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Megafunds a ‘mixed blessing’ for growing number of retiree members
For many retirees, the rise of the megafund – superannuation funds managing more than $100 billion – is like the curate’s egg, partly good and partly bad.
On the positive side, these funds – currently there are five with three more on the cusp of $100 billion – can offer those members in the pension phase better fee outcomes due to their increased size and efficiency.
As the Morningstar state of the industry report, Mergers and mega-funds: The superannuation landscape in 2024, says: “Since 2015, the percentage of fees paid (incorporating administrative, investment and insurance costs) across the industry has fallen by more than 20 basis points, from 0.59 per cent to 0.37 per cent.
“When it comes to price, the impact of scale is evident. The administrative, advice fees, costs and taxes, or RAFE, for MySuper options, is typically around 50 per cent higher for funds managing less than $10 billion than for funds managing more than $30 billion.”
It’s not just lower fees benefiting the more than three million retiree members in APRA-regulated funds, as well as the 1.7 million sitting the wings in the transition-to-retirement phase (those aged between 60-64).
There has been a regulatory and legislative tailwind behind superannuation with governments of all political persuasions acutely aware that an industry approaching $4 trillion in assets under management needs to be handled with kid gloves.
Aside from the 2023 Your Future, Your Super (YFYS) reform package, there has been the Retirement Income Covenant, the Quality of Advice legislation and the ASIC Report 779, all of which should enhance the financial security of superannuation fund members.
As the Morningstar report explains, the YFYS performance test sets a good baseline in evaluating a super investment option, especially in weeding out the worst performers – which can only benefit retiree members.
“Past performance can show the prudence and repeatability of an investment process, and the resourcing and continuity of an investment team’s implementation of the strategy. These are, in turn, useful predictors of future performance. Similarly, the incorporation of both administration and investment fees in the YFYS performance test also creates a clear link between price and future viability.
“That said, YFYS has limitations. Relying exclusively on past performance, it does not consider forward-looking investment merit. It also leaves out strategic asset-allocation choices and does not adjust for risk,” the report says.
Lower fees, more investment options and administrative synergies – these are all reasons why the industry regulator, the Australian Prudential Regulatory Authority (APRA), believes that funds below $50 billion will be uncompetitive in the long term.
As the report argues, bigger funds benefit from economies of scale as larger mandate sizes beget lower negotiated investment manager fees, more cost-effective insourced investment functions and more efficient access to private markets. “It’s no surprise that the benefits of greater scale have been flagged by the government and APRA as key drivers for consolidation within the sector.”
From APRA’s perspective, smaller funds with higher fees and less scope to benefit from economies of scale find it harder for their investment options to pass the fee-dependent YFYS performance test.
What this means is that the merger mania of recent years is likely to continue, albeit at a slower pace. Although mergers may be beneficial in the long run, the report argues that they aren’t perfect – and members can suffer as they are often accompanied by restructuring and headcount reductions.
“The impact on team cohesion and staff morale is, understandably, sub-optimal. In the case of mergers between similarly sized funds, the new parent will have to successfully establish a new culture that is unlikely to develop overnight.”
Even the profit-for-member industry funds have struggled with mergers. Questions that the report poses, and retiree members should be asking of their fund, relate to composition of a fund’s board and whether they are best suited to set and oversee a fund’s strategic direction? What proportion of board members are independent? Do industry links skew asset-allocation decisions?
In addition to these questions retiree members should also be asking whether their phase in the superannuation cycle is reflected in the board’s composition? Industry funds pride themselves on their employer-employee representation, but with more than three million retiree members spread across the APRA-regulated system, perhaps they deserve board seats. Certainly, the expertise would be there.
One final point. Although the megafund trend seems irresistible, it’s worth noting that some smaller funds continue to perform very well, both relative to YFYS benchmarks and peers, the report says.
“While having less scope to compete on fees, a small fund with talented staff and a strong investment process can be nimbler and invest in higher active return generating strategies without the capacity concerns of larger funds.”
