It was only Wednesday when we reported that many super funds had delivered members record returns for the past financial year, but future results like this could be a thing of the past, according to a leading consulting firm.
Associate principal of consulting firm Right Line Abhishek Chhikara believes the federal government’s recent introduction of the Your Future, Your Super reforms threaten to make the superannuation system less competitive, creating concerns about future performance.
The Right Lane analysis indicates that the changes could lead to a situation where superannuation is dominated by just a handful of mega funds.
Read more: Did your super deliver a record return?
“The recent reforms are aimed at addressing structural flaws in the system such as multiple member accounts and fund underperformance,” Mr Chhikara explained.
“However, the changes will disproportionately affect small and medium-sized funds, challenging their viability and potentially forcing them out of the system.
“This could lead to a system dominated by mega funds, with no room for quality specialist funds.”
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These specialist funds often deliver tailored products based on a deeper understanding of members and are the most at risk of being squeezed out of the market, according to Right Lane.
“Historically, many funds have efficiently grown members through default distribution channels,” Mr Chhikara said. “However, the Your Future, Your Super reforms will ‘staple’ a member to their first or existing fund, considerably shrinking the default system.
“To maintain growth, many funds will be forced to compete for new members through direct-to-consumer channels. This ‘retailisation’ of funds will drive up costs and diminish the competitiveness of many quality specialist funds.”
Data from the Right Lane report shows that the number of people defaulting into a new super fund each year could decrease by more than two-thirds as a result of the government’s reforms.
The direct-to-consumer market, where members make an active choice to join or switch funds, is growing rapidly and will become the new battleground for member acquisition, according to Right Lane.
However, only a few funds are well positioned to win in this market, with the analysis showing that a handful of large funds capture nearly all the member switching flows.
“The changes are likely to solidify the position of a few large, fast-growing funds, with the capability to invest in direct acquisition, the capacity to keep pace with increasing compliance requirements, and the courage to persevere in the face of ever-growing scrutiny,” Mr Chhikara explained.
“For the rest, the pressures of slowing growth, falling revenues, and rising costs may force them into decline.
“Right Lane research suggests that an ideal system would comprise between three and five generalist mega funds plus between seven and 10 specialist funds.
“Such a system, not too fragmented and not too consolidated, will deliver an optimal mix of competitiveness and efficiency.”
Are you worried that the government’s Your Future, Your Super reforms will lead to reduced superannuation returns in your retirement? Why not share your thoughts in the comments section below?
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