Big super funds are in APRA’s ‘unsustainable’ category

Rod Myer
Feb 16, 2017, updated Feb 17, 2017

A number of big superannuation funds, including those run by financial giant AMP and the Commonwealth government’s public service super fund, risk being in the ‘unsustainable’ category, according to a senior regulator.

Helen Rowell, deputy chairman of the Australian Prudential Regulation Authority told the SMSF Association national conference in Melbourne on Wednesday that ” a number of the top funds have negative cashflow and that is not sustainable in the long term.”

APRA recently released its Annual Fund Level Superannuation Statistics data that details the situation. A number of funds were effectively in reverse because they were paying out more to their members than they were receiving in contributions.

And these were not all small funds. The following table details some big funds and well-known names in the super industry which are paying out more to their members than they are taking in.

Some funds on the list, Australia Post, One Path and Public Sector, did increase their total asset base slightly over the year despite a net loss of contributions. This was a result of investment returns making up for the shortfall.

One Path is owned by banking giant ANZ while The Universal super scheme is owned by NAB subsidiary MLC. Russell is an international investment giant that manages money for corporate and retail super funds.

The ageing of the population is a major factor driving the move to negative contributions. As a greater per centage of the workforce retires, fund find themselves paying out more pensions and receiving relatively less in contributions from those still working.

Some super funds approached by The New Daily did not comment for this story. A spokesperson for AMP said “AMP’s funds are governed to ensure members interests are not compromised by periodical fluctuations in cashflows, which can be impacted by range of factors, including the external market environment”.

The AMP fund listed was a trust covering the group’s range of super funds. Individual funds were regularly monitored to ensure their sustainability, the spokesperson said.

Earlier Ms Rowell had said smaller funds, many of which are in negative contribution territory, would be pressured by APRA to merge to improve their viability.

Shrinkage presents the funds with with two problems. They have to adopt a more conservative investment strategy to make sure they have liquidity available to fund withdrawals by members regardless of the situation of volatile investment markets.

This means they face lower investment returns which compounds their shrinkage problem. Also, as funds shrink, their management, investment and administration costs become a larger per centage of the overall fund size, again compounding their returns problems.

Ms Rowell also told the conference the super industry faced difficulties “responding to the changing demographic” as the population ages.

“The system has shifted from mostly accumulation to have more drawdown. One of the industry’s biggest challenges will be adjusting to change while maintaining trust,” she said.

This trust, she said, was under threat because of public disputes between the retail and industry funds sectors. Their representatives are often in conflict over issues like regulatory changes, investment performance, administration costs and the rules around financial advice.

“The industry is its own worst enemy,” she said.

“It sends a lot of messages in a negative way that causes distress and undermines trust. The industry needs to be more positive about what it does rather than constantly throwing rocks at each other.”

Research group IBISWorld forecast last year that industry revenue will drop by as much as $165 billion next financial year, from $284 billion in 2016-17 down to $119.4 billion due to investment market weakness and ageing.

But despite the expected revenue slippage, the total amount of money in Australia’s super pool is tipped to keep growing over the next two years from the current level of almost $2.2 trillion to more than $2.4 trillion. By 2020-21, IBISWorld predicts that Australia’s total super assets will be close to $4 trillion.