Impact of long-term trends on superannuation
- On 13/12/2019
- projections, research, superannuation
Today, we released our annual superannuation projections for the next 15 years. The headline figure is the increase from the current $2.7 trillion to $4.8 trillion. Even though the number has been discounted to today’s dollars, this is still a 4% compound annual growth rate, and it shows how the superannuation industry is growing to be a more important part of our economy. For those who prefer the growth expressed in funny-money terms, the market will be about $7 trillion in future dollars in 2034 (assuming our assumptions fare well).
Of course, as with any projection, the numbers are a function of the assumptions used, and it is more important to note the trends.
We looked at our projections from 15 years ago to see how they fared.
We could not have predicted the Global Financial Crisis nor the extraordinary amount of legislative change, generated from countless reviews. We have also had major tax changes – the 2007 Costello changes making pensions tax-free, the 2017 changes to the Age Pension means tests, and the 2017 tax changes to superannuation pension accounts including the Pension Transfer Balance Cap. Over this period, concessional contributions have fallen gradually from $100,000 a year (if you were over age 50) to $25,000 a year (for everyone).
We foresaw the demise of corporate funds and (most of) the growth of industry funds. We didn’t foresee the sustained growth of the public sector funds. However, the main funds in that sector now have public-offer status, so membership has gone far beyond the public sector.
We failed to see the implosion of the commercial (retail) sector. Weak management and a failure to respond to the changing marketplace has led to a fall in market share from 37% to 26% of the industry. Similarly, we expected the SMSF segment to grow to about $400 billion today, but huge tax advantages over the last decade meant much higher growth to $750 billion.
Retirement assets grew 45% more than we anticipated, with much of the additional assets being placed in large SMSF funds.
Over the next 15 years, the superannuation industry will evolve to be a more mature and sophisticated industry. Based on the trends, we speculate that there will be some profound changes to the industry, including:
- The revolution in technology will begin to filter into superannuation and it will dramatically improve the experience for members. Basic administration functions such as transactions, unit pricing and member statements are becoming commodity services. They will be offered by a few specialist businesses with low fees based on volumes. Conversely, the much larger super funds will insource key services such as member engagement and data analytics – leaving the Third-Party Administrators (TPAs) with a narrower set of services.
- Funds will set up retirement solutions as separate business lines with specialised administration (not yet available), tailored financial advice and structures for couples.
- The average size of funds grows each year. Within five years, there will be ten funds with more than $100 billion of FUM.
- The retail segment will be transformed as legacy products are converted to MySuper giving proper scale. Bravely, we assume the sector will still have 25% of assets in 15 years – but the owners of these assets will be different with newcomers like Vanguard gaining market share in time. The major life companies operating in Australia are now all foreign-owned; will retail superannuation be similar?
- Superannuation funds will be required to hold more capital. Superannuation will soon dominate the whole economy and will exceed the size of the banking industry, but without the same capital constraints. Large funds are already innovative in moving into ownership of other (related party) financial services businesses, usually via private equity or venture capital. As these risks are borne by members, little capital is required at present. However, the process is not transparent, and the structure is cumbersome. Hence, it is likely that funds will need to hold more reserves as capital to back those activities.
- The financial advice regime is in a period of transition. The legislation is prescriptive and has not kept up with changes in technology which provide the opportunity to deliver advice efficiently to the masses. The legislation will be re-written at some stage and funds will be able to deliver all types of advice profitably and at a reasonable price to members.
- Funds will leverage their strong investment capacity to provide access to investments (outside superannuation) for medium term savings such as providing for school fees or home deposits.
- The retirement segment will decline from 31.5% of all assets to slightly less than 30%. The key reason is the increase in pension payments as the baby-boomers age and consume their benefits. There will also be a run-off of large SMSF funds as the current older retirees age and withdraw from the segment.
Another emerging issue is the management of liquidity. While the industry will have positive cash flow for at least fifteen years, some funds are already experiencing negative cash flow. This flows through to investment decisions as not all assets can be invested long-term.
If the system for selecting default funds changes, or if funds fail to meet the tests under either of APRA’s Member Outcomes or ASIC’s Design and Distribution Obligations, they could have outflows of members. Arguably, many funds would fail to meet these tests for their current retirement solutions.
For purchase enquiries of Rice Warner’s Superannuation Market Projections 2019 report and Executive Briefing, email firstname.lastname@example.org