In 2019, super funds averaged double-digit returns, with median balanced options returning 13.8 per cent on average. Funds entered the new year in a strong position but have already experiencing lower yields and returns.
Markets in 2019 were driven by the healthcare and materials sectors. The financial services sector, despite delivering a positive result overall, remains shaky, due mostly to the royal commission.
Pension funds performed well last year, with the median balanced option returning an estimated 14.9 per cent, compared with 18.2 per cent for the growth option and eight per cent for the capital stable option.
“We’re anticipating a solid year for super in 2020, but the key challenge for funds will be the low return environment,” said SuperRatings executive director Kirby Rappell.
“Even with the possibility of a pick-up in economic growth, yields are extremely low and it’s getting harder to find opportunities in the market. Company earnings growth is slowing and Australian consumers are under pressure, so fundamentally it will be more challenging than 2019.
“That doesn’t mean it will be a bad year, but super members should not expect to bank another 13 per cent.”
One way funds are looking to face this challenge is through tactical mergers.
Mr Rappell said 2020 could, in fact, be the ‘year of fund mergers’.
“We expect to see an increasing number of fund mergers in the coming 12 to 24 months. This is being driven by a desire from the regulator to see a reduction in the number of super funds,” Mr Rappell told YourLifeChoices.
A number of high-profile mergers took place in 2019 and more are expected in 2020. Many funds have been seeking partners to sure up weaker areas in their operations. Another key driver of mergers is to reduce operating expenses, which could also drive down member fees.
“When mergers occur, trustees of the funds go through an in-depth process to consider whether a merger would be in the best interests of members, so it is pleasing to see members are front and centre,” said Mr Rappell.
“Typically, we have observed that if your fund does merge, the fund that ceases to exist realises good fee savings for members as the new fund typically has a better fee structure. For the new fund, we see the benefits being greater scale to invest in products and services.
“As always, making sure your fund is competitive is important, but I think it is a reality of the times as competition in the sector increases.”
However, some smaller funds left with a higher cost per member (CPM) and management expense ratio (MER) are likely to come under pressure to compete with the lower fees and value-for-money that mega-funds can offer – especially relevant as APRA turns up the heat on serial underperformers.
Assistant Minister for Superannuation, Financial Services and Financial Technology, Senator Jane Hume, said that mergers of underperforming funds “would make our super system more efficient and could significantly benefit members”.
“If their fund is not delivering the best outcomes for members, or if it stands at increasing risk of not doing so, it begs the question, should that fund merge? And increasingly, regulators may come knocking to ask – why has that fund not yet merged?” she said.
Do these mergers and movements of the new mega-funds actually affect retirees who have already reached preservation age or are in the decumulation phase?
“Typically, strategy is the most important to ensure you are in the right investment option and you have a long-term strategy to manage your savings,” said Mr Rappell.
“Our main focus when examining funds from a retiree’s lens is the challenging conditions for cash and fixed interest returns and what funds are doing to maximise these. This is combined with a need for better advice services and retirement products to help retirees to have a stable income in retirement that lasts.
“This is a major issue for the industry and more needs to be done. The volume of regulatory change has slowed product innovation and there is a need for more of this in the retirement space.
“The government’s retirement income review will be a key space for retirees to watch.”
Do you know how your fund is performing so far this year? Has your fund merged? Have you noticed any obvious savings yet?
If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.