that could benefit members through improved returns or services.

For instance, size can enhance the ability to invest in big-ticket private market assets such as unlisted infrastructure and property, which offer a range of benefits but tend to be higher cost. Being able to bring more resources to bear can enrich functions like portfolio and risk management.

Large size can assist in providing more and better customised services to members, to the extent that such services require significant resources in terms of systems and staff. Ability to customise may be particularly important in offering retirement income strategies.

The drawback of scale

Size also brings disadvantages and a raft of challenges.

A number of features could work to hamper investment returns. Large funds need to source assets in large volumes. They thus rely on the availability of attractive assets that can take enough investment to move the dial.

Large funds can also outgrow the ability to invest effectively in some public market segments like small-mid cap equities and various niche markets where there may be better opportunities. Big portfolios are harder to adjust quickly at low cost. Internal teams could struggle to perform.

Large organisations tend to suffer problems of internal coordination and bureaucracy. They are typically less flexible. And they find it harder to deliver a good experience to those members who engage.

Recipe for success