$100bn mega-funds to dominate super

What will the superannuation sector look like by 2030 and how will mega-funds play a part?

Member engagement with their super is extremely low, enabling the funds to wield extraordinary power.

At least 10 mega-superannuation funds with member assets in excess of $100bn will dominate the financial services landscape in 2030, even without mergers, according to industry forecasts.

Research undertaken for The Weekend Australian by independent superannuation consultancy CoreData shows that industry funds will be in the ascendancy with five mega-funds, followed by the retail sector (three) and the public sector (two).

The group of 10 super-sized funds, spearheaded by behemoth AustralianSuper, will have $2.7 trillion in member assets by 2030 — roughly equivalent to the size of today’s entire super system, and the $2.8 trillion in deposits held by the nation’s banks.

Industry Super Australia chairman and former Labor minister Greg Combet said the emergence of mega-funds in a super system worth about $5.5 trillion by 2030 was an “unequivocally good thing” for the country.

“It changes the financial system,” Mr Combet said.

“For the banks, it doesn’t mean there will be any shortage of liquidity; they will access liquidity from superannuation institutions, which they are doing now. But the impact at a macro level will be that Australia becomes a capital-exporting nation, and you can see that in the national accounts.

“We’re too small in lots of asset classes, so the super system will increasingly invest offshore and repatriate yield, which will be a great thing for the country because it will reverse our current account deficit.”

AustralianSuper, the nation’s biggest super fund with more than $180bn in assets, will stand head and shoulders above the other mega-funds with $444bn under management.

Its nearest rival will be QSuper, which is projected to hold $249bn on behalf of Queensland public servants.

READ MORE: Sort out this super mess | APRA tells super funds to shape up or merge | Funds head for double-digit return for 2019 | Paying very wealthy pensioners is hardly prudent | Our retirement system is far from perfect

If the mooted merger between QSuper and the industry fund Sunsuper proceeds, the combined group will be in the same league as AustralianSuper with $377bn in assets.

The CoreData estimates rely on a number of key assumptions, including rates of return based on the average experience for each fund dating back to 2004.

No allowance is made for future mergers, potential increases in compulsory super, or demographic trends such as longer accumulation periods for younger members.

Despite this, the projected size of AustralianSuper by 2030 accords with commentary by the fund’s outgoing chair Heather Ridout in the 2019 annual report.

AustralianSuper’s outgoing chair Heather Ridout (right) and chief executive Ian Silk (left). Picture: Britta Campion

Ms Ridout said member assets, “notwithstanding the normal ebb and flow of investment cycles”, were expected to grow in the next five years to $300bn.

In 10 years, she said, balances would mushroom to $500bn.

Growth in individual funds and the wider system is now being driven by compounding returns, as opposed to compulsory contributions in the system’s earlier years.

Riches flow from retail sector

The industry funds are also benefiting from huge inflows from the troubled retail sector, triggered by misconduct revelations in the Hayne royal commission.

AustralianSuper has forecast $20bn of net inflows in the current financial year, up from $16bn in 2019 and $9bn in 2018.

Net flows in the September quarter were $5bn.

Of the forecast $20bn, about $12bn will come from compulsory super, with the remainder coming from voluntary contributions and new members.

More than 413,000 new members joined the fund in 2018-19.

The trend is not isolated to AustralianSuper, with $21bn switched out of retail funds in the three months to last June, taking the total for the 2019 financial year to $32bn.

The mega-funds loom large in the Australian financial system, but they remain relatively small by global standards.

AustralianSuper is positioned at number 33 among its global peers, dwarfed by the top-ranked $US1.37 trillion Government Pension Investment fund in Japan.

The next local representative in the global league table is First State Super, ranked at 61 with $US63bn in member assets.

A woman walks by an electronic stock board of a securities firm in Tokyo. Picture: AP

Industry funds sped past their retail rivals in assets under management earlier this year, amid forecasts that the self-managed super sector will be scaled in the current financial year.

The concern in some parts of corporate Australia is that member engagement with their super is extremely low, enabling the funds to wield extraordinary power, particularly in relation to environmental, social and governance risks.

Last February, the ACTU pressured 30 industry funds to use their financial muscle to convince BHP it should guarantee the jobs of local seafarers.

Treasurer Josh Frydenberg expressed alarm to Australian Prudential Regulation Authority chairman Wayne Byres, seeking urgent advice as to whether the regulator had sufficient powers to ensure trustees were acting in the best interests of members.

Mr Combet, who also chairs the $US103bn global institutional funds manager IFM Investors, said he had recently returned from a roadshow to the US and Britain and it was clear that ESG issues were now mainstream.

“Our clients include 350 global pension funds and, if anything, we have to catch up on these issues,” he said.

“Climate risk, for example, is not some environmental pursuit of the finance industry; it’s a mainstream issue.

“Look at the changes BHP is making — it’s repositioning itself from fossil fuels to a diversified energy company.”

IFM itself had to embrace the new environment after acquiring Buckeye Partners, a US owner and operator of oil pipelines and terminals on the east coast and gulf coast, for $US6.5bn.

“We’ve been roundly criticised for investing in something that transports fossil fuels, so (climate change) isn’t some kind of industry-fund fascination,” Mr Combet said.