Subscale superannuation funds in Australia experiencing declines in net cash flows and participant accounts will face challenges sustaining good outcomes over the long term, according to a report by the Australian Prudential Regulation Authority.
Just under half of the 78 super funds reviewed by APRA — 24 small funds with less than A$10 billion ($7.5 billion) each and 11 medium-sized funds with between A$10 billion and A$50 billion — are facing "immediate sustainability challenges" as a result of membership and cash flows trending lower, the report said.
APRA board member Margaret Cole said in a news release that APRA's findings show that "size matters when it comes to boosting financial outcomes for super members."
The Australian regulator has long encouraged industry consolidation as a means of ensuring super funds remain well positioned to provide members with strong investment outcomes at modest fees.
Over the last few years, the pace of mergers has accelerated — the majority involving big funds swallowing subscale funds. But hefty industry players have joined forces as well, most recently on Feb. 28 when two Brisbane-based funds — A$133 billion QSuper and A$97 billion Sunsuper — combined to form a A$230 billion heavyweight, renamed Australian Retirement Trust.
The 78 superannuation funds in APRA's sample have combined assets of more than A$1.7 trillion, or 81% of all APRA-regulated assets, according to the report.
The 13 funds in the sample with more than A$50 billion each, meanwhile, have combined assets of A$1.3 trillion, or 72% of the total.
The report reiterated APRA's contention that greater scale can give funds a competitive edge, including increased ability to negotiate scale discounts with service providers, access a wider range of investments, including private markets, and an ability to spread operational costs over a larger participant base.
"APRA will continue to encourage trustees facing performance or sustainability pressures to seek a strategic merger that can quickly deliver improved outcomes to their members," Ms. Cole said.
Funds that are losing members or assets "will face challenges to keep fees and costs low for members," leaving them at a growing disadvantage with competitors with the scale to build efficient and resilient investment operations, she said.
