GOOD old Sir Joh Bjelke-Petersen didn't much like the prospect of good Queensland superannuation money being managed by a bunch of southerners back in the 1980s. So, whereas construction workers outside Queensland might typically be a member of the $19 billion C-Bus, in Queensland they are more likely to be members of the much smaller Brisbane-based BussQ.
Despite some consolidation over the past decade, there are still almost 400 industry, corporate, retail and public sector superannuation funds regulated by the Australian Prudential Regulation Authority.
And despite the rapid growth of self-managed super funds, it is in these APRA-regulated funds that the bulk of Australia's $1.4 trillion of superannuation money is held.
The Catholics have got a $4 billion super fund and the Lutherans and the Uniting Church each have (smaller) funds.
The canegrowers and the truckies also have modest funds.
Then there is the troubled Bookmakers Superannuation Fund with total assets of more than $100 million. Investors with the misfortune of having pension funds stuck in its illiquid investment strategy racked up a 29 per cent fall in the value of their investment in the 2012 financial year, on top of a 19 per cent fall in the 2011 financial year.
The fund's investment manager, Joseph Palmer & Sons, which can trace its history back 140 years, said realisation of mortgage assets in the portfolio remained extremely challenging. "Each property is potentially for sale but the process will take a long time to complete as buyers are scarce," it said.
At its simplest level, superannuation is a tax structure. Increasingly, personal wealth is going to be held through this structure, yet the understanding of it by the public is appalling and too many people in the industry think this is a good thing.
There are about 31.3 million member superannuation accounts. The average balance in a retail account is just $24,500 and the average balance in an industry fund just $21,900 clearly not enough to retire on.
But industry restructuring is gathering pace.
A recent report suggested that about half the subscale funds are already in talks with rivals about mergers, or developing closer relationships to share management and advisory services.
One sticking point is that the funds often don't like each other and some industries don't like the prospect of having money under the influence of unions.
As is this country's way, no ideal industry structure has been enunciated, but Jeremy Cooper, the author of a key industry report, has noted that any fund with $2 billion or less under management is "clearly" too small. "And even a $20 billion fund, certainly globally, is really just not a player," he said.
The federal government's Stronger Super changes are hastening consolidation, knocking it into a shape that APRA will feel more comfortable regulating.
The Stronger Super changes will promote the automation of the sector's transactions, permit mandatory consolidation of individual accounts, and see the introduction of low-cost MySuper accounts.
The country's biggest industry fund, AustralianSuper, is often heralded as the blueprint for the future of the industry. Last week, AustralianSuper unveiled plans to build an internal management team as its next initiative to reduce costs and boost returns to members.
AustralianSuper is growing rapidly, with $46 billion in funds under management expected to increase to $100 billion by 2016 the result of employer and member contributions, market returns, and merger activity. But its challenge will be to remain close to its members, despite having about 2 million of them. Some see the likes of AustralianSuper morphing into an AMP or a bank-like institution.
Some in the industry wonder whether a concentrated industry with, say, 10 AustralianSuper-like players is best for Australia's ambition of becoming a hub for financial services in the region.
One issue is that the bigger a fund gets, the more difficult it is to outperform the market encouraging the fund to invest more money in passive investment strategies.
One thing is certain and that is AustralianSuper is more professionally run than many of the largely unregulated 442,528 self-managed superannuation funds supposedly overseen by the Australian Taxation Office.
But that's another story.
Stewart Oldfield is a research analyst at Investorfirst Securities. soldfield@investorfirst.com.au
Frequently Asked Questions about this Article…
Why are smaller APRA-regulated super funds considered riskier for everyday investors?
Smaller APRA-regulated super funds can be riskier because they often lack scale, which can lead to higher costs, limited diversification and illiquid investment strategies. The article highlights the Bookmakers Superannuation Fund as an example, where illiquid mortgage and property holdings contributed to steep losses (19% in 2011 and 29% in 2012) and made asset realisation difficult.
How many APRA-regulated super funds are there and where is most of Australia’s super held?
There are almost 400 APRA-regulated industry, corporate, retail and public-sector super funds, and these funds hold the bulk of Australia’s roughly $1.4 trillion in superannuation. Although self-managed super funds have grown rapidly, APRA-regulated funds still contain most of the country’s retirement savings.
What fund size is considered 'too small' and why does size matter in superannuation?
According to Jeremy Cooper cited in the article, any fund with $2 billion or less under management is 'clearly' too small, and even $20 billion is described as 'really just not a player' globally. Size matters because larger funds benefit from lower costs, better access to professional management and greater ability to diversify and manage liquidity.
What are the federal 'Stronger Super' changes and how will they affect fund consolidation?
The Stronger Super reforms promote automation of sector transactions, allow mandatory consolidation of individual accounts and introduce low-cost MySuper accounts. The article says these changes are hastening consolidation in the industry, reshaping it into a structure that APRA will find easier to regulate.
What happened to the Bookmakers Superannuation Fund and what caused its large losses?
The Bookmakers Superannuation Fund, with just over $100 million in assets, experienced major value falls—19% in the 2011 financial year and 29% in 2012—largely because its investment manager, Joseph Palmer & Sons, faced difficulty realising mortgage and property assets in an illiquid market, making exits slow and painful for members.
What are the average superannuation balances and are they sufficient for retirement?
The article states there are about 31.3 million member super accounts. The average balance in a retail account is around $24,500 and in an industry fund about $21,900—figures the article describes as 'clearly not enough to retire on' for most people.
Why is AustralianSuper often cited as a model for the future and what challenges does it face?
AustralianSuper is frequently heralded as a blueprint because it is the country's biggest industry fund and is taking steps—like building an internal management team—to cut costs and boost member returns. The article notes it was $46 billion and expected to reach $100 billion by 2016 through contributions, returns and mergers. Its challenges include staying close to about 2 million members and the risk that very large funds may start to behave like big financial institutions.
What does consolidation in the super industry mean for everyday investors and should they be concerned about bigger funds becoming more passive?
Consolidation can mean lower costs, improved regulation and fewer duplicated accounts—benefits for everyday investors. However, the article warns that very large funds may find it harder to outperform the market and may shift more money into passive strategies, which can reduce the chance of above-market returns. Members should weigh the trade-off between lower fees and the potential for active outperformance.
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