In the year to 30 June 2022, super funds experienced a negative return year with the average growth fund falling by 3.3 percent, following their stellar returns of 18 percent in 2021.
The good news is that super funds invest for the long term and long-term returns remain healthy at 8.1 percent per annum over 10 years and 7.9 percent per annum over 30 years.
Melinda Howes, Lisa Butler Beatty and Linda Elkins, KPMG Superannuation Advisory, examine what 2023 may look like.
Ten themes for super funds
We have picked ten themes that will shape superannuation fund discussions and decisions this year. Some are macro-economic, but mostly forces directly impacting super funds.
1. Market volatility, higher inflation and interest rates
With a global recession looking more likely in 2023, amidst the continuing effects of COVID-19 and the ongoing war in Europe, continuing volatility looks the order of the day for share markets.
Interest rates had a dramatic rise in 2022, with the RBA unveiling eight interest rate hikes since May in an attempt to control rising inflation, seeing the cash rate rise from just 0.1 percent in to 3.1 percent in December (with one more rise predicted in early 2023 by KPMG economists). Yet despite the speed and magnitude of this change, interest rates are still at historically low levels.
Super fund members in their 50s and beyond would clearly remember 18 percent interest rates in the early 1990s, although given higher house prices now the mortgage stress on the weekly budget of Australian households is broadly equivalent to what homeowners experienced in the 1990s.
Some retirees who may have switched their investments into higher growth options or shares to try to replace the returns they have lost through low interest rates, will be finding these markets a bumpy ride.
It is also important to remember the many retirees who rely on fixed interest investments and would be welcoming the return of some higher income.
2. Public and private assets
As super funds seek out long term returns, they are considering internalisation of investment functions and the balance of public and private assets to deliver the retirement outcomes they are promising to members. These decisions have critical impacts on their investment and operational risk profiles.
3. Global expansion
Superannuation funds that have investment concentration in Australia are increasingly looking offshore as they consider their global footprint.
We are also seeing overseas investors entering the Australian market as they diversify their portfolios and offices internationally.
4. ESG and climate risk
Given the long-term nature of superannuation, it follows naturally that super funds need to be concerned about the impact that climate risk has on their investment portfolio. APRA has also emphasised this point by updating Prudential Standard SPS530 Investment Governance (and November draft guidance SPG530), calling for super funds to undertake scenario testing on climate risk.
Australian superannuation funds, as the long-term owner of many direct assets, play a critical role in assisting in the transition to net-zero.
Fund members expect their super fund to not only protect their investments from climate change risks, but also consider how they are using their investment clout to drive better environmental and social outcomes.
5. Superannuation fund mergers
Merger activity continues apace, with many super funds either having just completed a merger, currently in the midst of one, or contemplating one.
These funds are questioning whether they have the balance right on the resources, time and strategic focus devoted to mergers vs. continuing to grow and compete. As competition for members heats up, the successful funds will be those that can do both these things successfully at the same time: run their merger and realise the planned benefits, whilst growing and defending their scale.
With the ‘heat map’ performance test having been released in December 2023, APRA’s Discussion Paper on Superannuation Transfer Planning (replacing SPG227 Successor Fund Transfers and Windups) requires super funds to transfer their MySuper members to another fund within 90 days of an RSE licence being cancelled, or on a second failure of the performance test. And CPS 190 Recovery and Exit Planning will require a trustee board-approved recovery and exit plan for such an eventuality from 1 January 2025.
6. Member acquisition and retention
Growing and maintaining members means having a clear strategy to deliver outcomes that will attract and retain members. The number of members who will exercise choice is growing:
- Employers are still a major source of members, but the role of the employer’s default fund and flow of new members is no longer automatic, and the advent of member choice as part of the stapling regime means all members can decide whether to join, and even more importantly, whether to leave.
- Access to advice is important to many members, but advice is becoming less accessible and more expensive with a complicated regulatory framework making it difficult for funds themselves to offer advice.
- Direct attraction through marketing and digital member onboarding is in its infancy, but has a lot of focus in many funds right now and will be critical to future success.
Attracting and retaining members will be critical for funds wanting to create scale and to ensure they are sustainable. This will be particularly important as members move into retirement.
As more of the super system assets shift into retirement phase, super fund size and scale will in part be dependent on how successfully funds can retain their members into retirement. This means encouraging members to make a positive election into their existing fund’s retirement strategy.
All funds have now published a summary of their retirement income strategy, and clearly there will be a lot more work in 2023. We expect to see much innovation in this area as trustees build out the next stage of their strategies for different retiree cohorts.
8. Financial advice
Accessible and affordable advice is important for super fund members. Advice, amongst other things can help members choose a quality fund, set goals and develop contribution, insurance and investment strategies. Advice is also important when members move into retirement given the complex choices and specific risks that need to be considered. How funds provide or make accessible quality advice is difficult with the current regulatory settings, concerns about the financial viability and risks of providing advice.
Regulatory reform that may come from the Quality of Advice Review, delivered to the Government in December 2022 (but not yet public), might assist Trustees to deliver appropriate advice into retirement. But we don’t expect any recommendations to be able to be implemented quickly, with a minimum 3-year timeframe likely.
9. Transformation and digitisation
All funds need to realise the benefit of their scale by operating more efficiently, to reduce cost to service members and allow further reductions of member fees.
Digitisation of administrative back ends and member servicing front-ends, supported by the use of Cloud infrastructure, will be key to realising economies of scale. This will be critical for merged funds that are now running a larger operation with similar staffing levels. The leading funds are implementing integrated Finance and HR back-ends which provide significant operational efficiencies and enhanced management reporting.
Digital front-end services for members, including intuitive apps and web portals which make member transactions quick and seamless, will be key to success. Those funds that design beautiful and fast digital customer journeys that support member acquisition and retention, and provide straight-through processing links to the back end systems, will be the winners in this space.
10. APRA increased prudential requirements
APRA is modernising its Prudential architecture, with a series of connected APRA reforms underway with a comprehensive range of Discussion Papers or new or proposed Prudential Standards being released in recent months.
In superannuation, there is a clear focus on strategic planning and member outcomes, operating a superannuation business in a financially and operationally sound and sustainable manner and addressing areas of underperformance that is underpinned by:
- detailed evidence and metrics
- scenario modelling and planning
- detailed operational risk requirements
- strong third-party management and governance
- strong operational resilience in the face of disruption
- proposed changes to financial resiliency and operational capital requirements
- strong recovery, exit and resolution planning.
2023 sees no respite from the hard work Superannuation executives and trustees need to do to ensure they are providing excellent member outcomes and keeping up with member expectations. With the growing size and importance of superannuation funds in the financial services system, regulatory reform and scrutiny will also continue at pace to ensure Australia continues to have a world leading superannuation system.
Source for all return figures: Chant West “Super Members Spared The Worst In A Rough Year For Market” 19 July 2022