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Leading specialist consulting firm Right Lane has warned the Federal Government’s Your Future, Your Super reforms aimed at addressing structural flaws in the superannuation system, which were recently passed by the Senate, risk creating a less competitive system that is dominated by a handful of mega funds.

“The recent reforms are aimed at addressing structural flaws in the system such as multiple member accounts and fund underperformance. However, the changes will disproportionately affect small and medium-sized funds, challenging their viability and potentially forcing them out of the system. This could lead to a system dominated by mega funds, with no room for quality specialist funds,” said Abhishek Chhikara, Associate Principal at Right Lane.

Right Lane warns these specialist funds, which often serve members with similar demographics or occupations and deliver a tailored offering based on a deep understanding of their chosen member cohorts, risk being squeezed out. Right Lane believes the trigger in the Your Future, Your Super changes that will have a significant impact on specialist funds is the dismantling of the default distribution system.

“Historically, many funds have efficiently grown members through default distribution channels. However, the Your Future, Your Super reforms will ‘staple’ a member to their first or existing fund, considerably shrinking the default system. To maintain growth, many funds will be forced to compete for new members through direct-to-consumer channels. This ‘retailisation’ of funds will drive up costs and diminish the competitiveness of many quality specialist funds,” said Chhikara.

The data highlighted by Right Lane shows that the number of people defaulting into a new super fund each year could decrease by more than two thirds. The market segment of workers switching funds due to a change in employment, estimated to be around 675,000 workers, would be virtually eliminated. This would reduce the default system to only new entrants to the workforce each year that do not exercise choice.

The direct-to-consumer market, where members make an active choice to join or switch funds, is growing rapidly and will become the new battle ground for member acquisition, according to Right Lane. However, only a few funds are well positioned to win in this market, with Right Lane’s analysis showing that a handful of large funds capture nearly all the member switching flows.

Right Lane predicts that as the default distribution system is dismantled, some quality specialist funds may struggle to grow organically and enter a spiral of decline. In addition to growth challenges, growing compliance requirements are likely to place further pressures on some funds’ capacity to operate, potentially forcing them out of the system. It is easy to imagine these changes leading to a relatively undifferentiated system with 3-5 mega funds.

“The changes are likely to solidify the position of a few large, fast growing funds, with the capability to invest in direct acquisition, the capacity to keep pace with increasing compliance requirements, and the courage to persevere in the face of ever-growing scrutiny. For the rest, the pressures of slowing growth, falling revenues, and rising costs may force them into decline,” said Chhikara.

“Right Lane research suggests that an ideal system would comprise between 3 and 5 generalist mega-funds plus between 7 and 10 specialist funds. Such a system, not too fragmented and not too consolidated, will deliver an optimal mix of competitiveness and efficiency,” said Chhikara.

READ AFR ARTICLE HERE

Super reforms create a competition conundrum

The government’s super reforms are designed to expose more super funds to competition. But by doing so, could we end up with a system dominated by a handful of giant funds? By forcing Australia’s big superannuation funds to compete harder for members, could the Coalition’s Your Future, Your Super reforms ultimately make the sector less competitive? That’s the question posed by Melbourne group Right Lane Consulting … read full article

About Right Lane

Right Lane was established in 1997 to help private, not-for-profit, and public sector clients to accelerate their growth plans. The firm has a specialisation in superannuation, advising several funds and their service providers. In 2015, Right Lane became Australia’s first B Corp certified strategy consulting firm. This follows Right Lane’s decision in 2011 to adopt ‘for benefit’ principals across the firm, including reasonable returns, inclusive ownership, stakeholder governance, transparency, and social and environmental responsibility.

For more information or a copy of a selection of pages from the subscriber-only 2021 Industry Super Forces at Work report please contact Abhishek Chhikara at abhishek.chhikara@rightlane.com.au or Stephen Dabkowski at steve@bluedot.net.au.

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