Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 303

Where is the super industry heading?

While the 2019 Federal election may lead to significant superannuation changes, 2018 set the long-term agenda for structural reform. The Financial Services Royal Commission led the way, pushing every major bank to plan an exit from wealth management, once seen as the fast train to growth against the slow train of basic banking services. The Commission's revelations wreaked havoc on financial advice, while recommending the extension of the Banking Executive Accountability Regime (BEAR) to superannuation.

In addition, the Productivity Commission supported the removal of underperforming funds and changes to the default system with a 'best in show' proposal. Regulatory changes included Protecting Your Super to remove small balance funds from the super system, while more power was given to APRA and ASIC.

In this context, KPMG's 'Super Insights 2019' is a timely look at the present and future of the superannuation industry. Their work includes a website report and a fascinating interactive dashboard with great detail on which large APRA funds are growing and which are struggling, and their market shares.

In 2018, despite market volatility especially in the final quarter, the superannuation industry delivered strong outcomes for members overall. The APRA-regulated sector grew by 10.3% over the year, with closing assets nearing $1.8 trillion. SMSFs experienced slower growth, with assets increasing by 6% in 2018 to close at almost $750 billion. In total, the assets supporting superannuation closed 2018 at $2.7 trillion, some 39% higher than the market capitalisation of the Australian share market.

Number of funds to halve under industry consolidation

Faced with structural and legislative changes, KPMG expects significant industry consolidation in APRA funds in the short-to-medium term, as shown in Table 1.

Table 1: Projected number of funds, 2019 to 2029

Industry funds to dominate growth, but SMSFs hanging on

The reduction in large APRA funds from 217 to 85 will create some enormous asset management companies, with considerable clout in all sectors of the Australian economy. In particular, a reduction in industry funds from 38 to 12 will see the power of the big funds taken to another level.

KPMG's interactive feature shows how fund size has changed between 2004 and 2018. Back in 2004, the retail funds of NAB/MLC, CBA/CFS and Westpac/BT dominated superannuation, and the industry funds looked like minnows. While these three retain high positions, AustralianSuper is now the largest, and QSuper, Unisuper and First State Super will probably overtake the retail funds in the next few years. For the first time in history, the industry funds in total were larger than retail funds in 2018.

At the end of 2018, as shown in table 2, AMP was second to AustralianSuper by fund size, with substantially more member accounts. AMP's ranking is unlikely to last, based on latest flow statistics.

Table 2. Market position, asset and members of retail and public funds 

KPMG expects industry funds to overtake SMSFs in 2020, holding over $2 trillion in assets by 2029, as shown ion Table 3. Retail funds will still grow, but at half the rate, reaching $1.2 trillion in a decade. The entire superannuation industry at the moment is about $2.7 trillion. By 2029, total super assets will reach $5.4 trillion, dwarfing anything the ASX can achieve.

Table 3. Forecast assets by superannuation sector

Despite the optimistic outlook, KPMG's Paul Howes added:

"There is no room for complacency, including in the industry sector. During 2019, it is incumbent on all trustees of all funds to review their operations, business models and product portfolios. We believe that in all sectors, significant opportunities exist for funds to develop innovative retirement products to suit the needs of a variety of members.

We are concerned that the potential changes to the advice landscape, including the additional educational requirements proposed by FASEA, the removal of commissions and banning of advice fees being charged on MySuper products will potentially impact the number of members that receive advice. This may have the impact of reducing the demand for pension products going forward and may result in more individuals taking lump sums out of the superannuation systems, which may put more pressure on the social security system, which is unlikely to be a sustainable long-term position for the Federal Government. As such, KPMG believes funds will have to review their advice models to ensure that they can continue to deliver advice to members in an efficient, affordable and compliant manner to facilitate the continued growth of the retirement income product market.”

Footnote, not from the KPMG Report

If Labor's proposals on the refund of franking credits become legislated, many SMSF assets will switch into industry and retail fund structures, including the wraps and direct investment options. In its costing of Labor's proposal, Treasury wrote that the revenue impact will be reduced by SMSFs retaining franking credits through switching to APRA funds:

"This behavioural response is assumed to be greater for higher wealth SMSFs ... Assets that shift into APRA funds are assumed to continue to draw the benefit of the franking credit since most APRA funds are in a net taxpaying position. Some other SMSFs will rebalance their portfolios away from franked dividend paying shares towards other forms of income to compensate for the fall in after-tax returns on shares in the absence of refundability. These other forms of income could include fixed income, property trusts, managed funds or offshore equities."

It will be interesting to see how KPMG amends its 10-year forecast in 2020 if Labor's proposal is implemented.

 

Graham Hand is Managing Editor of Cuffelinks. The information in this article is drawn from the KPMG Super Insights 2019 Report. See Report for further disclaimers. This summary is general information and does not consider the circumstances of any investor, and does not seek to cover the detail in the report.

 

4 Comments
Jan H
April 27, 2019

Glenn H: Further to my previous response to you, I forgot to say that those poor wage-earners actually get $18,200 tax-free before they have to pay any tax. SMSFs cannot take advantage of the tax-free threshold ($18,200) because their tax is zero.. Now, the TFT is several times more than the cash refunds some SMSFs and individuals receive (see Treasury stats).
Remember, Labor raised the TFT in 2012/13 from $6000 which was raised from $5400 when the cash refunds were introduced.
Now, Tony, if Labor wants Budget repair it could lower the TFT and remove cash refunds so the status quo pre-2000 would be restored. But, bearing in mind cash refunds were part of the GST compensation package which included the $6k TFT and family benefits totally 2.4 billion. (Refer Howard's speech, during which he said: "The new tax system is designed to reward Australians and their families with lower income tax and increased family benefits." (June 2000 - http://australianpolitics.com/2000/06/29/howard-gst-address-to-the-nation.html).

Now Labor wants to take away one arm of that GST package but retain the rest. It's a very lopsided policy so definitely not in accordance with the principles of taxation.

Davidy
April 26, 2019

That's because Bowen doesn't know. It is pretty obvious from the policy and answers to questions that they do not understand how SMSFs work

Glenn H.
April 26, 2019

Chris Bowen , will not advise if accounting charges and ATO SMSF levies will come out of non refundable franking credits or will these charges further reduce a retirees income , can anyone throw any information on this .

Jan
April 27, 2019

Glenn H: Currently, a SMSF in pension mode with no accumulation account, cannot deduct expenses. The compensation is that the fund pays no tax. However, deductions e.g. compulsory ASIC fees/ levies, audit fees plus accountant fees can be offset by the cash refund. The way I see it, SMSFs will not only lose the value of their franking credits but will also have to pay the fees from the fund. So, if FCs are $5000 and fees are $2000, then the loss is $7000. I haven't heard any commentators raise this further reduction of income Of course, it will put many SMSF members below the Govt pension income but all the Labor camp say is :suck it up" because we have to balance the books at your expense for the benefit of all those wage-earners who are being sucked dry by your tax dodging loopholes.

 

Leave a Comment:

     

RELATED ARTICLES

On franking, all public funds are not the same

The death of the single-industry superannuation fund

The road to super hell is paved with good intentions

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.