If you thought last year was a big one for superannuation fund mergers, that may just have been a warm up for this year.
With the Australian Prudential Regulation Authority (APRA) continuing to put pressure on underperforming funds, the message to get big or get out will become stronger this year.
APRA has declared that out of a total of 78 funds examined, 38 face immediate sustainability issues, having declined on all three metrics measured.
Three factors show failings
The big three factors that APRA looked at from the 2021 MySuper and Choice heatmaps were member accounts, cash flows and rollovers.
Ominously, the regulator found administration and operating expenses for super entities with less than $10 billion in funds under management sit at about 0.57% of net assets – a figure that compares to just 0.33% for funds with more than $50 billion.
Its analysis is really bad news for 24 small funds that manage less than $10 billion, which are marked as declining and face immediate sustainability issues.
APRA said such funds “will likely face challenges in addressing areas of underperformance, such as high fees and poor investment returns, and funding operational improvements that ultimately benefit members.”
It also found that more than half of the funds with between $10 billion and $50 billion in assets are also facing problems.
Eleven of these funds are declining in net cash flows and member accounts and are at risk of trying to compete for membership growth against funds with really large-scale benefits.
Funds are struggling to grow
On the growth side, medium sized funds all struggled, with only one recording increases in total accounts over the three years to June 2021.
On this measure, small funds seemed to have an advantage, with seven smaller funds managing to grow their number of accounts by more than 10%.
Most large funds are building their net cash flow with a median measure of 3.01%, while small funds shrank by a median of 0.44%, a poor figure that was bolstered by six small funds that grew new cash flow by more than 10%.
Only six medium funds managed to achieve positive net cash flow ratios in the three years to June 2021.
On the third measure of net rollover ratio for the three-year period, more than half of the large funds experienced net asset growth as members joined, with a ratio of 0.25%.
Assets in small and medium funds overall declined as members left.
Only 13 funds growing across all three measures
Overall, of the 78 funds analysed, 38 failed across all metrics and just 13 are growing across all metrics – eight small funds and four large ones.
APRA only named funds that failed on all three measures that had less than $10 billion in assets, including Alcoa of Australia Retirement Plan, Australian Meat Industry Superannuation Trust, BUSSQ, First Super, Meat Industry Employees Superannuation Fund, Perpetual WealthFocus, Qantas Super, REI Super and TWUSUPER.
Other funds were named but have already taken steps to merge and improve outcomes for members including Maritime Super, which is now looking to merge with Hostplus, LUCRF Super which will merge with AustralianSuper, and Australia Post Superannuation Scheme, which is merging with Australian Retirement Trust.
While APRA didn’t name the larger funds that failed all three tests it did say that three of them had more than $50 billion in assets.
Mergers achieving big savings
A majority of 61% of the medium funds – 11 in total – are declining across all metrics and are considered likely to struggle to compete with large funds.
APRA was not shy of its role in encouraging mergers, saying that since the heatmaps began in 2019, combined fee savings because of mergers have reached $21 million a year.
That is made up of $13 million of savings in administration fees and $8 million in investment fees and costs.
Mergers achieved by folding into a large funds delivered savings almost 2.5 times greater than those into a medium or small fund.
“With the largest funds growing solidly, either organically or through mergers, the sustainability and performance gaps between the industry giants and the rest will only widen further without urgent action by small to medium funds,” said APRA member Margaret Cole.