Is big better?
Published on 29 Mar 2022
By Lachlan Baird - CEO of Prime Super
Recent discussions and events in the super industry would have you believe big is better, but I don’t agree.
Currently, the super industry has a diversity of different sized funds. However, what we are seeing more often is the demise of small funds as they merge with, and are absorbed into, larger funds.
This is underpinned by a perception that only mega-funds, those super funds with a very large pool of funds under management and very large memberships, can be high-performing.
I believe that high-performing super funds are those that provide sustained, strong, long term, above average returns for their members, at a reasonable cost, and provide a useful service to their members.
High performing super funds can be many different sizes.
The market should be able to accommodate high performing funds ranging from the very large mega funds through to the smaller (relatively) niche players like Prime Super (where niche relates to 125,000 members and over $6 billion in funds under management). This provides Australians with more choice of where to invest their super. This choice leads to a healthy competition between funds and a better outcome for members over the medium and long term.
Competitive tensions between small and large operators deliver long-term benefits to consumers and the economy in general.
The strength of an open market is demonstrated through both large and smaller players within that market. Two examples of this are the banking and retail industries.
What we need to avoid is the creation of oligopolies and, worse, monopoly environments. It is competition between super funds that drives better long-term outcomes for members.
Competition generated by a broad range of super industry participants is incredibly important to deliver the best returns for members, provide high levels of service and keep costs down.
The royal commission into the banking industry found that consumer expectations were not being met by an industry dominated by a small number of large businesses.
Just as super funds have different sizes, they also differ according to ownership structures, philosophies, underlying investments, business operations and motivations.
The second argument against a small number of very large funds is that through a broad range of businesses within the superannuation industry we do not risk creating businesses that are too big to fail.
The economy benefits from having both large and smaller super funds. Large funds invest differently to smaller funds. This means the superannuation industry dollar is spread across a variety of investment opportunities in the economy with different risk and return profiles.
Large funds can invest in opportunities in the tens of billions of dollars, while smaller funds invest amounts of tens or fifties of millions of dollars. This spreads the superannuation investment dollar more widely across the economy.
This investment diversity means not putting all your eggs into one basket from a total economy point of view. It is also a protection against downturns in different market cycles.
A well-diversified spread of superannuation assets will, collectively, deliver better and more sustainable growth for the industry as a whole, and for the Australian economy.
A reduction in the number of superannuation funds will potentially lead to herd mentality, where all funds have similar investment strategies, have similar investments and make similar returns – all to avoid underperformance. This will lead to less diversity in asset allocations and alikely long term under performance compared to the more competitive environment that is currently in place.
A diverse range of small, medium and large super funds will, in aggregate, deliver a superior long-term outcome to the majority of Australians for their superannuation investments.
Diversity in super will provide us all with a choice of how to invest our super savings and the opportunity to get the most out of our retirement dollar.
*SuperRatings Fund Crediting Rate Survey - Balanced (60-76) June 2021. Please note, past performance is not a reliable indicator of future performance.
Disclaimer: This article is current at the date of publication and is subject to change. It contains general information and does not take account of your specific objectives, financial situation or needs or personal circumstances. You should seek professional financial advice, consider your own circumstances and read our Product Disclosure Statement (PDS) before making a decision about Prime Super. For a PDS call 1800 675 839 or visit the primesuper.com.au/pds. Prime Super Pty Ltd ABN 81 067 241 016 AFSL 219723 RSE L0000277 (Trustee), Prime Super ABN 60 562 335 823 RN 1000276.