Smaller Superannuation Funds Facing Sustainability Challenges

Declining assets in small and medium sized superannuation funds suggest further consolidation, but some providers reversing trend with ESG focus.

The Australian Prudential Regulation Authority (APRA) has released analysis indicating that smaller superannuation funds are more likely to struggle to deliver quality member outcomes.

The analysis looked at the three sustainability metrics in the 2021 MySuper and Choice heatmaps; member accounts, cash flows and rollovers.

APRA found that 24 out of 47 small funds (less than A$10 million under management), as well as 11 out of 18 medium-sized funds (between A$10 billion and A$50 billion under management), declined on all three sustainability metrics.

By comparison, only 3 of 13 large super funds (over A$50 billion under management) declined on all metrics.

The analysis found that cash flows and member accounts are declining in small and medium sized funds as they struggle to compete in areas such as fees and investment returns, and face challenges funding operational improvements that would benefit members.

APRA found administration and operating expenses for small super funds sit at about 0.57 percent of net assets, compared to 0.33 percent for large funds, which can more easily spread their costs over a wider membership base.

Only one medium sized super fund experienced growth in member accounts in the three years to June 2021, and only six had positive net cash flow ratios over the same period.

However, the analysis also found that six small super funds saw more than 10 percent growth in net cash flows. These were funds with new or niche offerings, such as ESG-focused products.

On the whole, assets in small and medium sized super funds are declining, as shown by a negative median net rollover ratio, the third metric APRA analysed.

APRA said analysis of merger outcomes since the heatmaps began in 2019 shows combined fee savings from mergers of about A$21 million per year, comprising A$13 million in savings from admin fees and AUD 8 million from investment fees and costs.

Mergers delivered savings almost 2.5 times greater when the successor fund was a large super fund, compared to mergers where the successor fund was a small or medium fund, the analysis found.

“While bigger isn’t always better, increased scale makes it easier for trustees to build an efficient and resilient business model that delivers strong financial outcomes for members,” said APRA member Margaret Cole. “A fund that is losing members or has declining net assets will face challenges to keep fees and costs low for members, and fund operational improvements that ultimately benefit members.”

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