Negative cashflows in a growth industry

Superannuation assets grow steadily each year and are now about 140% of Gross Domestic Product (GDP).  This is remarkable given they were about 10% of GDP 30 years ago.  Yet, against this solid industry growth, many funds have been merged into other funds and others have stagnated – an incredible 46% of superannuation funds experienced negative net member benefit flows (cashflows before investment returns and insurance) in the year to June 2016¹.

There are multiple reasons why so many funds are struggling.

• The growth in the industry is not uniform and many funds are sub-scale with little prospects for growth.
• Funds charge fees for each member account, yet there has been a reduction of more than 4 million accounts in the last seven years.
• The very large funds are increasingly winning more Choice members and more of their members are consolidating their superannuation accounts. These funds provide a wider range of services and have large marketing budgets and growing brand awareness.  They are winning business from smaller funds.
• Some funds are exposed to sectors of the economy with low employment growth, and they will lag funds operating in faster growth sectors such as health and aged care.

In addition, some are concerned about the shift of the large cohort of baby boomers reaching retirement and predict large outflows from the industry in the form of lump sums over the next decade.  Some have even postulated that this will push the industry into net outflow territory.

Rice Warner analysis shows that these forecasts ignore many facts:

• Most assets are rolled over to pension products at the point of retirement rather than taken as lump sums
• Over half of pensioners take the minimum drawdown (which is less than the earnings on the fund in many years)
• Growth at younger ages will still be strong with:
  • future increases in the Superannuation Guarantee to 12%
  • high levels of immigration driving population growth.

The reality is that, although long-term growth will be slower, the superannuation industry still has many golden years ahead of it.  Indeed, Rice Warner’s latest Superannuation Market Projections Report (to be released next week) projects that compound growth rates over the next decade at 7.4% p.a. may be higher than the last of 6.1% p.a. though this decade did include the GFC!

Graph 1 shows that superannuation assets are expected to continue to grow as a percentage of GDP for another 30 years, peaking at more than 180%.  This rate takes into account our low interest era and recent Government policy reducing the ability to contribute large amounts into superannuation.

Graph 1.            Historical and 30 year projected superannuation assets as a percentage of GDP (2017 dollars).*

Graph 2 shows that cashflows excluding investment returns will head into negative territory by 2038.  However, all the growth will come from strong investment returns on the large body of assets, including the growing investments held for retirees.

Cashflow presents a challenge for more than half of the superannuation funds but consolidation of funds and member accounts will help solve this, and superannuation still presents an incredible growth opportunity for funds for another 30 years.  The continued high levels of liquidity will allow funds to remain as patient long-term investors.

Graph 2.            Superannuation system cashflow projections

¹ APRA’s Fund Level Profiles and Performance.