APRA’s Cole warns about the challenges of small retail super funds

  • By Zilla Efrat

Any super fund, especially retail funds, with less than $10 billion in assets under management would struggle to stay competitive into the future, if it didn’t have other redeeming features, APRA executive board member, Margaret Cole, warned yesterday.

In a speech to a Financial Services Council webinar, Cole noted that 116 super funds each had less than $10 billion under management. And, of these, 78 were retail funds.

“It’s here in particular where we can see the potential vulnerabilities the retail sector faces in coming years,” said Cole.

She noted that 30 per cent of total assets held by APRA-regulated funds were sitting in the retail sector. “Yet retail funds have historically been able to avoid holistic scrutiny thanks to gaps in APRA’s data collection, and a bewildering array of products and options that makes comparisons difficult,” she said.

“That era is now at an end, as APRA and government shine a progressively brighter spotlight on the choice products that are dominated by retail funds. This will culminate in the first choice performance test in the middle of next year.”

“Size is not the sole determinant of performance. If it were, some of the 13 MySuper products that failed the recent performance test would have done markedly better than they did,” Coles added.

“But it is absolutely a key factor influencing not only member outcomes but also the sustainability of outcomes into the future. Increased scale enables trustees to spread fees and costs over a larger membership base, and access higher-earning investments in unlisted assets, such as major infrastructure projects.”

Coles said the challenges many retail funds faced would become evident in coming weeks when APRA published the findings of an information paper analysing the choice sector in preparation for its first Choice Product Heatmap in December.

These challenges include substantially higher average administration fees than for MySuper products, far greater variation in performance and significantly higher levels of underperformance.

“While that analysis covers choice products in all industry sectors, including industry funds, the majority of products and options analysed were operated by retail funds,” said Cole.

She added that the performance and sustainability challenges facing the industry’s long tail aren’t about to get any easier.

“If anything, they are likely to accelerate, as the mega-funds use their financial strength and a higher profile to grow further by attracting new members, and fund stapling breaks the traditional nexus between employers and default super funds,” she said.

“Greater transparency, through APRA’s heatmaps and expanded data collection, and the Your Future, Your Super reforms, will make it easier than ever before for members to identify the poor performers, and move their money elsewhere. The funds they move to will often be those brands they are most familiar with, further bolstering the influence of the largest funds.”

Cole noted that these trends were already evident. “In the six weeks since APRA published the first MySuper Annual Performance Test results, all but one of the 13 failing funds had seen an overall drop in membership.

“These drops are marginal to date but any reduction in scale is unhelpful for trustees trying to improve their performance. It’s likely we will see a similar response when the results of the first performance test for choice products are published next August,” she said.

“At the other end of the spectrum, some of the country’s largest super funds are getting around 1,000 new members every day, and $500 million of net new cash flow each week. Over a 12-month period, that’s an inflow of $26 billion – greater than the total size of almost 85 per cent of APRA-regulated funds.”

Coles observed that for all the talk today about the benefits of size, the number of funds and investment options remained so large as to be detrimental to members.

“Rather than being spoilt for choice, they’re being spoilt by choice,” she said.

“To begin with, it’s confusing for members, and contributes to them being disengaged from their super rather than grappling with making an informed choice out of more than 140 funds, and as many as 43,000 investment options – equating to one investment option for every 465 Australians over the age of 181.

“Secondly, it’s inefficient. If scale is an essential component of boosting outcomes to members, the fact that 116 funds together control only 8 per cent of the market is logically a handbrake on optimising those outcomes.

“Thirdly, it’s unnecessary. Too many funds and investment options are not sufficiently different in terms of their product offerings and features to justify the duplication, confusion and inefficiency.”

Coles said retail funds, in particular, should consider the benefits of consolidating their own product lines.

“It is common for retail trustees to operate a number of products across multiple funds – noting that each of these individual products is subject to the critical scrutiny of the performance test and APRA’s heatmap,” she said.

“Such an approach may deliver benefits to members in terms of choice of features and investment options, but it works against delivering economies of scale. Consolidating those funds is both an important and necessary way of achieving greater financial and operational efficiencies, which should hopefully flow through to improved outcomes for members.”