Fragmentation makes super market costly: JP Morgan

The superannuation industry is littered with small and medium-sized funds, making the market significantly fragmented and cost inefficient, according to custodian J.P Morgan. 

Senior relationship manager of investor services for J.P. Morgan Australia and New Zealand Seamus Collins said funds - especially small and medium-sized funds - were behind on cost efficiency in the global context.  

“That’s because we have a lot of funds, we have a long tail,” he said.   

“We have a lot of small- to -medium funds, and we don’t have as much scale as the Dutch, the Scandinavians and the Canadians who have a relatively small number of very large funds.”  

Collins said that as insurance becomes more expensive and new regulation is implemented, super funds are facing increasing cost pressures for their investments and member operations. 

He said the industry was asking questions about whether funds had sufficient economies of scale and size to cut operational costs. 

“The rationale of the operation cost focus is that all of the funds need to provide certain services. They need to provide administration, they need to provide diversification of investments in terms of the volatile market and more stable investments,” Collins said.  

Collins believes smaller funds are finding it harder to negotiate with intermediaries.   

“The questions that have been asked by the regulator and by the Government in terms of a macro-policy framework are: can you deliver members a strong service, a strong insurance outcome and effectively-costed investment diversity if you’re a small fund and if you don’t have a large asset base with which to amortise that across your services and your intermediaries?” Collins said.  

A J.P Morgan report from September last year on the cost benefits of scale in the pension landscape said major consolidation had occurred in the industry between 2005 and 2012, with the number of funds dropping by two thirds.   

Just over 20 funds now control about two thirds of assets outside the self-managed superannuation segment, up from 15 per cent of assets. 

Collins said that as MySuper put the spotlight on fund costs by promoting the ability to compare these costs, funds were asking themselves a number of questions. 

“How do we develop economies of scale? Should we merge with other funds to grow? How do we deliver a risk-balanced member service environment without the costs spiralling? Because the costs have been going up,” he said.   

Health-based fund HIP and Prime Super recently announced their intention to merge on 1 May to achieve bigger scale and better benefits for members. Tasplan and Quadrant have announced a heads of agreement this month to explore the merits of merging. 

But legalsuper chief executive Andrew Proebstl recently rejected arguments that small super funds would have to merge to stay competitive, arguing they are specialist industry funds that keep costs low when compared to large funds.