October 26, 2016

GoogleSuper? We don’t think so.

With all the doomsday predictions of digital disruption you could be forgiven for thinking the industry is on the verge of catatonic capitulation. The industry’s customers are apparently chomping at the bit to change super funds, invest online and save some acorns in spaceships!

But, coming back to earth, it’s important to understand a critical difference between superannuation and most other industries. In many industries, the most important factor for a competitor is the proportion of new buying decisions that they can capture. Every time you buy an airline ticket you make an entirely new decision about which airline to fly with. Many people make that decision several times per year. Each time you take a taxi you decide: uber, silver service, or hail a cab? Those decisions are independent of each other; you might select a different option on each occasion (albeit there is some customer loyalty).

Superannuation is different. Oftentimes employers make a decision for their employees at a point in time, and the cashflows follow that decision for many years to come – sometimes a lifetime. Or an individual chooses a fund one day, switching their balance across – effectively undoing their prior purchasing decision and transferring their value as a customer to a new provider.

We are often heard to be saying superannuation is a ‘stock’ system – as the system matures it’s increasingly important to have a large asset base (rather than strong flow metrics).

And this is borne out in the numbers. Only 4% of superannuation assets moved from one fund to another last year. And with a net contribution rate of only 2.2% for the system, that means a total of just 6.2% of assets were up for grabs last year.

So if a mythical new entrant appeared on the scene intent on disrupting the industry, and was so successful that it managed to get a 25% share of assets on the move, they would steal a whopping 1.5% market share. It’s not meaningless, but it’s not disruptive, either.

Somewhat perversely, the incumbents are affected by the same challenge – large market share shifts are hard to affect in a system where – at the highest level at least – the opportunity is limited by the lethargy of existing assets, members and employers.

So, what’s a super fund to do?

None of this means that it’s not worth competing fiercely, of course. The stand-out success in the market share game is AustralianSuper, with a cumulative change in market share of 0.39% in one year and 2.03% over 5 years. It’s fair to say they’ve rocketed up the market share charts (in a relative sense at least) and they’ve done it through a combination of merger and transfer activity.

An obvious opportunity for increasing the contestable opportunity each year would be for the plethora of small funds to be swept up by larger funds looking to win the market share game that’s so critical. There are complex reasons why that hasn’t happened to date, but none of them are insurmountable – perhaps they just seem more difficult and less interesting than spaceships?


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