The emergence of the big 8 super funds

Mike Taylor

Managing Editor and Publisher

26 September 2024

The rapid merger of superannuation funds over the past five years to create mega funds may have made the union/employer make-up of industry fund boards inappropriate, according to new analysis from research and ratings house, Morningstar.

What is more, Morningstar is suggesting that this situation warrants scrutiny.

The inaugural Morningstar assessment of the superannuation sector has also pointed to the evolution of a “big eight” industry funds which have come dominate the sector.

The analysis has questioned whether the balance on the boards of industry funds which have grown rapidly in recent years and across industry sectors remains appropriate.

“Profit-to-member funds, especially industry funds, dominate the superannuation market. Their parent structure can be a big benefit, encouraging a culture of member stewardship without having to balance it with the interests of profit-seeking shareholders,” Morningstar said.

“However, industry funds are by no means perfect. While many were established to cater to members in certain industries, the wave of super sector consolidation has seen larger funds’ member bases evolve to represent a broader cross-section of society,” it said.

But it said the more diverse memberships resulting from mergers may not be reflected in the composition of a fund’s board; “the directors are not appointed by members and may retain close links with industry-aligned trade unions and employer groups”.

“This warrants scrutiny around governance; are board members best-suited to set and oversee a fund’s strategic direction? What proportion of board members are independent? Do industry links skew asset-allocation decisions?” Morningstar asked.

The Morningstar analysis also pointed to the influence of the Australian Prudential Regulation Authority (APRA) and its belief that funds with less than $50 billion in funds under management (FUM) are uncompetitive.

“Compared with other types of investment entities, the regulatory landscape for super funds has an outsize impact on ongoing viability. APRA believes that funds below A$30 billion to A$50 billion are uncompetitive,” it said.

“Smaller funds tend to have higher fees and less scope to benefit from economies of scale – perhaps unsurprisingly, this makes it harder for a smaller fund’s investment options to pass the fee-dependent YFYS performance test.”

In terms of the evolution of the “big eight” Morningstar said that as of early 2024 there are five Australian megafunds, all industry funds: Australian Super, ART, Aware Super, UniSuper, and Hostplus.

“Three more industry funds—Cbus, Rest, and HESTA—are on the cusp of reaching this remarkable milestone. Collectively, these funds constitute a “big eight” within the industry fund segment, materially outpacing their peers in size,” it said.

“Not surprisingly, their market share continues to expand. A decade ago, they held roughly one third of the APRA-regulated market; today, they command over half of all assets. The two largest funds alone—AustralianSuper and ART—control nearly a quarter of the total assets. At the same time, the number of small funds continues to shrink, falling over 70% since 2015.”