Australian super funds could soon be forced to hold billions of dollars in capital as the $2.9 trillion industry surpasses that of the banking sector, according to Rice Warner.

The consultancy firm said the capital requirements will become legislated as the industry, which is forecast to swell to $4.8 trillion by 2034, buys up more so-called strategic assets particularly in financial services. Founder and executive director Michael Rice said trustees should ensure about 1 per cent of their fund’s total assets is held in a separate account.

“It’s inevitable,” said Rice in an interview. “This is an industry that is going to be double the size of the banking industry without the capital constraints. I don’t think anything will happen in the next year but wait until there is the next major disaster.”

The superannuation industry is already required by the prudential regulator to hold 25 basis points of its earnings rate for operational risk. Rice said capital would also need to be held against certain investments as some super funds were already starting to lose money on some of the strategic assets. He added that the money raised would have to be taken from members’ returns over a certain period of time.

“That’s the catch,” he said. “In a year that a fund earns 10 per cent, they may have to take 50 basis points to put into reserves.”

Up until now, if a super fund needs to inject capital into an asset like a financial planning firm or an insurer, they can use members’ money and report it as an investment. Rice said there needs to be more transparency to show how funds are spending the savings of members.

“Mixing strategic assets with an investment pool is wrong,” he said. “The process is not transparent, and the structure is cumbersome. Hence it is likely that funds will need to hold more reserves as capital for these activities.”

Rice said the issue would become more apparent as the lion’s share of assets flow into the not-for-profit sector which unlike the retail funds does not have the ability to raise capital. MLC’s Life Insurance unit late last year, for example, raised $290 million in capital from its shareholders amid pressure from the regulator.

In a report released last month, Rice Warner said industry and public sector funds will hold almost half of Australia’s total superannuation assets by 2029, equivalent to $2.8 trillion. The remaining 50 per cent is expected to be divided evenly between retail and self-managed super funds, while corporate funds will hold just 1.2 per cent of assets.

And within four years, at least nine funds are forecast to exceed $100 billion in assets. Subject to merger talks proceeding, Rice Warner said the nine biggest funds, which will include NAB, AMP, IOOF and OnePath, CBA, BT, AustralianSuper, First State and VicSuper, QSuper and Sunsuper and Unisuper, will oversee a combined $1.7 trillion in assets.

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