Good news for super funds – member contributions are way up

Trialogue chart 20 Jan 15 - member contributions

20 January, 2015

One of the key characteristics of Australia’s super system has been the steady decline of net inflows over time, with growth in outflows outstripping growth in inflows – equally true of APRA funds and SMSFs.

In the second half of 2014, we had been hearing anecdotal evidence from APRA funds clients that their cashflows were better than they had expected. We’re currently in the process of compiling the 2014-15 Tria Super Funds Review, and it looks like the numbers support this, especially in the industry fund segment.

Net inflows are up by ~20% for industry funds, an extra $3bn. This is unusual in itself, but what’s particularly notable is that around half of the jump has come from member contributions. Member contributions are voluntary extra super contributions made by members, not including additional salary sacrifice contributions beyond the 9.5% SG (these are usually counted within employer contributions).

Several factors make this really interesting:

– Member contributions are generally discretionary, so they are a proxy for whether members are confident about their super and whether they see it as attractive. If members feel negative about super, as a group they will reduce their voluntary contributions and just rely on their compulsory employer contributions.

– Because member contributions are by far the smallest inflow factor, they have to move a lot to have any real impact. But in 2014 they did move a lot – rising by ~50% in the industry fund segment – and smaller, although still very significant, increases in the other major segments. This is a broad based development not confined to a couple of outliers.

– Big increases in member contributions are usually related to one-off tax changes which make it attractive to transfer large amounts of money into super. This was particularly true of the 2007 year. However there were no special factors at work in 2014.

Thanks to improved member sentiment, roughly an additional $4-5bn flowed into the super system in 2014 compared to 2013 – despite regulatory review uncertainty and general negativity surrounding super, due to constant government tinkering with the system and its taxation.

So what’s driving this unexpected but very welcome development? We see several possible explanations:

Members took to heart the Coalition’s policy not to make any adverse changes to super, improving confidence in the system (structural improvement).

A growing number of members approaching retirement increasingly realise they have not saved enough and are starting to top up their accounts (also structural).

It’s a trend-following reaction to the run of positive returns since the financial crisis, and the particularly good year in 2013 (cyclical improvement).

Today’s chart looks at total member contributions since 2007-8, compared to the previous year’s default return (we’ve used AustralianSuper as a benchmark):

Member contributions fell by nearly a third in 2009. Default returns in the 2008 year had been -6%.

They then stagnated for the 3 years. The even worse returns of the 2009 year didn’t reduce member contributions further in 2010, but nor was there any response to the better returns of the following two years. $16 billion pa appears to be a floor.

– There was some improvement in member contributions in 2013 despite investment returns around zero in 2012, but the big jump was 2014.

It’s a short series, but there’s a correlation of ~70% between member contributions and one year lagged default returns. Correlation does not always mean causation of course, but it doesn’t look spurious here. The smart thing for members might have been to increase their contributions when markets were awful in 2009-10, but the reality is that retail investor behavior tends to follow market trends.

Member contributions is effectively fund member sentiment in action. Members are now feeling more confident about super, but as the chart shows, it has taken six long years for member sentiment to recover since the financial crisis. Sentiment deteriorates quickly and dramatically, but does not quickly turn around.

Investment returns are a big part of that story, but clearly not the whole story. While additional voluntary contributions are always good news for the system, the extent to which it is simply trend-following is less good. There are some important learnings here in member behaviour, but more research remains to be done on what else is driving these member behaviours, and the extent to which it can be guided away from just chasing recent returns.

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