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Superannuation: Super shake-up

Every Issue

Cite as: Jan/Feb 2010 84(1/2) LIJ, p.72


The head of the federal government’s superannuation review has predicted dramatic changes to the superannuation industry.

The second phase of the federal government’s review of the superannuation industry is underway and already some fundamental questions about the industry’s future have been raised.

The three-phase review, launched in June 2009, is examining the governance, efficiency, structure and operation of Australia’s superannuation system.

Australian Securities and Investments Commission former deputy chair Jeremy Cooper heads the review and made some bold statements at a major superannuation industry conference held late last year.

Speaking at the Association of Superannuation Funds of Australia national conference in November, Mr Cooper painted a future landscape in which Australia would have fewer and much larger super funds.

His reasoning was that bigger funds with increased scales would provide Australians with lower costs and higher performance by being able to access a more diverse range of investment opportunities.

According to statistics from the Australian Prudential Regulation Authority (APRA), in Australia at 30 June 2008 there were more than 450 super funds (excluding funds with one or two members) with the average fund size being just over $1.5 billion.1

Mr Cooper predicted a future industry with a $2 trillion pool of savings dominated by 27 mega-funds, with at least three funds of around $200 billion, four around $100 billion and 20 managing about $50 billion each.

In this scenario the average Australian super fund would manage around $75 billion, about three times the size of the largest super fund in Australia at the current time.

The size of funds being predicted is far from the current position.

If Mr Cooper’s vision is to become a reality, this significant change would need to be managed carefully to ensure the security of the retirement savings of Australians currently held in more than 32,000,000 member accounts.

It is generally accepted that better funds have lower fees, deliver higher investment returns and provide best practice products and services to members.

Intuitively, the view that bigger funds will have lower fees sounds logical; however, it does not hold true in all cases. In fact, if you look closely at the fees of some Australian funds this view is not supported.

The chart above shows the investment fees of 10 industry and retail super funds.

The funds in the chart are ordered from largest (AMP) to smallest (legalsuper) and as illustrated, larger funds do not necessarily have lower investment fees. Significantly, the smallest fund has a lower investment fee than eight of the other funds.

Turning to another sector of the financial services industry in which significant consolidation has occurred – the banking sector – from our personal experiences we know that bigger banks have not necessarily delivered lower fees and better services.

The current banking model of four big banks has more than likely resulted in less rather than more competition.

Despite the promises of better or more service, it is fair to say that there is community-wide disenchantment with the banks.

It is possible that Mr Cooper’s view, that in future there will be a few very large funds in Australia, could result in similar community disenchantment.

A small number of dominant funds would more than likely reduce competition in the sector and could create very large financial institutions which, if they were to fail, could “lose” the retirement savings of large pools of Australians.

Mega-funds are also likely to wield great influence over the financial services industry – the equivalent of a financial gorilla in the room. These mega-funds could exert strong influence over other funds and industry service providers.

As the chart above shows, the bigger super funds are not delivering lower investment fees. If Australians’ experience with the big four banks is repeated in a landscape where a few mega super funds dominate the industry, lower costs or better services may not be the outcome.

Bigger is not necessarily better.

For more information on the federal government’s superannuation review, see www.supersystemreview.gov.au.


ANDREW PROEBSTL is chief executive of legalsuper, Australia’s industry super fund for the legal profession. He can be contacted on ph 9607 9430 or via aproebstl@legalsuper.com.au.

1. Statistics, Quarterly Superannuation Performance, June 2009 (issued 24 September 2009), APRA.

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