The Hayne royal commission’s damage to retail super’s brands is not the only reason those funds’ retirement savers will continue to pull their money in droves, a new report states.
Credit Suisse’s sector review of Australian platforms, released this week, reveals three decisive factors driving the stunning $3.3 billion in net outflows suffered by major retail banks’ super in the September 2018 quarter.
“The first is weak contributions or gross flows amongst the retail funds, the second is the retail funds skew towards pension assets, which are in outflow, and the third is net transfers or switching between funds, which are favouring the industry funds,” the report’s author, James Cordukes, says.
The problem with pension assets
Where the banks and AMP experienced $3.3 billion in outflows, which is a $4.5 billion negative swing from the $1.2 billion of inflows a year ago, industry funds drew $10 billion of net inflows during the quarter, which represents a downward swing of 10 per cent from a year ago.
“[A] contributor to net flows is the benefit payments from pension (or retirement) phase accounts as superannuants draw down on their super accounts,” Cordukes explains.
The Credit Suisse report, based on data from Strategic Insight, states that retail funds are experiencing benefit payments 70 per cent higher than industry funds.
A large part of this differential, the report states, is due to the composition of accounts, with 34 per cent of the retail funds under administration (FUA) in drawdown phase, while only 10 per cent of industry funds’ FUA is in pension phase.
The twin prongs of falling contributions to retail funds – down 16 per cent, year on year, in the 12 months to September 2018, from $38 billion to $32 billion – and an increase in people switching to industry funds are also placing pressure on the retail sector.
That said, the negative publicity surrounding retail funds over the course of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been a factor in where consumers direct their retirement savings and given some of the country’s largest super funds a bump.
The country’s biggest fund, AustralianSuper, reported $6.97 billion in net inflows in the six months to September, a rise of 49 per cent on the previous year. Hostplus net inflows grew 150 per cent to $2 billion for the same time period, while Cbus Super experienced a 67 per cent increase to enjoy net inflows of $1 billion in the six months to September.
“The last 24 months have seen $24 billion of net transfers into industry funds, while retail funds have seen $12 billion of outward net transfers,” Cordukes says.
Not a new phenomenon
Credit Suisse cautioned against seeing this data as a new or solely royal commission-influenced occurrence, despite allowing that the inquiry had been “very damaging for the brands of the retail funds”.
“The higher-growth industry funds lead to market share gains of 1.4 per cent over the last year,” Cordukes states in the report. “This is not necessarily a new phenomenon, with the industry funds gaining 6 per cent market share over the last decade. However, the market share gains over the last year have been amongst the highest in our time series.”
Corporate super sector shaky
Of concern for retail superannuation providers is Credit Suisse’s assertion that “any reputational damage is likely taking a longer period to manifest”, with the corporate super sector to be hard hit in the months ahead.
In October, AMP lost its contract with Australia Post, following news that it had only weeks earlier lost another client – the $250 million Anglican National Super Plan – to Mercer. It is understood Australia Post is going to tender.
“Retail corporate super funds have now shifted into outflow, with likely further outflows to come,” Cordukes says.
KPMG’s Super Insights Report 2018 states that the corporate sector will experience little or no growth from now until 2028, when it is projected it will hold $76 billion. In comparison, the wider super sector will be worth $5 trillion by 2028.
While the headline findings from the Strategic Insight data appear to show strong growth in the platform market overall, Credit Suisse highlighted that an unusually high contribution from markets was required to offset a record fall in net inflows for the period.
Stripping out the effect of rising investment markets, flows in the September 2018 quarter were the worst on record for the last 15 years.
“While strong markets have supported growth in the year to Sept 2018, the fourth quarter of calendar year 2018 is unlikely to reap the same benefits, given equity markets have fallen approximately 10 per cent, although we note platforms are partially insulated from this due to a tiered pricing structure,” Cordukes says.