What super funds will look like in 2034

Superannuation market will reach about $7 trillion in future dollars in 2034, according to Rice Warner.

The research house found over the next 15 years the super industry would grow at a 4% compound rate and was becoming a more important part of the economy. Over the next five years there would be 10 funds with more than $100 billion in funds under management.

However, while the industry would have positive cashflow for the next 15 years, some funds were experiencing negative cashflow and this would flow through to investment decisions as not all assets can be invested long-term, Rice Warner said in an analysis.

The analysis said profound changes over the next 15 years would include technology, retirement solutions, fund size, retail funds, capital requirements, legislation, investment capacity, and the retirement segment.

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Technology would help improve member experience as basic admin functions such as transactions, unit pricing, and member statements were becoming commodity services. These would be offered by few specialist business with low fees based on volume. The analysis noted that larger funds would insource services such as member engagement and data analytics.

The research house expected retirement solutions to be part of a separate business lines in funds with specialised administration, tailored financial advice and structures for couples.

On the retail segment, Rice Warner said it would be transformed as legacy products would be 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,” it said.

“The major life companies operating in Australia are now all foreign-owned; will retail superannuation be similar?”

With the industry soon to dominate the economy and will exceed the size of the banking industry but without the same capital constraints, the analysis said.

“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,” it said

“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.”

On advice, the analysis said legislation would be re-written at some stage and funds would be able deliver all types of advice profitability and at a reasonable price.

Funds, it said, would also have the capability to provide access to investments (outside super) for medium-term savings for expenses such as school fees or home deposits.

The retirement segment would decline from 31.5% to just under 30% thanks to increase in pension payments as baby-boomer aged retirees consumed their benefits and current older self-managed superannuation fund members withdrew from the segment.