Australia’s super system is on track to reach some $5.2 trillion in assets by 2029 and $14.1 trillion by 2049 – a whopping 169 per cent of gross domestic product.
This is according to Mercer’s Shaping Super report, which shows that, by hitting the latter figure, the industry is likely to reach a “mature” steady state.
But as Australia’s retirement savings continue to grow, the number of funds managing these savings is poised to keep shrinking.
Namely, the industry continued to consolidate at a rapid pace through FY2023–24, with the number of Australian Prudential Regulation Authority (APRA)-regulated funds reducing from 107 to 89.
“This consolidation has primarily focused on smaller funds, with 17 of the 18 exited funds having assets below $10 billion,” Mercer pointed out, noting this trend will continue to shape the market.
Looking ahead, Mercer believes the next decade will be no different and expects the number of APRA-related funds to shrink to just 30 by 2034.
“From 2034, we anticipate a gradual decline, reaching a median long-term position of approximately 20 funds,” it added.
The next 10 years are also set to see the number of funds with less than $30 billion in assets under management fall to around six in 2034, down from 50 last year, according to the report. This reflects continued rationalisation, consolidation and organic growth of funds.
Notably, “megafunds” – those that manage more than $100 billion – are set to grow from six to approximately 10, while platform funds will reduce from 20 to 5–10.
Data from Mercer also indicates that, on an asset-weighted basis, these “mega” funds are expected to gain significant market share, growing from 45 per cent of the market in 2024 to a whopping 75 per cent in 2034. This share is conceded by the smaller APRA-regulated segment that are projected to reduce in number.
“Funds will need to invest to keep pace with ever-increasing expectations from both members and regulators. However, where funds will need to focus will differ based on their nature,” it said.
“‘Mega’ funds will need to face a ‘new normal’ as investing as a $1 trillion fund presents different challenges and opportunities compared to investing at $100 billion.”
In particular, the firm said that outperformance becomes more difficult to source as deal sizes shrink relative to the size of the fund. “In many cases,” Mercer said, “this requires exploration of alternative asset classes and comfort with achieving outperformance through success across a range of smaller sources added up.”
Moreover, it said that “on the ground” local expertise or relationships with outsourced managers, with clear governance applied to these relationships, remains critical to perform in global markets.
Looking ahead, the report estimates that more than half of the eventual consolidation that will occur over the next 25 years will be done within the next five.
“This means that if funds are to survive to this ‘endgame’, they must be strategically positioned for short- and long-term success. For most funds, this will require detailed consideration (and modelling) of their position and material changes to their fund strategy and operating model.”
