Falling member numbers mean not-for-profit funds face pressure to raise fees

After a delay of almost three months, APRA recently released its fund-level superannuation statistics (which means subscribers our Tria Super Funds Review will have recently received a supplementary update).

While assets were up strongly during 2014, there was less good news for growth in member numbers. Total member numbers in the Tria large funds universe is little changed over the past 4 years, and as today’s chart indicates, more than half of these funds are experiencing declining member numbers.

The trend actually improved slightly in 2014 with 43 funds experiencing a fall in membership rather than 50, but it remains a major ongoing problem. And for those funds still experiencing positive member growth, it is generally in the very low single digits. Growth about 5% is a rarity in the landscape.

This dynamic shouldn’t be a surprise. Pretty much everyone is in the super system already; indeed there is a significant excess of accounts over any rational estimate of a reasonable number that the system should be supporting. Campaigns by funds (and indeed regulatory activity) have increased the rate of account consolidation, which is outweighing any natural growth in the working age population.

Zero member growth highlights the different revenue models of retail and industry funds.

• Retail funds are primarily FUM driven – $ based fees, where they occur, most commonly cover fixed costs (insurance, statements etc) and revenues are primarily sourced through the variable component. Lack of member growth is an inconvenience, but not the main game as far as most retailers are concerned.

   
  Retail revenues are highly correlated to FUM growth, especially market returns, which means that retail funds are heavily focussed on attracting high balance members and generating rollovers from other funds. Retailers are hurt by bear markets rather than a lack of member growth.

• For most not-for-profit funds – particularly industry funds– the inverse is true. Dollar-based fees cover the great majority of running costs of the fund, with asset based fees primarily being the pass through of actual investment costs. Lack of member growth means no revenue growth (in the absence of a price increase), and of course costs have not stopped rising. As a result, many not-for-profit funds have switched to a hybrid fee model which has introduced a small asset base fee of typically 5-20 bps to supplement dollar-based revenues.

   
  QSuper is almost entirely funded in this manner while at the other end of the scale just a few funds (eg AustralianSuper) remain with a pure dollar-based revenue model.

While an environment of flat or declining member numbers is challenging for everyone, it creates a real issue for industry funds:

• Revenues stay flat or go down
• Some costs may also stabilise, but many costs are people or rent related, so overall the cost structure is still likely to be rising by CPI at least. And if the fund is investing to enhance its ability to win and retain members, costs may be rising well above CPI.

So… how to close the gap when it opens up? Of course a fund can simply increase its $ fee to members to bring it back to balance, but the equation above implies future increases well above inflation. And with competition increasing, funds need to look over their shoulders at the risk of becoming uncompetitive.

Not-for-profit funds are likely to hedge their bets here, increasing their reliance on asset-based fees. That may be the easier road in the short term – but in the longer term it continues to erode the pricing differentiation between not-for-profits and low cost retail simple super products.