Super in 2025 – a big industry, but also a brutal one

What will the super industry look like in 2025?

For those who didn’t make it there, this was the subject of our presentation at the 2014 ASFA Conference.

Unless compulsory SG is abolished, the growth of super is assured.  It will be huge by 2025 – around $5 trillion in assets, depending on how investment returns play out.

Super will be big, but it won’t be easy.  Indeed the indications are that it will be brutally competitive, creating lots of openings for entrants but increasingly difficult for today’s incumbents.  It’s hard to resist the conclusion that a significant number won’t be around.

As unwelcome as that may sound, it shouldn’t be a surprise.  Conditions are already getting more challenging – net cashflows are getting harder to come by, there’s virtually no net member growth, and traditional distribution models are under threat.

That means an industry increasingly reliant on investment returns for growth; and a not-for-profit business model (in most cases) struggling to maintain revenues.  It won’t be easy going for the commercial players either.  Slowing growth in any industry generally results in intensifying competition, falling margins, and consolidation.

And for all existing players there’s the threat of new entrants, unconstrained by current thinking or legacy systems.  A $5 trillion industry has a lot of room for new billion dollar businesses.  Super may be compulsory – but it doesn’t mean that today’s incumbents, or indeed collective funds at all, will continue to be winners.

Lack of organic growth also means an industry vulnerable to shocks, including regulatory shocks.  Look at the impact on Challenger arising from unexpected change in social security treatment of one of its products, or on UK annuity providers which received no notice of the removal of compulsory annuitisation.  Consider the effects on super funds generally of measures such as restrictions on franking credits, removal of tax exemptions for pensions, or adverse social security changes – no longer unimaginable.

So super in 2025 will be bigger than the Japanese or UK pension systems of today – but there’s not much reason for anyone to feel comfortable.  Indeed most funds should be having an honest discussion about whether they have what it will take to deliver on their objectives – whether to members or shareholders – in the super industry of 2025.

For those funds which believe there is a place for them going forward, there’s a series of other honest conversations they will need to have in order to be competitive:

•  Generational change – the not-for-profit segment in particular features many long serving CEOs and directors.  Despite rumours of immortality, there’s going to be a big generational change in super in the coming decade.  Replacing long-serving officers is a challenge in itself; this needs to be aligned with a conversation about the management team needed for the industry of the future.
• Deciding which business you are in – today most funds predominantly compete in the market for collective super, and some will continue to specialize here.  Other will migrate towards different and more diverse business models across retirement income, individualized super, insurance, and perhaps new fields such as aged care.  Clarity of where a fund is seeking to compete is essential to a coherent competitive strategy.
• Capabilities – in an increasingly competitive, open, yet disrupted industry, funds will need a broader and deeper set of capabilities than in the past – across distribution, marketing, products, and advice for starters.  Developing capabilities is neither cheap nor fast, and the additional investment will likely be occurring against a background of little revenue growth and ongoing regulatory upheaval.
• Governance model – the industry needs to get to a conflict-free model which is best for the members (not stakeholders or shareholders), before one is imposed by government.  We need to get past the current impasse which features overly simplistic arguments on both sides.  For example, the addition of independents, whether a third or majority, does not necessarily mean better decisions.  And the equal representation model is not the reason why not-for-profit funds have outperformed historically, other than in a very indirect sense.  What’s needed is a model which delivers flexibility and the right skills around the table to respond to a difficult and changing environment.

None of these are easy conversations.  But they’re necessary.  Super has some of the classic signs of vulnerability to disruption – a big industry with established ways of doing things, and slowing growth.  It’s also vulnerable to ongoing externally imposed disruptions from policymakers, the Financial System Inquiry final report and tax white papers being the next instalments.