A maturing superannuation industry, part I: declining organic growth
Last week’s release of the 2015-16 Tria Super Funds Review showed that a meaningful proportion of large superannuation funds are in net outflow. APRA agreed, making public comments last week to the effect that 45% of the superannuation funds it regulates are not generating enough in contributions to offset benefits paid to members and balances transferred to other funds. This might sound surprising in an industry that benefits from mandated contributions – it turns out the rising tide does not lift all boats.
Whilst it’s a long (very long) time before the entire industry will be in net outflow, the spoils of legislated growth are far from evenly spread. Only 12 funds are really winning – 80% of positive netflows go to less than 15% of the funds. And as today’s first chart shows, that has been clearly trending down over the last 10 years as the number of funds that are ‘winning’ becomes progressively smaller.
A secondary issue is that the industry’s organic growth rate continues to tumble, coming in at just 3.1% in 2015, down from the lofty heights of 5.7% just seven years ago. Organic growth is the net industry growth generated by flows (rather than investment returns) and this drop is driven by two factors:
- Benefit payments rose substantially during the year (a trend that will, of course, continue as the Baby Boomers retire). $47b was paid out to retirees in 2015, up 24% on the previous year. This is a good thing (it’s what the system is for, after all), but it is a headwind to growth
- The asset base is now so large that the impact of contributions gets smaller and smaller every year… so whilst contributions were up 9% during the year (driven primarily by member contributions), that’s still a smaller proportion of the faster growing asset base
So, whilst the system will continue to grow, it is maturing. Classically in a maturing industry we expect to see growth concentrated in fewer firms (which we are seeing in super) and some participants who are no longer successful exit through failing or consolidation (which we are not seeing).
It is difficult to see the objective case for 85 super funds continuing to exist, especially when many are in outflow. The supposed barriers to consolidation are well known.
Next week we’ll take a look at consolidation of funds – where have we come from, and what needs to happen to put some momentum behind consolidation.