Mega funds maintain momentum though ‘second six’ report strong growth

The superannuation sector grew 7.6 per cent in 2023, with total super assets under management now exceeding $3.5 trillion, according to KPMG’s annual Super Insights report, and the seven largest funds – AustralianSuper, Australian Retirement Trust, Insignia, Aware Super, UniSuper, AMP, CFS – each holding over $100 billion in funds under management, represent nearly 60 per cent of these assets. 

As the superannuation sector continues to stratify, however, KPMG highlights movement in the $50–$100 billion fund cohort, which grew 20 per cent in the last 12 months to pull ahead of the rest of the pack, due in part to merger activity and strong investment returns.

This cohort now comprises six funds, up from five last year, with the addition of $70 billion Mercer Super following its merger with BT Super in April 2023.

Meanwhile, the 14th-largest fund is a “long way below” at $38 billion, KPMG pointed out.

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In its comprehensive analysis of statistics from the Australian Prudential Regulation Authority (APRA) and the Australian Tax Office (ATO), KPMG stated it expects the mega funds to continue to dominate and benefit from cost efficiencies and synergies due to economies of scale. However, KPMG also noted that smaller funds with low fees and high performance will “continue to be competitive and successful.”

In FY23, the growth of industry funds staggered slightly, increasing by 1.7 per cent to 38.3 per cent, compared to 5.6 per cent growth in FY22.

Public sector funds also witnessed growth in FY23, with their market share increasing by 0.4 per cent.

However, corporate funds continued to see contraction with a 0.1 per cent decrease in market share throughout FY23.

“We note that a number of corporate funds were wound up in FY23 and merged into industry and retail funds,” KPMG said.

In the last 12 months, two of Australia’s largest corporate funds – TelstraSuper and Qantas Super – have both signalled they are seeking a merger partner. 

What is the optimum scale for a super fund?

Looking at investment performance, KPMG observed the optimum scale of a super fund remains unclear, given strong performances from both mega funds and their smaller counterparts.

As at 30 June 2023, mega funds delivered an average return of 8.82 per cent over one year, compared to 8.62 per cent for all fund sizes.

Over a 10-year horizon, mega funds delivered 7.94 per cent compared to 7.78 per cent from all fund sizes.

In FY23, the gap between the best-performing fund and the average stood at 3.62 per cent, down from 4.66 per cent.

“This investment performance data shows that there is still no clear evidence as to what the optimum level of scale is for a super fund, and funds are all at different stages of maturity,” KPMG said.

According to Linda Elkins, KPMG national sector leader – asset & wealth management, member outcomes have been strengthened with strong net investment returns and improved fee arrangements across the super sector since the introduction of the super guarantee three decades ago.

However, sustainability will now be a concern, she said, and could see merger activity ramp up in 2024.

“The flow of members is going to a limited number of funds and some are in a net cash outflow position. While the merger activity of recent years slowed a little in FY23, we anticipate this picking up again,” Elkins said.

In terms of consolidation, KPMG noted the importance of “appropriate levels of operational synergies” along with timing or phasing of synergy realisation and a disciplined action plan to achieve these synergies.

“The operational synergy/benefit profile of the merger needs to appropriately consider the anticipated effort and transition costs associated with administration/platform migrations to ensure these mergers are in the best financial interests of members,” it said.

In FY23, the only funds on the top 10 list where the organic growth in member numbers appears to be without the assistance of mergers are the retail platforms (HUB24, Netwealth and Macquarie) along with First Super, Hostplus (who previously merged with Statewide Super in FY22), and Australia’s largest super fund AustralianSuper.