The performance of not-for-profit corporate, industry and public sector superannuation funds improves with fund size, according to new research released by the Australian Prudential Regulation Authority (APRA).
The prudential regulator’s working paper, “Effect of fund size on the performance of Australian superannuation funds”, found the greatest benefits accrued when APRA-regulated funds reached a multi-billion-dollar size.
“Therefore, there is reason to believe that further growth in fund size and member balances will result in further economies of scale in the not-for-profit sector.
“However, the size of the fund did not have an overall positive impact on the performance of retail superannuation funds.”
The data of participating superannuation funds, both not-for-profit and retail, were divided into quintiles based on net assets of the previous quarter.
The average fund in the smallest fund size quintile had only $96 million in total assets, while the average fund in the largest fund size quintile had over $9 billion in total assets, the APRA report said.
Larger not-for-profit funds earned higher risk-adjusted gross returns compared to smaller not-for-profit funds, due to opportunities larger funds would better exploit.
“These funds had higher allocations to asset classes where they were likely to have had a size-related advantage, such as private equity and real estate. However, there were no such economies of scale evident for retail funds,” it said.
Larger not-for-profit funds also benefited from lower investment expense ratios, suggesting these funds were able to secure more competitive fee arrangements with external investment managers through bargaining power.
In addition, significantly lower operational expense ratios were evident from larger not-for-profit funds, suggesting larger funds were able to spread fixed costs associated with administration and IT infrastructure over a larger asset base.
The report said: “Based on this evidence, fund members are likely to benefit from further industry consolidation in the non-for-profit sector.”
It focused on 280 superannuation funds during the period of September 2004 to June 2010, with total assets of at least $50 million. The funds represented 98 per cent of assets in APRA-regulated superannuation funds.
The report highlighted the need for the government to pave the way for more funds to merge into the not-for-profit sector by providing certainty of capital gains tax relief for merging funds, Australian Institute of Superannuation Trustees (AIST) chief executive Fiona Reynolds told InvestorDaily.
“While many AIST member funds recognise the benefits to be gained for their members through merging with another fund, the lack of certainty on capital gains tax relief is proving a major barrier,” Reynolds said.
“The report also raises concerns about the structure of many retail funds, which inhibits their performance and their ability to pass on benefits to members.
“The evidence in the report confirms what we have been saying for some time: that the governance and operational structure of retail funds is flawed and not in their members’ best interests.”
