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Are you better off in a large superannuation fund?

Underpinning the current wave of consolidation amongst Australian superannuation funds is the belief that it helps to be big. Is this really the case? Is there any advantage in being a member of a large super fund?

We address the question of whether large size benefits members in a recent paper found here. Our answer is a ‘definite maybe’. We don’t think size matters as much as how it is used. If a large fund can leverage the advantages and limit the disadvantages of size, then members can be better off. However, operating effectively at scale faces many challenges. In the end, what matters is how well management executes, whatever the fund size.

Australia now has mega-funds

Consolidation combined with member contributions and switching has created some large superannuation funds. Australia sported 17 funds with assets under management (AUM) exceeding $50 billion at June 2022 (see chart). Of these, 14 are superannuation funds. The biggest is AustralianSuper at $272 billion, with Australian Retirement Trust (ART) not far behind at $247 billion. The Australian superannuation industry has not only become systemically important – at $3.3 trillion at June 2022 it stands at around 1.4-times both GDP and the ASX market cap – but now contains some seriously large financial organisations.

Advantages of large size

Size brings two types of advantage. First is that it can be used to lower costs per member, i.e. economies of scale. Second, large funds can do some things that smaller funds and private investors cannot, i.e. economies of scope.

Large fund size can lower unit costs in three ways.

First is by managing assets in-house. The cost of running an internal team is fixed to some extent, meaning that the cost of managing a particular asset mix declines as AUM increases relative to paying a basis point fee to external investment managers. AustralianSuper now manages 53% of their assets internally while Unisuper is at 70%. The percentage managed internally is rising at most larger superannuation funds in part with the intent of limiting fees which come under regulatory and public scrutiny.

Second, lower fees may be negotiated with external investment managers for larger mandates.

Third, some elements of administration costs are fixed and can be spread over a larger member base. Research confirms that size does indeed reduce per-unit costs in administration.

While lower investment expenses combined with administration efficiencies hold out the potential for lower fees for fund members, it may not work out this way. Large funds might instead use their size to do things that might benefit members in other ways.

On the investment side, large size facilitates investing directly in ‘big ticket’ unlisted assets such as infrastructure or commercial properties. This can help with diversification and may provide access to unique opportunities. However, investing in unlisted assets is costly, which limits potential for fee reductions. The key benefit is in finding additional return sources in private markets that are not available to smaller funds (or private individuals).

Large size might also support more and better customised member services where significant resources need to be committed. Ability to customise may be particularly important in offering retirement income strategies going forward, noting that retirees have widely differing needs. While tailoring to these differing needs might be more effectively done under financial advice, there are many retirees who may not take advice and will look to their superannuation fund to assist them. A larger fund should be better able to cater for such members where doing so effectively relies on high levels of functionality through expensive systems and staff.

Disadvantages and challenges

There are also downsides from being large. A key one is that the fund becomes constrained in taking investments that cannot absorb the larger licks of AUM required to make it worthwhile. This is the case in certain segments of the equity market, such as small-caps and even mid-caps. As a fund grows in size, it becomes harder to move an equity portfolio without incurring costs through ‘price impact’. The investible universe also narrows simply because there are limits to how much can be reasonably held of particular stocks.

To explain, the table below shows the percentage that needs to be held of the three ASX stocks ranked 50, 75 and 100 by market cap at time of writing, assuming that the fund targets a 25% weight in Australian equities and a minimum holding equal to 2% of the equities portfolio. For example, to hold a 2% position in Pro Medicus, a $100 billion fund needs to take 7.4% of the company, while a $250 billion fund needs to take 18.4%. Once a fund gets to ‘mega-fund’ status, it is doubtful they could prudently invest in Australian mid-caps in sufficient volume to make a meaningful difference, let alone invest in small-caps.

Such investment constraints matter if these smaller areas offer the best opportunities. This can be often the case as they may be under-researched or offer illiquidity premiums. Smaller funds and private individuals face no such size constraints. Instead, their challenge is having the capacity to identify and access good opportunities. While this might be done through investment managers, there are fees, and talented managers need to be identified.

In addition, large organisations are more complex, less flexible, more bureaucratic, and can find it difficult to coordinate staff to work towards a common purpose. These elements may easily create dysfunction that can work to the detriment of performance. Also, surveys suggest that large funds are poorer at delivering a positive personal experience to those members who engage.

Large funds can be challenged to find sufficient attractive assets to fill a big portfolio. AustralianSuper, for instance, received inflows averaging about $500 million per week during 2021-22. If there are insufficient attractive assets available, performance will be diluted. Whether this is the case depends on the pricing of large ticket assets, which in turn may vary with competition for those assets and market cycles.

Large funds need to construct operating structures to succeed at scale. This likely entails building an internal team with capabilities to invest in unlisted assets, noting that this area is somewhat specialised. Members will only benefit if the internal team performs, so that any cost savings are not wiped out by lower returns. Eventually there may be a need for overseas offices – AustralianSuper and Aware Super are taking this step. This only increases the degree of difficulty. Attracting and retaining skilled staff is particularly important, but tricky. Strong governance and a positive culture also matter.

Delivering enhanced member services can be challenging. It usually requires building systems, where projects tend to run over-time and over-budget and sometimes fail. No easy wins there.

In short, large size offers a mix of advantages and disadvantages along with many challenges. None of the benefits are guaranteed. Management has to execute well.

Potential systemic impacts

It is also worth noting that growth and consolidation in superannuation could have some systemic impacts. These are more likely to detrimental, although unlikely to be major. Our concerns fall into two groups.

First, the financial system would be stronger and more vibrant if populated by superannuation funds of various sizes. Concentrating assets in a handful of large funds could dent market resilience and competition, both of which are enhanced by diversity of participants. Institutional presence could be hollowed out in markets that large funds tend to pass over, such as those providing capital to smaller companies. This matters as institutions help enrich the market environment through research, price discipline, monitoring and liquidity.

Second is what happens if a large fund gets into trouble. Large funds have more members and a bigger footprint. Any ructions might cause damage on a broad front. While a run on a fund seems unlikely, it is not impossible given that member choice allows members to switch at call. The Your-Future-Your-Super test only raises the risks on this front. The losers would likely be members within the fund, as it scrambles to unwind it positions.

Capability matters more than size

Something of a ‘size is good’ mantra has been going around parts of the superannuation industry. However, size is not an automatic win. One consideration for members is whether a superannuation fund offers capabilities or services of value to them, ideally at a competitive fee.

Large funds have the potential to deliver aspects such as lower fees, enhanced exposure to unlisted assets and a richer set of services such as retirement strategies. But an even more important consideration is whether the fund will deliver. In the end, the capability of its management probably matters most of all.


Geoff Warren is an Associate Professor at the Australian National University and a Research Director at the Conexus Institute. This research is conducted with Scott Lawrence of Lawrence Investment Consulting. This article is general information not personal financial advice.


April 17, 2023

Investment constraints on mega funds will only on become more prevalent. Passive investments, profiling on ESG and life cycle approaches show that trustee have the wrong emphasis.

Ben W.
April 16, 2023

One can be large but the demographics of the size are such (i.e % approaching pension phase) that the structure that you built, based on a large AUM pivots from being a benefit to being a hindrance.

The focus on private investments, if things don't pan out, represents a significant risk to the cost base of these platforms. Particularly the liquidity issues that potentially could arise. I would also reject the smoothed assertion in the piece.

The customisation benefits alluded to do not require a large platform, technology can provide solutions in this space. The growing use of customised indexing is an example of this.

April 14, 2023

One simple advantage is omitted. Large funds can attract and retain higher quality staff.
Better asset managers, customer service staff, better financial advice, etc
That generally translates into better outcomes for members.

April 15, 2023

I would add to this - large funds attract more attention. When they male mistakes, there is generally more public pressure to have those corrected, relative to smaller funds.

April 18, 2023

Regarding both Ben W and Adam's posts: I selected a large industry fund as safety was as important as returns and as Adam says, there are more eyes on the top (size wise) funds. Not a guarantee of course. Ben's observation raises the importance of thinking about how the demographics pyramid will impact investment strategies of funds. Some will try to capture younger demographics to balance the membership age group, but there is a large cohort retiring soon. There should be more discussion about this

April 16, 2023

This is totally not true …. The very best fund managers don't work for the big industry funds for wages, they run their own funds for profit. Same for the best financial advisors they aren’t working in industry fund call centres. There are some good ones for sure but the proposition simply doesn’t stand up in the real world ..

Graham Hand
April 16, 2023

I would not be so emphatic, Drew. It's what you say that is not true. Fund managers are motivated by many things, and there are many excellent fund managers in industry funds. For example, I would back John Pearce at Unisuper over any fund manager in Australia, and John works in industry funds because he is allowed to 100% concentrate on managing money (and he earns $1.5 million a year). He does not need to continuously market his fund as someone running their own business does. Just think about all those fund managers who you seem to think are amazing when you say "the very best fund managers ... run their own funds". How much time do they spend pitching their fund to investors when they would prefer to concentrate on investing? And what is your evidence that most of them are especially talented anyway?

April 17, 2023

Tony this is nothing I'm aware of that supports this proposition.

The mega funds don't pay top dollar so don't necessarily attract the best talent. Some minor expectations but I'd be just as ably provide a list of recruits that have failed elsewhere and now in very senior roles within ISA.

Murray McLean
April 13, 2023

Backing up David Williams comment, how many large funds identify and serve the needs and best interests of life partners?

Peter M
April 14, 2023

Most fund managers have difficulty in beating indexed returns over the longer term horizon of superannuants. In this context lower costs per member of larger funds would seem to be more important than many of the purported disadvantages.

Geoff D
April 13, 2023

Don't forget that some funds, including Australian Super, have a member direct investment option which allows individual members, to some degree, make their own investment decisions without being totally bound by the restrictive nature of very large funds. At the same time those members are still able to take advantage of the other benefits of belonging to a large fund.

Graham W
April 13, 2023

To serve its members properly a large fund surely needs to be broken up into some sub-funds depending on age and whether in pension mode or not. How otherwise does the fund decide on participating in share buy-back schemes for example?. Good for those in pension phase, not so attractive for those in accumulation stage.

David Williams
April 13, 2023

A very timely wake-up call. Size may bring efficiencies but not necessarily effectiveness. A core value of a super fund is to respond effectively to the individual differences of their older members. Lower fees are unlikely to be a driver, and the article suggests that size seems likely to be more of an impediment to good performance than an advantage.
The risk is the same for relationships. A better mix of technology and personal contact could support older members and sustain their trust and relationship with their fund. Moving the financial advice goalposts towards digital financial advice is one such strategy but does not address the non-financial challenges and opportunities for individuals. Investing in longevity planning also would support a more sustainable member culture.

Russell (a veteran adviser)
April 13, 2023

"a richer set of services such as retirement strategies". Conflicted, surely.

David Bell
April 13, 2023

Thanks Geoff and Scott. I admire the discipline to not lurch towards a stronger conclusion that big is always better. Key message for me is that members in funds of all sizes (perhaps some minimum threshold to ensure basic operating standards can be met at reasonable cost) can experience a good outcome. There are advantages that come with size but it takes a high quality board and executive team to fully realise those benefits.


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