KPMG predicts two-speed super sector

Will industry funds become diversified financial institutions offering non-superannuation products such as aged care and broader banking products?

The answer according to KPMG’s second annual Super Insights Report is that, yes, they very likely will.

The KPMG report also suggests that the number of superannuation funds in Australia will be halved in the coming decade and claims that the sector is already seeing a two-speed divide between larger and smaller funds.

The prediction around industry funds becoming more diversified stands in contrast with KPMG’s prediction around retail superannuation funds, which is suggests could narrow their offering, reflecting the long-term viability of their wealth businesses.

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KPMG head of Asset and Wealth Management, Paul Howes said the company’s analysis showed an increasingly two-tiered super fund industry in Australia – not so much between retail and industry funds but by larger and smaller funds.

He predicted the Productivity Commission’s (PC) review into the efficiency of the system would impose significant challenges on smaller funds – and should it recommend a limitation of existing default awards this could spell the end for many small funds.

“While rationalisation has happened very slowly, we believe the pace will quicken sharply in the next few years,” he said.

The KPMG report is based on 2016/17 Australian Prudential Regulation Authority (APRA) data and found that the average fund grew Assets Under Management (AUM) by 9.3 per cent in 2016/17, and by 15.6 per cent in terms of contributions, which was a strong turn-around from 2015/16.

It found that while employer contribution growth remained relatively stagnant at 4.8 per cent, personal after-tax contributions increased substantially, by 47.8 per cent.   

The report said funds delivered strong investment returns to members in an ever more competitive fee landscape but added that there continued to be an ongoing issue regarding operating expense increases which had risen by 6.7 per cent posing a significant challenge to the sector.

 The KPMG research found that larger funds had materially higher increases in AUM and greater contribution flows last year than smaller funds – some of which experienced net outflows for the first time, through leaner contributions and greater transfers out.

It said membership continued to decline on a total system basis, with the average fund losing 1.0 per cent of accounts, however, strong growth in retirement products continued in 2016/17, emphasising the importance of competitive retirement income products to retain members.