Australia’s superannuation funds are getting bigger — and fewer. There were close to 400 funds in 2010. With mergers, it’s now closer to 120. By 2025, according to industry executives surveyed last year, there will be fewer than 50.
The portfolios of the two biggest super funds, AustralianSuper and Australian Retirement Trust, are bigger than even the federal government’s Future Fund Management Agency, which oversees the A$194 billion Future Fund and several other funds worth a total $242 billion.
Underpinning this consolidation is the idea that larger scale is beneficial for superannuation fund members. But that’s not necessarily true. A bigger fund is no guarantee of better returns.
I’ve examined the issue of fund scale with Scott Lawrence, an investment manager with 35 years of industry experience. Together we’ve written a report for The Conexus Institute, an independent research centre focused on superannuation issues.
Our conclusion: funds, large and small alike, succeed or fail depending on how well they formulate and execute their strategies.
Managing assets in-house
The first potential benefit of bigger size is that funds can manage assets using their own dedicated investment professionals, rather than outsourcing everything to external investment managers to invest on their behalf.
For example, UniSuper (the higher education industry fund) manages 70% of assets in-house. AustralianSuper, with more than double UniSuper’s assets, manages 53% of assets in-house.
This can be cheaper than paying fees as a percentage of assets to these external providers. It offers more control as the super fund can decide the assets in which they invest, rather than leaving the decision to someone else.
But fund members will only benefit if the internal team makes investment decisions that are as good as the service they are replacing. For this reason, there is no reliable correlation between performance and degree of in-house management.
Investing in big-ticket items
The second potential benefit is it becomes more possible to become successful direct investors in “big ticket” assets such as infrastructure and property, instead of just focusing on shares and other assets traded on stock exchanges.
For example, AustralianSuper owns 20.5% of WestConnex, Australia’s biggest infrastructure project, having contributed $4.2 billion to the consortium that is building the mostly underground toll-road system linking western Sydney motorways.
Opportunities like this are easier to access by large funds, and can help to diversify their portfolios.
But such direct investment is costlier than buying shares and bonds. This limits the potential for fee reductions.
For members to benefit, these investments must deliver attractive returns. This requires a fund developing capability in what are specialised markets. Size alone won’t deliver on its own.
Economies of scale and scope
The third potential benefit is that size brings economies of scale and scope.
Scale can reduce fees, by spreading the fund’s fixed costs over a larger member base.
Our review of the research literature confirms there are solid reasons to expect administration costs to reduce with size, as well as in-house management reducing investment costs.
Economies of scope involve an organisation being able to improve or increase services — say, by investing in better systems and more staff.
But investing in better systems also brings potential pitfalls. Big visionary projects tend to run over time and over budget, and sometimes fail.
An example is the disastrous attempts of five industry funds (AustralianSuper, Cbus Super, HESTA, Hostplus and MTAA Super) to develop a shared administration platform, called Superpartners. It was meant to cost $70 million, but development costs blew out to $250 million before they gave up.
Size brings its own challenges
Large funds also face some unique challenges. Because they have more money to invest, they have more work to do in finding sufficient attractive assets to buy.
The risk is they need to accept some assets offering low returns to do so. They can also outgrow some market segments, such as owning shares in smaller companies.
Large organisations are typically more complex, more bureaucratic and less flexible. They can find it difficult to coordinate staff to work towards a common purpose. These elements may create dysfunction if not managed.
This may explain why, despite the potential increased scope of their offerings, surveys suggest large funds tend to deliver less personalised service.
So the idea “bigger is better” is not necessarily true. Large size is not an automatic win. Whether the advantages outweigh the disadvantages and challenges ultimately depends on fund trustees and management doing their jobs well so that members benefit.
This article is republished from the Conversation.
Self managed Super Funds are now 26 % of the Super pie. The growth in this sector contributes to less need for Commercial Super Companies. I greatly appreciate that I can manage my own Retirement fund and have managed to achieve growth far exceeding what any Super Fund has achieved in the 12 years I’ve had it. Small is beautiful and having control of your own assets seems to be very attractive if you have the level of seed funds to make it viable.
The reality is that most people have neither the balance to make an SMSF cost-effective nor the financial literacy to make sound investment decisions. Looking at the enormous number of people who switch out of growth into cash options during every economic crisis and locking in losses is heartbreaking, even when people are warned not to panic, they panic.
I’d note that that 26% in SMSFs is FUM and represents a tiny minority of accumulation members due to the significantly higher balances in SMSFs. APRA’s starts on performance don’t demonstrate higher performance by SMSFs, during COVID they did worse.
As for your reference to ‘commercial’ funds, the largest funds are not-for -profits.
There is a fallacy at the heart of the debate on superannuation fund performance. It is this: super returns are destined to grow at about 2% per year (real), not the “killings” that are implied in advertisements or the stories from yesteryear.
Why? Simple, really – when super funds were a small fraction of the Nation’s GDP – about one-sixth thirty years ago according to the chart – investors could (and did) pick the eyes out of the available investments, thus being able to make impressive returns. It was more like punting on the stock market – with all the attendant risks and returns.
But not now – as the chart shows, the super funds are almost double the size of the Nation’s annual GDP, with considerable restrictions on their investments and most people opting for “balanced” portfolios, which, in simple terms, will reflect the annual productivity gains of the Nation. This is generally less than 2%, but one assumes that all the money spent on “commissions” for advice and management of portfolios means that the slow and dud enterprises have been dropped out, thereby boosting the returns a bit above overall GDP productivity.
Of course, self-managed super funds can do better than this – and they can do worse, too.
The real fallacy at the heart of Super Funds performance is that they are ALL trying to “outperform” the market………………
……….yet they themselves ARE the market.
The days of stock-pickers are long gone, and Super funds are wasting money employing fund managers.
The Total Return on a typical passive investment (Vanguard VAS ETF) over the past ten years is 110%.
(Which is a hell of a lot better than your “2% p.a.” for ZERO effort).
We’re pretty-much in agreement – pity that “The Conversation” is now a Monologue”. By “Real 2% per annum”, I mean discounted for inflation. That’s about 30% real, compounded over 10 years. Of course they might do better than 2% if they are parasitic on some neo-colony’s production and productivity.
I agree about the Conversation. The UK version still accepts comments.
Dinosaur One to Dinosaur two: “Yep, Bruce, life is certainly better now we are all so much bigger.”
Dinosaur Two: “What was that big bang in the sky I heard just now?”