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Superannuation: The big debate about small funds

Every Issue

Cite as: October 2009 83(10) LIJ, p82

Despite moves towards mega funds, there is still room for niche funds in the super industry.

The federal government takes a close interest in super funds given their important social role in accumulating wealth for Australians and significant growth -more than $1 trillion is now held in super in Australia.1

As a result, the super industry is highly regulated and the compliance burden on trustees of super funds and its associated cost is not insubstantial.

In 2005 fund choice gave most Australians the right to choose their super fund.

One by-product of that choice was to increase the complexity and sophistication of products and services needed to be offered by super funds to compete. Also, as funds grew they diversified their investments outside traditional assets, which resulted in higher investment management fees.

With fund costs increasing, debate has centred on the optimal size of super funds.

A number of commentators have asserted that super funds need to be big to keep their fees low. Some say $1 billion or $5 billion, while others say $50 billion.

But what is big? Australia's super funds are relatively small compared to others. The world's biggest super fund, Japanese Pension Investment Fund, has $US1,072,429 billion, the world's 20th largest, New York State Teachers has $US106,042 billion, while Australia's largest, Future Fund, has "only" $US44,354 billion.2

Only 10 Australian super funds have total assets exceeding $10 billion.

The contention of some commentators is that super funds need to be "big" to survive and keep their fund operating costs competitive, and that smaller funds will be forced to merge.

This implies "big" funds have lower costs, which is not always the case, as the following table shows.3

Investment fee
(default investment option)
Size of fund Super fund
0.55% $14 billion Rest
0.64% $1 billion legalsuper
0.65% $7.6 billion Health
0.66% $5 billion MTAA Super
0.67% $13 billion Hesta
0.70% $3.3 billion Care Super
0.70% $12 billion Sunsuper Corp
0.72% $29 billion Australian Super
0.73% $7 billion Hostplus

In June 2009 legalsuper announced reductions in investment fees. It also recently introduced a $1000 cap on administration fees paid by members with balances more than $350,000, reducing the administration cost for higher balanced members.

These initiatives show that smaller boutique funds like legalsuper can continue to provide competitive fees relative to larger funds.

In my view, evaluating super funds through a single lens of big or small fails to take into account that choosing a super fund is based on multiple criteria that differ between individuals.

The debate about scale actually misses the point. It is not so much whether a fund is big enough, but whether it is big enough to provide the type and quality of services and products its members want at a competitive cost.

Boutique super funds are better placed to understand and serve their particular target market. For example, legalsuper has been able to secure industry-leading insurance for its members because as a white-collar profession the legal profession is viewed by insurers as having lower risk.

The debate about size has little relevance to consumer decision making when choosing their super fund.

When choosing a fund you would be well advised to consider a wide range of criteria, including investment performance, frequency and type of communications, quality and type of services, member education and advice services, and member insurance.

While competition will continue to increase in the super industry (a good thing) there will always be a role for both smaller and bigger funds that deliver the products and services their respective target markets demand.

ANDREW PROEBSTL is chief executive of legalsuper, Australia's largest super fund dedicated to the legal profession. He can be contacted on ph 9607 9401 or or see

1. Statistics, Quarterly Superannuation Performance, March 2009 (issued 25 June 2009), Australian Prudential Regulation Authority.

2. Funds figures from research by Watson Wyatt, "Australian superannuation funds continue to be the fastest growing in the world", 3 September 2008.

3. Research by legalsuper.


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