The prominence of superannuation in Australia means superannuation funds administration is big business. Australia's funds management market is the fourth-largest in the world. Much of this is due to the nation's $1.5 trillion superannuation system, which ensures a steady flow of retirement savings. Both administrators and asset managers benefited from this steady flow of funds over the five years through 2012-13, a result of strong national employment and income. However, equity markets – and thus the total value of superannuation assets – were highly volatile.
Earnings recover after volatile time
A significant portion of superannuation assets is invested in Australian and international equities. After years of double-digit growth, the value of assets increased by just 4.9% in 2007-08 as the Global Financial Crisis began to hammer equity markets. A significant contraction occurred in 2008-09, and revenue earned by the superannuation industry followed, recording a double-digit decline. Although asset values have since recovered, it took two years to restore the lost ground. Ensuing market volatility was not helpful, with many funds reporting poor performance. However, strong stock market gains over 2012-13 resulted in healthy earnings for fund managers, which typically derive their revenue from management and performance fees, meaning income tracks in line asset values.
Superannuation industries are facing yet another wave of significant changes. The rollout of MySuper reform on 1 July 2013, coupled with an increase in the superannuation guarantee contributions, could set off several structural shifts in the related industries. MySuper is a standardised superannuation option similar to the traditional default option previously offered by superannuation funds. It is designed to be easily comparable across numerous funds and offer clients more transparency. As of 1 January 2014, employers will be required to nominate the MySuper option on behalf of their employees, unless the latter choose otherwise. Additionally, the superannuation guarantee contribution increased from 9.0% to 9.25% in July 2013. Although this is expected to come out of employers’ pockets, some workers may see a slight decline in their wages.
The sheer amount of funds in superannuation means that any changes are expected to affect both fund administrators and asset managers. While they both benefit from the increasing amount of funds in superannuation accounts, Australian managers charge the highest fees out of any developed country. However, this could change with MySuper regulation, as the Federal Government places increased restrictions on fees and charges. Additionally, managers will have to adjust to a larger number of self-managed super funds (SMSFs) bypassing them and investing directly in equity and debt markets.
The MySuper reform is a double-edged sword for the superannuation industry. On the one hand, it presents an opportunity to design new products that are suited to the distinctive features of the reform. On the other, super funds offering a MySuper option may select more passive investment strategies that do not require the high expertise of asset managers.
Banks looking for more involvement
The reforms are coming at a time when national and regional banks are seeking new growth opportunities within Australia. For these institutions, mortgage lending is the largest source of revenue, followed by corporate and other retail lending. Corporate lending has been weak, as business sentiment remains subdued, while household deleveraging weighs down retail lending. Therefore, the domestic growth of banks is essentially limited to the housing market.
Moving into superannuation management presents a big opportunity for banks. Although this trend has been occurring since the late 2000s, the banks are now trying to penetrate the superannuation asset management business, with limited success thus far. Banks are trying to cross-sell their superannuation products to their existing client bases. As well as providing superannuation accounts, banks provide trading platforms for SMSFs. These are designed to provide a wide range of services and be a complete one-stop shop for SMSF management. Ultimately, this may allow the banks to further tap into the $1.5 trillion of assets that need to be managed. To put this in perspective, the total value of superannuation assets now exceeds the total market capitalisation of the All Ordinaries in Australia.
Overall, the outlook for the superannuation management industry remains bright, but all participants need to be aware of challenges that could prevent them from capitalising on current opportunities. Similarly, banks need to be smart about the way they target their customers and make sure that their acquired superannuation businesses, such as Westpac’s BT Financial and the Commonwealth Bank’s Colonial First State, are effectively utilised.
IBISWorld is Australia’s best-known business information corporation providing research, analysis and forecasts on over 500 industries, and has provided this summary of the current superannuation landscape exclusively for Cuffelinks.