Breaking down Australia’s superannuation reforms

AustraliaThe Covid-19 crisis will accelerate restructuring of Australia’s pensions industry according to a Funds Global survey, writes Bob Currie. Testing financial conditions during 2020 have added to the pressure on Australia’s superannuation industry to deliver better investment outcomes and greater cost efficiency, according to Funds Global’s 2020 Australia survey conducted in partnership with Calastone. Respondents predict that this will accelerate mergers between superannuation funds, while placing fresh demands on fund providers to offer wider product choice to scheme members. The Australian pension fund, or “superannuation”, sector, has been under scrutiny from financial regulators over the past four years as part of a far-reaching review of pensions and wealth management provision. The Australian Royal Commission on Misconduct in the Banking, Superannuation and Financial Services was established in 2017 to investigate misconduct and poor standards in the financial services industry. Publishing its findings in February 2019, the Commission identified “cultural failings” in the superannuation, banking and wealth management sectors and highlighted a need to reform governance, fee structures and remuneration policies which often worked to the “financial detriment” of scheme members. These regulatory pressures come on the back of an exacting 2020 for Australia’s superannuation industry which has been struck hard by the impact of Covid-19. Australia’s economy contracted 7% in the three months to June, following a 0.3% decline during Q1, forcing it into recession for the first time in 30 years according to data from the Australian Bureau of Statistics and Trading Economics. As part of its emergency support measures, the government announced extraordinary provisions to allow Australians to draw from their superannuation savings (AUD10,000 from April 20, 2020, with a further AUD10,000 if required after July 1). The government planned initially to end this scheme on September 24, but subsequently extended it until December 31, 2020. By December, more than 3 million people had withdrawn close to AUD36 billion (€21 billion approx.) from their superannuation accounts under this facility, according to data from the Australian Taxation Office. Faced with these economic and regulatory pressures, 73% of survey respondents said that there will be further consolidation within the Australian ‘Super’ marketplace to deliver scale efficiencies and to reduce costs. Product Heatmap
A noteworthy consequence of this process review has been the launch in late 2019 of the Australian Prudential Regulatory Authority’s (APRA’s) MySuper Product Heatmap, which evaluates superannuation products according to their ability to deliver positive outcomes to scheme members, including their fees, investment performance and sustainability. As part of this review, APRA has also been evaluating the importance of economies of scale in the Super industry. It advises that further consolidation may be required in this sector, indicating that larger superannuation funds are “typically better able to… provide good outcomes for its members now and into the future.” In line with this conclusion, KPMG predicts further consolidation of smaller and mid-sized super funds in its annual ‘Super Insights’ report. “Post Covid‑19, we expect to see further mergers of funds/providers in the AUD50 billion+ space, creating an increasing number of mega funds in the future and a wider gap between these funds and the rest of the sector … [We also expect] to see mergers among medium-sized funds, largely in the sub‑AUD30 billion space,” according to KPMG’s, ‘Super Insights 2020: The Superannuation Sector, Before and Beyond Covid-19’. According to David Hutchison, Principal Consultant at NMG Consulting, around 90 MySuper providers are currently competing for new scheme members [as of December 2020], but this could drop to a handful. “If funds are not allowed to advertise for new members, there will be a lot of funds without any means to grow. This is likely to accelerate the Super fund M&A that policymakers and regulators have been talking about for so long,” he says. Additionally, more than half of respondents to the Funds Global survey highlight the need for super funds to extend better product choices to scheme members, avoiding a situation where their work-based savings are held in underperforming default funds which deliver poor outcomes (51%). Expanding on this point, NMG’s Hutchison says that asset management and retail industry has not been good at managing legacy product and this has left many investors in old products paying more than they should. This has already resulted in a drive for fee reductions, but this may have some distance to go before it bottoms out “with a further 10% fall in MySuper pricing quite possible over the next 4 years and a further 10-15% in the 5 years after that.” Investment advice
Reforms introduced since the Royal Commission inquiry are also likely to trigger changes in how investment advice is delivered in the Australian market. 62% of respondents to the Funds Global survey say that models for delivering investment advice will change subsequent to the Commission’s findings. Significantly, 48% of respondents believe that these reforms will deliver greatest benefit to higher net-worth clients. NMG’s Hutchison predicts that reforms will raise the overall standard of financial advice but may also, paradoxically, make it more difficult for retail investors to access advisory services. Consolidation in the sector will mean that fewer advisers will support a smaller number of, typically, more affluent clients. Just as there has been a drive for fee reduction and better cost management in the Super world, so the advised channel will potentially look for opportunities to reduce asset management and administration costs to improve competitiveness. Justin Christopher, director of client relationship management for Australia and New Zealand at Calastone, predicts this will reinforce the importance of scale and drive further M&A activity across both the asset management and fund administration sectors. Margin pressure
The survey reveals that margin pressure is being felt across the investment funds value chain in Australia, with asset management companies currently bearing the heaviest burden (64%) but with this also weighing heavily on asset servicing companies (49%) and fund distributors (46%). A prominent message to emerge from the Australia survey, however, is that little of this cost pressure will be passed through to the end investor: only 7% of respondents believe that investors will pay more. Respondents expect, inter alia, that asset managers will introduce a wider range of ETFs and other low-cost products and take further steps to reduce operating and service costs in efforts to prevent cost pressures feeding through into higher fees for the end investor. The trend towards low-cost passive and exchange traded funds will contribute to falling fees, according to Calastone’s Christopher. Take-up of low-cost exchange-traded products in the Australian market has moved relatively slowly until recently, representing just 2.5% of a total AUD1.62 trillion pool of fund manager assets, and has been heavily dominated by retail investors. However, this is now accelerating, with ETF purchases growing at upwards of 30% per year. For Christopher, the relative value of active and passive management is likely to become more clearly defined in coming years. “Investors are distinguishing between alpha and beta and what they’re prepared to pay for each, even in alternative strategies such as hedge funds,” he says. “While passive investments will form the foundation of multi-asset solutions, active and alternative investments that deliver alpha will be important components that boost performance. Transparent, flexible and cheap passive ETFs will remain popular, although ETF providers will also increasingly support active strategies. Despite the continuing drive towards Super fund mergers, respondents predict there are still opportunities for new technology-driven platforms to enter the market, offering superior, digitally-enabled outcomes to scheme members and a user experience that better fits the expectations of younger investors (49%). In managing this reform agenda, NMG’s Hutchison warns about the effects of regulatory fatigue for pensions and wealth management sectors that face major changes to their ways of working. This, he says, is already a concern with new Design and Distribution Obligations (DDOs), which requires issuers and distributors to have an effective product governance framework in place and to publish a ‘target market determination’ specifying which categories of investor will be targeted for sale of an investment product. “The industry’s approach is currently to do the minimum that it needs to comply, rather than using this as an opportunity to think differently and to redefine how we can best serve the needs of investors,” he says. Read the full report now » © 2021 funds global asia

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