“What keeps you up at night” might be an expression which is overdone in some industries with little change, but you could never say that  – right now anyway – about Australian superannuation.

For all our success in creating, inside two decades, the world’s fourth largest fund management industry – around one third of it managed by the not for profit sector – there is certainly a lot of insomnia-creating change happening in the industry at present.

We’ve had a global financial crisis, a drive for consolidation, a drift to self-managed super and now trustees are grappling with MySuper and SuperStream. Who has time for any sleep at all?

Data from the Right Lane

It was in this context that AIST partnered with management consulting firm, Right Lane, to conduct a survey of trustees in July. The survey comprised 58 “suppositions” on what could happen in the industry over a three-to-five-year time frame on issues such as competition, performance, distribution and pretty much the whole super universe.

The survey was conducted online and was sent to 599 trustee members, 113 of whom replied. The large majority – 72 per cent – of respondents were from industry funds with between $10 and $15 billion in assets. Respondents were split fairly evenly between employer representatives (47 per cent) and member representatives (41 per cent).

Four themes dominated the responses: the impact of competition, the direction of government policy and regulation, the future of the not-for-profit governance model, and the education and skills of trustees, given all the changes to governance and regulation.

Competition is a top-of-mind issue. There was a high level of agreement on respondents on a few key issues, with a more than 90 per cent seeing an intensification in competition from retail funds, whose value proposition would increasingly converge with the not-for-profit sector.

“The increasing popularity of SMSFs – as well as the move by retail funds to offer lower cost products – means that not-for-profit funds are feeling the pressure from all sides,” AIST chief executive, Fiona Reynolds, said.

“Funds will increasingly be looking for ways to differentiate themselves and this survey shows that performance, service and brand rate highest among potential bases of differentiation for not for profit funds over the next three to five years”.

Trends, likelihoods and competition

Other trends were the increasing importance of employer relationships, and the likelihood that new members would take their accounts with them when they changed jobs. More than 80 per cent either disagreed or strongly disagreed with the supposition that the growth of SMSF’s would slow down in the next three to five years.

Competition would also introduce a squeeze for funds: 75 per cent of respondents expected competitive pressure to put an upward pressure on costs, while 70 per cent expected it to already put downward pressure on fees.

“The need to remain low cost – while also having to spend money to remain competitive and implement the reforms – is something that every super fund is grappling with at the moment,” said Reynolds

“There is some concern that the low-cost focus may have unintended consequences. One of the success stories of our sector was its early adoption of alternative investments such as infrastructure. These investments aren’t low-cost but they have delivered great value to members over the years and are a key factor in the out-performance of our funds.”

Government policy and regulation has been a major factor in the industry and respondents believed that they would continue to shape change. More than 70 per cent believed regulation and policy would continue to put pressure on small funds to merge, continue the speed towards consolidation as the not-for-profit sector looked to build scale more quickly.

There was some disagreement in this area too. Respondents were polarised on the question of whether members would become more engaged and whether the upcoming changes would make it difficult for members to get the information they needed for good product choices.

They’re not all the same

The results were not homogenous between sectors, either. For example, smaller trustees – of funds of below $1 billion – were overwhelmingly more confident about their ability to outperform funds over the next three to five years. Seventy-six per cent of respondents from smaller funds were confident they could outperform retail, but only 32 per cent of respondents from $20 billion-plus funds had the same confidence.

Trustees of larger funds were more inclined to see their fund working with retail and commercial players to provide more comprehensive wealth management solutions, while trustees from small funds were split on the issue.

Larger funds were also more positive about the impact of MySuper on their product development efforts, with smaller funds seeing MySuper as a constraint.

The survey also compared responses between employer and member representatives, but the disparity was not as wide as with independently appointed trustees. A majority of both employer and member representatives believe that the not-for-profit sector would rely on different service providers in three or five years than it does today, but independent trustees were not so sure.

Respondents were given a choice among four topics for the direction of not-for-profit fund governance. Fifty-five per cent marked strategy and planning and the first priority, followed by a focus on strategic risks (22 per cent) and external market risks (15.1 per cent). The vast majority of fund trustees agreed that not-for-profit funds would be more transparent with respect to governance matters in the next three to five years and many noted that the equal representation model had served members well.

“While there is has certainly been a lot of change in our industry that has created some uncertainty, we believe that once the reforms are bedded down, that the outcomes will be overwhelmingly positive for members,” Reynolds said.

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