Making workers invest in their own retirement is rapidly filling the coffers of Australian superannuation funds, but not everyone is benefiting from their increasing size. In a paper presented at the Australian School of Business 20th Annual Colloquium of Superannuation researchers concluded that while industry fund members benefit from having bigger funds, retail fund members do not.
In the paper, Effect of Fund Size on the Performance of Australian Superannuation Funds, James Cummings, a research analyst at the Australian Prudential Regulation Authority (APRA), found there were three ways members could potentially benefit from scale: better gross investment returns, lower investment expenses and lower operating expenses. For industry funds, positive scale economies were evident through all three channels while the impact of scale on the performance of retail funds was mixed. Whatever the reasons, industry funds have outperformed retail funds by about 1.2% a year (after investment fees and tax) over the long term.
Industry funds dominate in the size stakes, representing the top 10 Australian funds by size. Australian Super heads the list at A$45.4 billion, followed by Qsuper ($35.7 billion), State Super NSW ($31.4 billion), UniSuper ($30 billion) and First State Super NSW ($23.1 billion). The largest retail super fund is AMP Flexible Lifetime with $18.38 billion under management, in 11th place.
The biggest operator of super funds is the New South Wales government with $64 billion and four funds, followed by AMP-AXA with 47 products running $62.5 billion. According to the APRA research, two-fifths of the overall impact of size on the performance of industry or not-for-profit funds is realised in the form of higher gross returns. Larger industry funds have higher allocations to asset classes where they are likely to have a size-related advantage, such as infrastructure, private equity, direct real estate and other alternative investments.
One-quarter of the overall improvement is derived from lower investment expense ratios, which suggests that larger industry funds are able to negotiate more favourable terms with external investment managers. One-third is derived from lower operational expense ratios, suggesting that larger industry funds are able to spread fixed costs associated with administration and IT infrastructure over a larger asset base.
“Based on this evidence, fund members are likely to benefit from further industry consolidation in the not-for-profit sector. The results of this study indicate that the greatest benefits accrue when industry funds grow to a multibillion-dollar size and are not exhausted at the largest Australian fund sizes,” says APRA.
Why retail funds don’t measure up
With retail funds, APRA found that larger retail funds have lower gross returns, which it says may be explained by the structure of many retail funds that operate as platforms. Members of these funds create their own portfolios from a suite of investment products. An implication of this approach is that there is limited opportunity for the fund trustees to optimise the investment allocation, at the whole-of-fund level, to benefit from larger size.