KPMG has made the call in its latest annual Super Insights report, which has recorded accelerated merger activity in the sector.
Using ATO and APRA data, KPMG has focused on APRA-regulated funds, which represent $2.4 trillion in assets under management. During 2019/20, the number of funds had fallen from 171 to 154.
By the time the currently known mergers are through, 76 per cent of assets under management (AUM) and 77 per cent of member accounts are projected to be managed by the top 12 funds, each with AUM greater than $50 billion.
Around half (47 per cent) of AUM and 43 per cent of member accounts are expected to be overlooked by five “mega funds”, in excess of $100 billion of AUM.
AustralianSuper retained its spot as the largest fund as at June 2020, with around $180 billion in funds under management. Aware Super, after merging with VicSuper, and QSuper had overtaken AMP in second place, with around $120 billion in AUM.
QSuper, AMP and Colonial First State/CBA followed in third, fourth and fifth place, respectively.
Linda Elkins, KPMG national sector leader, asset and wealth management commented consolidation is the “stand-out issue in the industry”.
“Over the next few years we will see an increase in scale of the mega funds (over $100 billion) and a widening gap between the sub-mega funds (over $50 billion) and those lower down,” Ms Elkins said.
“As for the retail funds, the main issue for them will be transformation through restructure – with the separation of wealth businesses from the major banks and the requirement that superannuation trustees cannot perform other roles. But all funds need to address how they are going to centre their operating models around members, with greater engagement and expectations of online services.”
A higher rate of retirees, low investment returns and the impacts of the early release scheme and the Protecting Your Super transfers had all contributed to a 12 per cent fall in the number of member accounts and zero growth in AUM over the 2019/20 year.
Net cash flows fell by 30 per cent, from $30.5 billion to $21.2 billion. Overall, 61 per cent of the funds and providers were in net cash outflow over the year.
Heavier outflows particularly hit industry funds, with pension payments increasing by 14 per cent and the number of industry funds in net outflow rising to nine from seven. But inflows to industry funds from retail continued, albeit at a reduced rate from previous years.
KPMG has also predicted industry funds will also overtake SMSFs, projecting they will represent 36 per cent of the market in 2025.
The overall fund composition of the sector as at 30 June 2020 was:
Corporate – 2.3 per cent
Industry – 29.6 per cent
Public sector – 13.1 per cent
Retail – 24.5 per cent
SMSFs – 30.5 per cent
Ms Elkins added the proposed Your Future, Your Super legislation will create challenges for funds, further driving mergers.
“For many funds, meeting rising member expectations will lead to increased costs and the challenge is to find more sustainable ways to operate,” she said.
“These increasing expectations and the challenging regulatory environment – such as the ongoing impact of APRA’s MySuper Product Heatmap – will continue to drive mergers, as we see from current market discussions.
“Whilst developments in products and service offerings are not isolated to funds with scale – some smaller funds have shown that they can be innovative – they are more common in the larger funds. These developments are transforming the nature of funds’ businesses and bringing with them new operating challenges.”
But there is still a place for entrants, Ms Elkins said.
As a result of COVID-induced market falls, the sector overall gave a flat return of -0.4 per cent over the 2019/20 year, -0.9 per cent excluding SMSFs. Corporate funds and SMSFs were the only sectors achieving positive returns, with the public sector funds giving flat performances, while industry funds outperformed retail.
However, during the six months from July to December 2020, the sector revived, making an average of 6 per cent.
