Amid Government moves to defer both the Retirement Income Covenant and the timing of its Retirement Income Review, new research has emerged suggesting that the Australian superannuation industry has reached a tipping point where smaller funds need to consider merging or face extinction.
The research, the 2020 Industry Super Forces at Work report, produced by management consulting firm Right Lane, identified what it said was the urgent need for higher-cost superannuation funds to merge or face the consequences as cashflows as well as asset values fall, in large part due to the impact of COVID-19.
The report, the eighth produced by Right Lane on the state of the industry, has suggested the optimal number of superannuation funds in Australia is 15 – well down from the current figure of 92 funds.
It outlined that the superannuation system had now reached a tipping point when smaller funds need to accelerate plans to merge or face the prospect of extinction as growth becomes more difficult and members continue to switch into larger funds.
“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,” the report analysis said. “Under this system, those who currently join an average sub-scale fund at the start of their working lives could be $45,000 better off by the time they retire.”
The report found that size matters when it comes to cost efficiency and returns, meaning the smaller funds must merge or face the possibility of declining competitiveness and eventual extinction.
"Size matters for costs – at a system level, the largest funds are generally the cheapest and our research on long-run average costs shows that funds with fewer than 500,000 members are generally not efficient. Costs impact retirement incomes significantly – while investment returns come and go, costs stay forever,” the report said.
“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,” associate principal at Right Lane, Abhishek Chhikara said.
“At a sector level, industry funds have outperformed retail funds on growth and efficiency. Seven out of the top ten fastest-growing funds are industry funds, and the median operating cost for an industry fund is approximately half of the median cost for a retail fund,” he said.
“While industry funds have consistently delivered better net returns for members, more than half of them are facing headwinds when it comes to their economics. 19 out of the 34 remaining industry funds have been growing total costs while member numbers have decreased. As inflows dry up, accounts consolidate and returns go negative, many of these funds also risk a cash crunch, making it harder for them to remain competitive.”