Budget changes picking ‘winners’ and ‘losers’ in the super system

The changes announced in the recent Budget, aimed at improving efficiency in the super system, are in essence picking the ‘winners’ and the ‘losers’ in the system.

The stapling of accounts and spotlight on fees and performance is likely to escalate switching behaviour while reducing the prominence of the default distribution market, which may shrink to less than 220,000 accounts annually.

The battle ground for member acquisition will shift to ‘direct to consumer’ distribution, a market which is estimated to be approximately 1 million accounts annually, currently dominated by a handful of large funds.

Stapling of accounts means that unless they choose, members will continue to receive contributions to their existing fund even in the event of a job change, to reduce duplicate accounts in the system. This is likely to favour funds appealing to younger membership demographics at the start of their careers, virtually eliminating the default market segment of around 140,000 workers switching funds due to a change in employment each year.

Stapling of accounts will tie a member’s fate to their existing or first fund unless they exercise choice and switch providers.

The number of members exercising choice has been increasing for a few years, with recent estimates suggesting around 605,000 workers annually actively choosing to switch superannuation providers, in addition to around 375,000 new entrants to the system that actively choose a fund each year.

The spotlight on fees and performance will intensify this switching behaviour.

The new battle for funds will be winning market share of potentially 1 million annual ‘choosers’, currently dominated by a handful of large industry funds. The default market is likely to shrink to only the new entrants to the system each year that do not exercise choice, estimated to be less than 220,000 workers. With a bleak outlook for employment and migration, this number could be even lower.

The changes may lead to a relatively undifferentiated system that may not be optimal for competition. 

These changes will help solidify the position of large, fast growing funds – with the capability to invest in direct member acquisition, the capacity to invest in the ever-growing compliance requirements, and the courage to persevere in the face of ever growing scrutiny.

For the rest, the prospect of a long slow decline is likely to create a greater sense of urgency to consolidate.

It is easy to imagine these changes leading to a relatively undifferentiated system with a few mega funds. But will it be optimal for competition?

Our research suggests otherwise. We believe an ideal system will comprise between 3 and 5 mega-funds plus between 8 and 10 specialist funds that serve a specific group or offer a specific value proposition, all above minimum efficient scale.

Such a system, not too fragmented and not too consolidated, will deliver an optimal mix of competitiveness and efficiency, something we all agree that the system needs.

If you would like to discuss any of this content further, please contact me through the links below.

Abhishek Chhikara, Associate Principal

P: 03 9428 5336 or abhishek.chhikara@rightlane.com.au