Australia’s retirement industry is one of the world’s best, yet it continues to be transformed by the biggest suite of changes the industry has seen in the last two decades. 

The pace of change is happening so quickly, and across so many levels, that J.P. Morgan has launched the Future of Superannuation Report to help share the thoughts of industry leaders on the major pressure points and future opportunities.   

While merger activity has recently hit record levels since the Your Future, Your Super (YFYS) performance test was launched last year, a significant portion of the industry told us they expect this to accelerate. 

There were 15 mergers or alliances in the year to October 2021—the most activity ever seen in a single year— yet around 50 per cent of executives we surveyed believe there will be fewer than 75 funds by 2025, which would result in 100 of today’s funds disappearing.  

If the number of funds declines to fewer than 75 by 2025, this could consistently result in 20 mergers or more a year. 

Despite the continued focus on the creation of ‘mega funds,’ many executives still believe there will be a place for smaller, niche funds. For example, they may serve members who work in higher risk industries with particular needs, such as higher insurance. 

Investment innovation underpins sustainable retirement income   

The YFYS performance benchmark and APRA have been a driving force for consolidation with most of the 13 funds identified as underperformers already in the process of merging. 

The main reason funds are merging is to increase scale (83.9 per cent), followed by sustainability (58.9 per cent) and regulatory pressure (53.6 per cent), according to the report’s survey. 

However, the long-term impact of YFYS on investment strategies remains less certain. About three-quarters (76.8 per cent) of funds surveyed think the YFYS annual performance test will also result in more benchmark-like returns.  

This could add more pressure in an environment where inflation is showing signs of rising, which could depress future investment returns. Super funds have achieved strong long-term returns through innovative investment strategies such as unlisted infrastructure and private equity – they will now need to balance their existing strategies with the greater scrutiny of a performance test. 

Another investment strategy that continues to attract large funds is internalisation. Almost two-in-three surveyed funds (62 per cent) believe the insourcing investment trend is being driven primarily by cost reduction (fees are a component of the YFYS performance test). Although greater consideration should be placed on creating sustainable operating models with the added complexity in attracting and retaining talent across an increasingly competitive landscape. 

The regulatory hurdle gets higher  

Funds are ultimately judged on their ability to deliver sustainable retirement income for an estimated 16 million Australians.  

Yet our report showed funds don’t see this as their biggest challenge – almost two-thirds (64.2 per cent) of respondents cited new regulation requirements as their biggest challenge over the next three years. 

The YFYS performance test has attracted the most attention, but other components include fund account stapling (when workers change jobs to cut down on inadvertent multiple accounts), while trustees’ obligation to act in members’ best interest is now members’ best “financial” interests. 

This may affect industry funds more than previously thought, with survey respondents saying they will consider reducing sponsorship (55.3 per cent), corporate entertainment (42.7 per cent), and advertising (37.5 per cent). 

Funds must now also reveal their specific investments through Portfolio Holding Disclosure (PHD) laws while APRA’s Superannuation Data Transformation project is placing new data collection demands on funds.  

Almost four-in-five survey respondents (83 per cent) said PHD will not be an accurate or useful measure for fund members to make decisions, while three-in-four (75 per cent) think it will not be in members’ best financial interests. 

Funds invest in data, automation, people  

While funds are generally supportive that new regulations are driving best practice, they remain concerned about the associated impacts on costs, people, and overall outcomes to their members.  

Combined with a new investment environment of lower returns, funds are looking more closely at “operational alpha,” or ways to generate higher returns through greater efficiency. 

Funds are investing in data transformation (73.2 per cent), automation (69.6 per cent), and AI/Machine learning (21.4 per cent).  

The initial COVID-19 pandemic in March 2020 acted as a prompt for the industry to remove more manual processes and encourage straight through processing in response to people working from home. 

Work continues as funds collate even more diverse sources of data to generate new insights while removing manual touch points to free up staff to concentrate on higher value producing activities. 

 But while funds are investing in smarter ways of working, they are struggling to attract talent, particularly in areas such as data science where demand remains high. Almost one in three survey respondents (30.3 per cent) rated attracting and retaining talent as one of their biggest challenges in the next three years. 

While the super industry is facing momentous change, we remain confident that it will meet these challenges head on and continue delivering better retirement outcomes for all Australians. 

Download a copy of the full report here.