Super switching – how much money changes hands each year?

When choice of super fund was introduced around a decade ago, there were predictions of mass switching by members, with negative consequences for default super funds.

So what has been the experience? How much super AUM changes hand each year as members (and employers) change funds?

For most super members, their super fund is chosen by their employer. In many cases, employer choices are constrained by awards, enterprise bargaining agreements (EBAs), and of course by MySuper. Within such constraints, employers often stick with their default providers for extended periods of time, but some also review and switch providers from time to time.

This is one source of switching. Switching can also be originated by members (or their adviser). Employees gained the choice under the SG in 2005, and this was extended in 2006 to former state award employees.

So it has been 10 years, long enough to work through any pent up demand and settle into a pattern.

Having done some more work on the model behind the Tria Super Funds Review, we can now identify the amount of AUM sloshing through the system each year on its way to a new home. This is depicted in today’s chart, with the annual AUM of transfers from one super fund to another in the blue bars, and the percentage of system AUM on the move as the red line. Here’s what we include in the transfers figure:

• Switches from one collective fund to another – both employer and member initiated
• Switches from collective funds to SMSFs – almost always member initiated by definition

The first item also includes switches from one super fund to another controlled by the same RSE. These can have visible effects when advisers are changing operating model in significant numbers – eg from master trusts to super wraps – which we saw in 2014.

We don’t include switches within a super fund; eg from one investment option to another, or from the accumulation to pension division.

The amount of money switched / transferred within the super system in 2014 was ~$89bn, which was well up on 2013. That’s $89bn leaving one super provider (or product) for another – a large competitive opportunity.

Our analysis suggests that 2014 was been inflated by ~$10bn due to the sort of adviser operating model change noted above. We’ve also heard anecdotal evidence from funds of elevated switching as a result of SuperStream, but it’s not particularly evident in the AUM numbers (it may be more visible in terms of member numbers). Either way, $89bn is a large amount, which was divided as follows:

• ~$70bn was switched between collective funds – back and forth between retail funds, industry funds, and not-for-profit funds; and between different funds controlled by the same retailer.
• ~$19bn was switched from collective funds to SMSFs. Virtually nothing comes in the opposite direction – a salutary lesson that a member lost to SMSFs is probably lost forever.

Allowing for the inflated figures of 2014, the dollar amount of transfers has been rising at 8-9% pa – more or less long term investment returns. This reinforces that for the same amount of switching activity over time, you would expect the dollar amount to compound with the effects of contributions and reinvested investment returns.

And that’s pretty much what we see here. The switching rate – the dollar amount of transfers divided by average system AUM – has been 5-6% since 2009 (it was a little higher at ~7% in 2007-8).

In other words the rate of switching activity is relatively steady. Slightly more than one dollar in 20 makes a change every year, and most of that changes to another collective fund.

Keeping in mind that this reflects employer as well as member decisions, that’s quite an encouraging metric for incumbents and a slightly sobering one for entrants, especially non-SMSF entrants. Members and their money appear to be relatively sticky.