Non-prescriptive APRA confirms big 5’s super dominance

The Australian Prudential Regulation Authority (APRA) which acted as a catalyst for the consolidation of superannuation fund numbers over the past decade has produced a new insights paper confirming that 87 funds have exited over the past five years.

And despite APRA’s deputy chair, Margaret Cole stating that the regulator’s role “is not to prescribe the shape or composition of the industry” the findings of its research paper make clear it believes at least even smaller funds should be considering mergers or exits.

Indeed, the regulator has pointed to funds with “weaker operational efficiency and a weaker growth outlook needing to develop credible strategic plans and providing clear evidence of their ability to improve member outcomes over the medium to long term.

According to the APRA paper, over the past five years, the administration and operating expense (AOE) ration has been declining for most funds, but there is considerable variation across the industry, with AOE ratios remaining high in relative terms for approximately a quarter of funds

“Over the last five years, many funds have improved their operational efficiency, but there remain several funds with limited or no improvement in their AOE ratio. Funds with persistently high AOE ratios over both 1- and 5-year periods may be facing structural or resourcing challenges in improving operational efficiency,” it said.

Just as importantly, the APRA paper noted that the largest five funds hold $1.2 trillion in net assets and have a combined market share of over 45%, before pointing out that, “comparatively, 50 per cent of funds have net assets less than $8 billion which collectively hold approximately 4 per cent of the market share”.

“Increasing competitive pressure is also evident when examining the share of member accounts, where the five largest funds have 11.4-million-member accounts and have a combined market share of over 50%,” it said. “Comparatively, 50% of funds have less than 98 thousand members which collectively hold approximately 4% of the market share.”

APRA’s paper also signals just how challenging it will be for funds already behind the eight-ball to get their houses in order, noting that superannuation stapling is factor.

“The introduction of account ‘stapling’ in 2021 has changed the dynamics of member acquisition and retention,” it said.

“To reduce the creation of multiple superannuation accounts, individuals starting a new job have their existing account automatically carried over unless they actively choose a different fund. Consequently, many funds face challenges in engaging and attracting new members.

“If this persists over the long term, some funds with a declining membership base may have to cover a greater proportion of the operating expenses via higher member fees.”

“Around 70% of funds have negative net rollover ratios i.e. losing more in assets when members transfer to other funds than they gain from new members transferring in. Key drivers of this include the role of advisors, funds’ membership offerings and brand recognition,” the APRA paper said.

It noted that funds have two main sources of organic asset growth outside of investment with approximately two-thirds of funds experiencing positive net cash flows (NCFs) over the past year, indicating that contributions exceed benefit outflows.

“Approximately one-third of funds have negative 3-year NCF ratios, indicating that benefit outflows exceed contribution inflows,” it said. “This is not necessarily a concern as some funds may have strategic objectives to service a larger proportion of retirees compared to workers and a number of these funds have grown by gaining new members and receiving more money through rollovers,” the APRA paper said

“On the other hand, funds in the bottom quadrant show limited growth from rollovers and NCFs. These funds may rely more on investment returns to grow. While investment returns can support growth, heavy reliance on them can lead to instability in fee revenue. This is particularly relevant for funds that charge fees based only on a percentage of member balances, without a fixed-dollar fee. In such cases, market volatility can reduce fee revenue even as operating costs remain steady or increase, placing upward pressure on member fees.”