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The reinvention of super

Columnist
— 1 minute read
With funds under management rising almost in inverse proportion to the decline in super funds, Frank Gullone says the industry is set for significant change.
The Australian superannuation market is changing, and it's not just the product of what's happened in the wake of the global financial crisis (GFC). Although the ongoing fallout from that seismic event will have an impact on superannuation, there are other long-term factors at play that will coalesce to usher in change in this industry.

Funds under management (FUM) are set to grow exponentially. At 30 June 2008, the industry held $1.17 trillion in assets. This represented a 2.1 per cent decrease compared with 30 June 2007.

By 31 December 2008, that $1.17 trillion figure had, according to the Australian Prudential Regulation Authority's latest numbers, made a hasty retreat to $1.05 trillion - a 14.8 per cent fall. Despite this plunge in the value of assets under management due to the GFC, the long-term trend is positive as the continual inflows from the superannuation guarantee ensure a positive cash flow.

Even if the superannuation guarantee sits at 9 per cent  - and there are straws in the wind already that the federal government may increase this number in its second term - the forecast average annual growth is 11.9 per cent, according to a Dexx&r Market Projection Report. If this prediction proves correct, superannuation will have total assets of $2.64 trillion by 2016, about 2.5 times today's number.

Dexx&r is not the only consultancy talking these numbers; in a recent report, Deloitte Actuaries estimated FUM would top $2 trillion by 2014 and by 2018 would have trebled from today's number to exceed $3 trillion. Both calculations are based on a 9 per cent super guarantee and modest - repeat, modest - increase from investment growth as markets recover.

Those are the numbers. But while assets under management will grow, the number of funds will continue to fall. This trend is evident already, and I expect it to accelerate.

Nowhere will this be more evident than corporate funds. At 30 June 2006, there were 555 corporate funds. By 30 June 2008, that number had nearly halved to 226.

The reasons are threefold: costs are rising, more resources are required and the risk factor associated with running such funds, the latter reason no doubt reinforced by the GFC. The major beneficiaries of this decline in corporate funds have been master trusts, retail-style funds and industry funds. Most have proved quite adept at marketing themselves extremely well and are attracting significant interest.
 
With the exception of self-managed superannuation funds (SMSF), I expect all other funds - industry, retail, pooled trusts and retail - to also contract. Over a two-year period (30 June 2006 to 30 June 2008), all four declined, from 17.9 per cent for pooled trusts to 8.3 per cent for retail funds. On the other hand, SMSF numbers rose 12.3 per cent to 393,611 over this period.

There are myriad reasons for this pressure to merge. All funds are looking for economies of scale, to reduce duplication, increase their buying power (whether it be fund manager costs or software), to take advantage of the investment and administrative opportunities that come with size, to merge like-minded member bases or even the result of a government initiative in the public sector.

That said, mergers are not inevitable. There are factors working against this trend, including wrong timing, different internal cultures or strategies between funds, and where real benefits cannot be validated or guaranteed.

Although this will derail some mergers, I have no doubts fund numbers across these four sectors will continue declining. We will have fewer funds with very sizeable FUM.
 
Frank Gullone is chief executive of the Centre for Investment Excellence.

 

The reinvention of super
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