Superannuation fund mergers could lift to 20 a year over the next three years, possibly leaving Australia’s super system with 50 funds by 2025, according to a new report on the Future of Superannuation by financial services giant JP Morgan.

Half of the 11 superannuation fund leaders, who collectively manage $1 trillion in assets, and 56 respondents in an industry-wide survey, expect the mergers to increase from present record levels, reducing 174 funds to 75 funds by 2025.

One quarter of executives think those mergers will leave just 50 funds in play, the report found.

The inaugural Future of Superannuation report interviewed executives of Australia’s largest industry and retail funds including AustralianSuper, Cbus, HESTA, Aware and Qantas plus an industry-wide survey of executives in most APRA-regulated funds conducted with the Association of Superannuation Funds of Australia (ASFA).

A sector at a crossroads

JP Morgan head of Platform Sales, Securities Services Nick Paparo said the report showed a sector at a crossroads with twin movements of consolidation and investment in technology to continue to engage their members.

“The take on the mergers is to deliver scale. That’s ultimately what’s driving it,’’ Paparo said.

While the Report showed half of respondents expecting 100 funds to merge in the next three years to leave mega and “sub mega” funds, smaller funds would also become more niche, he said.

“Scale can be leveraged by all sized funds, particularly with the smaller funds that provide a niche service to their members, predominantly delivery of technology and automation,’’ he said.

“Fund’s must address these key challenges to ensure they continue to meet community and member expectations.”

Strong M&A activity

In 2021, 15 mergers or alliances were announced to the Australian market the strongest activity in a single year.

Creating scale (84 per cent), maintaining long term stability (59 per cent) and the regulator encouraging lower performing funds to merge (54 per cent), were the three top reasons to merge, respondents said.

State Super chief executive officer John Livanas, one of 12 executives who took part in hour-long interviews for the Report, said larger funds would dominate the market but size did not always equate with success.

“My sense is that, just like most markets that evolve to maturity, the top five to ten superannuation funds will end up with perhaps the majority of the investment market share,’’ he said.

“Then, absent regulatory constraints, it’s likely that there will be a fairly long tail of much smaller funds.’’

Meeting new regulations

Meanwhile meeting new regulations was the biggest challenge for fund executives over the next three years, with 64 per cent of respondents putting this above retaining and attracting members and investment performance, the report found.

In particular, 63 per cent said the APRA Superannuation Data Transformation project would increase costs while another 83 per cent of those surveyed said Portfolio Holdings Disclosure rule changes would not be a useful measure for fund members to make decisions.

Climate change abatement was high on executives’ agendas with 48 per cent of respondents believing funds should be committed to a net zero target.

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