Right Lane estimates that 54 of Australia’s 90 super funds could be in negative cash flow by the end of the financial year, leading to “significant consolidation” within the sector.
“Australia’s superannuation system is confronting its biggest challenge ever as it attempts to manage the impact of ongoing rising costs while [cash flows] and revenues decline rapidly,” said Abhishek Chhikara, associate principal at Right Lane Consulting. “These competing forces are not sustainable for short to [medium-term] and the result will be additional pressure on funds to merge or cut costs.”
Funds are fighting investment market shocks that have wrecked havoc on returns, high unemployment that has caused a significant decrease in super contributions, and policy change in the form of the early access scheme, which will see some funds experience a decline in assets of as much as 6 per cent.
“Our research has found that increased withdrawals from the ‘early release’ scheme alone could put 14 additional funds at risk of falling into a negative [cash flow] position in FY20,” Mr Chhikara said. “That comes on top of the 40 funds who were already cash flow negative going into the COVID-19 crisis.”
Right Lane projects that most funds will deliver modest or no growth in assets, and all funds in Australia will experience a decline in revenue in FY20, and that smaller funds relying on asset-based fees are likely to be hit hardest.
“The pressure is mounting on super funds,” Mr Chhikara said. “They are finding it harder to grow while keeping costs low and as we have said before, slow-growing, higher costs funds have been most likely to exit the system. The next three years will be [a] critical period for the system as it tries to recover from the impact of COVID-19.”
Right Lane believes that the optimal number of super funds in Australia is around 15, compared to the 90 that currently operate.
