APRA labels funds 'uncompetitive' as returns close to best in a decade

Super funds are on track for their best annual return in close to a decade and members of smaller super funds are more satisfied and enjoying a better standard of living in retirement than those in much larger funds. Yet the prudential regulator is hellbent on megafunds.

The Australian Prudential Regulation Authority (APRA) says that superannuation funds with less than $30 billion in assets – that is 90 per cent of funds – are “uncompetitive”.

Despite a series of mergers in the past 18 months, outgoing deputy chairman Helen Rowell said this week that the superannuation system still had “too many funds overall, too many underperforming funds and fees that need to come down further”.

Read more: Smaller funds outshine megafunds

She said a number of funds “probably lack the scale needed to deliver optimum member outcomes over the medium to long term” and criticised some fund mergers for creating “unsustainable entities with insufficient scale and governance capabilities”.

Ms Rowell says funds with less than $30 billion in assets should consider merging with larger funds.

“The emerging industry view seems to be that any fund with less than around $30 billion in assets under management is increasingly going to be uncompetitive against the so-called megafunds,” she said.

Read more: Where super stashes are flying – and where they’re floundering

“While there will inevitably be debate about the threshold level of assets needed, we agree with the sentiment.”

The AFR reports that almost 90 per cent, or 124 of the 142 funds in APRA’s fund-level superannuation data, have less than $30 billion in assets.

Ms Rowell drew attention to instances of small underperforming funds merging with other small underperforming funds. “Over the past eight years, about 70 APRA-regulated funds have finalised mergers, and there are currently around a dozen potential mergers under consideration that we know of,” she said.

Read more: You think you have enough? Here’s why you’re probably wrong

Ms Rowell did not name and shame any specific mergers, but the AFR said one would be the proposed merger between Energy Industries Superannuation Scheme and TWU Super, which would create a single $12 billion entity. Both funds’ default MySuper offerings are underperforming, according to APRA.

If you’re confused about megafunds versus smaller funds, revel in ChantWest’s latest reporting.

It says the median growth fund grew 2.2 per cent over April, bringing the return for the first 10 months of the financial year to 14.7 per cent. If super funds can hold on to that return for the next six weeks, The Australian reports, it will be the highest annual return since financial year 2013, when growth funds surged 15.6 per cent.

Chant West’s senior investment research manager Mano Mohankumar said funds had shown their resilience during COVID and were now showing their powers of recovery.

“The cumulative return since the end of March last year is about 22 per cent, which is astonishing given the health concerns, disruptions and economic damage caused by COVID-19,” he said

The median growth fund is now more than 7 per cent above its pre-COVID crisis high set in January 2020, The Australian reports.

Mr Mohankumar said: “Even looking at the past 20 years, which now includes three major sharemarket downturns – the ‘tech wreck’ in 2001-2003, the GFC in 2007-2009 and now COVID-19 – the median growth fund has returned 6.8 per cent per annum, which is still well ahead of the typical return objective.”

He said share markets were the main drivers of fund performance over April.

In other super news, APRA deputy chair Ms Rowell revealed that the regulator was considering whether to take super funds to court for potentially wasting money on marketing or sponsoring sporting teams. APRA has approached more than 20 trustees and industry associations to provide information on their advertising expenditure.

Have you looked closely at your super funds’ returns and fees in the past few years? Have you changed funds as a result? Do you believe megafunds are the way to go? Have your say in the comments section below.

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Written by Janelle Ward



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