Superannuation funds are only set to be knocked further by COVID-19, with KPMG estimating lowered wages and employment will lead to $700 million less in super guarantee contributions flowing into accounts each month.
The COVID-19 pandemic has significantly disrupted market trends in an already changing super fund sector, the latest KPMG annual Super Insights report has found, in its analysis of ATO and APRA data for APRA-regulated funds.
Looking ahead for the rest of the year, KPMG has estimated the COVID-19 impact on salaries and wages for employees is likely to lead to super guarantee contributions being cut by around $700 million per month.
ASFA statistics, based on APRA data, placed inflows from superannuation guarantee contributions at $17.7 billion for the December quarter in 2019, or $5.9 billion a month on average. A $700 million decrease would equate to roughly 11.8 per cent less from the monthly average in mandated employer contributions.
The industry funds whose memberships are in sectors that have seen the highest rises in unemployment are most exposed.
The ABS statistics for April showed unemployment rose to 6.2 per cent or 823,000, while underemployment rose sharply, to a record high of 13.7 per cent. Around 2.7 million people (one in five employed in March) either left employment or had their hours reduced between March and April.
Low wage growth, reduced contribution caps and an ageing population were already placing many funds’ cash flows under pressure – KPMG noted more than 40 per cent of funds reported a net outflow position over 2019.
The retail fund sector had felt the impact of the Hayne commission, with $8 billion in increased rollovers out. In contrast, rollovers into the industry fund sector increased by $7 billion.
KPMG had observed the rise of industry super funds, thinking they would overtake SMSFs to become the largest section of the super market.
But Linda Elkins, head of assets and wealth management said the arrival of the pandemic had “thrown everything into the air”.
“At the end of the 2019 financial year, we believed industry funds would overtake SMSFs as the biggest grouping, just as they had moved ahead of retail funds in the first three years of this study,” Ms Elkins said.
“But given the particular challenges now facing the industry funds – in particular resulting from allocations to illiquid assets and the expected increase in benefit payments under the early release scheme – we now predict that SMSFs will again move significantly ahead of the other sectors.”
The government has projected the early release regime may lead to outflows from the super fund industry totalling at $27 billion, but actuary Rice Warner has previously said the final figure may reach as much as $50 billion as unemployment rises. Four weeks into the scheme commencing, as at 10 May, early release claims had totalled at $10 billion.
The report stated the longer-term effects of the measure, coupled with a bear market will leave many Australians further behind their savings objective than previously predicted.
David Bardsley, KPMG superannuation advisory partner commented challenging liquidity conditions are expected to continue, even as the RBA has commenced quantitative easing and actively buying Australian government bonds and securities.
“At a portfolio management level, we have already seen a strain on liquidity, with portfolio managers finding it hard to sell their fixed interest assets to any buyer other than the RBA,” Mr Bardsley said.
“However this is not creating the volumes that institutional fund managers need to de-risk and rebalance exposures and raise cash. As a result we have seen a significant increase in buy/sell spreads, making it more costly to rebalance portfolios.”
Other challenges have been posed by global outsource models as offshore providers go into lockdown – impacting their ability to provide services to Australian customers.
Funds have also reported exponential surges in calls to their call centres, with a flood of inquiries around the market downturn, the early release measure and insurance cover. Processing centres have also been impacted, with demand for member switches and early release claims.
Funds have had to respond to the early release regime with asset and liquidity assessments, alongside out-of-cycle valuations on unlisted assets and accelerated remediation programs.
Funds may be pressured to merge
Ms Elkins added although regulators will return their pre-pandemic supervisory focus when the country recovers, the economy won’t be the same.
“Funds’ balances have fallen on the back of market shocks on listed and unlisted assets rivalling those of the GFC,” she said.
“Further, they are facing unprecedented calls on benefits and will suffer reduced contribution flows through increased unemployment. Some funds that were valued at sub-$50 billion pre-COVID-19 may come out… as sub-$30 billion funds and some may decide to leave the field altogether.
“If the government and or regulators decide that some funds should merge as a result of the impacts of COVID-19, they will need to identify a mechanism to achieve this. Receiving funds will need to act carefully and consider the cost and complexity, potentially making it difficult to satisfy the current requirements of acting in members’ best interests and achieving equivalent rights.”
After coronavirus, KPMG has forecast the remaining funds are likely to face a more engaged membership, with higher service expectations and a new set of needs.
The winners, Ms Elkins said, will be the funds which are clear about what member cohorts they serve, while capturing default contribution flows.
“Like the post-GFC era, members previously close to retirement may no longer be able to do so and will be looking for security of income once they finish work,” Ms Elkins said.
“Younger members, who have seen significant reductions in their balance, will need education regarding how markets and their fund work and advice on how to rebuild their retirement savings.
“We predict increased regulatory pressure on funds to meet the needs of their members and increasing mergers at the larger end of the market, with a small number of mega funds competing for the capabilities to deliver to these needs.”
The gap between “mega funds” and the “tail” of the market is only going to widen, KPMG added, despite prior thoughts that APRA’s product heatmap would drive further consolidation between smaller funds.
Instead, many smaller funds were found to have stacked up well out of the 70-odd funds holding under $10 billion in the regulator’s heatmap and are continuing to attract new members.
The merger mania in the super industry is forecast to run rampant among funds at the larger end, driving the rise of the “mega” fund.
The top 10 funds, all above $50 billion, were unchanged from the prior year and now represent, in total, around $1 trillion in assets under management, approximately 60 per cent of the APRA-regulated market.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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