Latest Super Statistics - by 2022 - SMSFs could be $1trillion!

As always, the latest superannuation statistics from the Australian Prudential Regulation Authority (“APRA”) – being for the 12 months ending 30 September 2017, makes interesting reading.  Set out below are some key observations in relation to the continued growth of industry funds (compared to retail funds) and self managed superannuation funds.

Within the next few months, it is highly likely that the Industry Fund segment will overtake the Retail Fund segment of the superannuation market (as measured by asset size).  Over the 12 months to 30 September 2017, the total super assets of the Industry Fund segment increased by 16.9% compared to a 5.5% growth in assets of the Retail Fund segment: in dollar terms the increase was $81b for the Industry Fund segment and $32.2b for Retail Fund segment.  

Previously, the Industry Fund segment was about 85% of the asset size of the Retail Fund segment (as at 30 September 2016).  Now the Industry Fund segment is 95% of the asset size of the Retail Fund segment (based on 30 September 2017 figures).  If this trend continues it is highly likely that the Industry Fund segment will, in terms of asset size, achieve parity or overtake the Retail Fund segment by 30 June 2018.

While the SMSF segment continues to be the largest super fund segment, it has very marginally decreased its dominance over the 12 months to 30 September 2017.  Over this period, the proportion of super assets held in SMSF segment fell from 27.98% (as at 30 September 2016) to 27.73% (as at 30 September 2017).  In absolute terms the total value of super assets held in the SMSF segment increased from $651.1b (as at 30 September 2016) to $701.6b (as at 30 September 2017), an increase of $50.5b (or about a $1b per week).

The significant regulatory and taxation changes in superannuation over the past 2 years seems to have had the effect of consolidation/rationalisation of both the Industry and Retail Fund segments. During the 12 months to 30 September 2017, the number of Retail Funds decreased from 130 to 126.  While a reduction in the total number of Retail Funds of 4 may not seem significant, it does suggest that the cost of developing and implementing the administrative and software changes needed to accommodate the significant changes to superannuation is a burden which some funds cannot bear or pass on to their members by means of either higher administration fees or lower investment returns. 

In contrast there was a reduction of one fund, 41 funds to 40 funds, in the Industry Fund segment has over the 12 months to 30 September 2017.  The result is expected given the fact that Industry Funds have faced and are facing the same cost issues of developing and implementing the administrative and software changes as are facing Retail Funds although not with the same degree of intensity.  Possibly, one explanation is that Industry Funds, being not-for-profit and mutual style funds, are not subject to the same financial discipline of having to justify their use of capital (and, by implication, their continued existence). 

However, in the long run, the smaller Industry Funds will find it increasingly more difficult to justify their continued separate existence and will have to face and answer the existential question as to whether they are “sub-scale” and, if so, whether their continued operation is in the best interests of the members.  This existential question – imposed by s29VN(b) of the Superannuation Industry (Supervision) Act 1993 - applies to trustees of superannuation funds which offer a MySuper product (almost exclusively these are Industry Funds) and requires the trustees of such funds to consider each year whether their fund has reached its use by date.  This existential question does not apply to SMSFs as SMSFs cannot, by law, offer MySuper products.

The presence and weight of the existential question – the s29VN(b) determination – will be significantly increased if the super funds which can receive default superannuation guarantee contributions are increased to include non-Industry Funds.  Default superannuation guarantee contributions are superannuation guarantee contributions where the relevant member either is not permitted to select the super fund to which they are made or, if permitted to make a selection, does not exercise that choice so that the contributions are allocated to the default superannuation fund.

One final point to consider is when will the SMSF segment assets exceed the $1 trillion threshold?  If the current net asset growth rate of 7.75% over the 12 months to 30 September 2017 continues for the next four years, then on or about 30 June 2022, the SMSF segment’s assets will be $1trillion.