Retail superannuation should be having its time in the sun. Retail funds are targeted at the wealthier end of town (a segment that has been growing rapidly as the system matures), particularly those nearing or entering retirement (clearly the baby boomers are driving growth in this segment). The complex regulatory environment notwithstanding, the superannuation market has shifted squarely into the retail sweet spot.
But, it looks as if the opportunity might just pass the retail funds by. We are several years into the retirement boom and instead of making progress, retail funds (primarily the banks) are going backwards. The retail segment has been losing around 1% of market share every two years. Four out of the big five retail providers are shedding market share at an alarming rate.
Hens in the fox hole
Industry funds have been the winners, hands down, increasing their share by 1.5% over the last year alone and are clearly encroaching on retail territory. To put some context to these figures, if the market shares had remained stable, retail funds would be a $120bn bigger today; even on very conservative figures, this is around half a billion dollars of missed revenues. The spoils aren’t being evenly spread between the industry fund comrades, however. The market share gains are being made by just five funds (AustralianSuper, UniSuper, REST, Sunsuper and HESTA) which now account for nearly 21% of the large fund FUM, up from just 16% five years ago. The other medium-sized and smaller funds are, in aggregate at least, just treading water.
Retail funds under attack
So where are the industry funds winning? The answer: pretty much everywhere.
Today’s chart shows a view of employer (SG) contributions and member contributions taken by industry funds vs retail funds, and it shows two interesting trends.
- Member contributions were historically the stronghold of retail funds whose members had enough disposable income to make discretionary contributions, or were at the stage of life where they were restructuring assets in preparation for retirement. Now, industry funds are encroaching on this near monopoly. While retail funds have managed to grow their member contributions by 67% (in nominal terms) since 2009, industry funds have achieved 260% growth.
- Thanks to their strong employer/union relationships, employer contributions have always been the primary source of flows for industry funds. Looking back to 2009, retail funds managed to take nearly the same level of SG contributions as industry funds. Fast forward to today and you can see the industry funds now taking 60% of those flows.
How are they doing it?
This is the question we are often asked – what magic sits behind the industry funds’ success? And how can it be replicated? The answer is that industry funds are slowly, steadily doing a better job of serving their members – and they are being rewarded with what is probably their natural share of flows. Industry funds have been investing in digital, in big improvements to customer service and member communications, in growing their brands, in providing financial advice and guidance. In some cases, they have simply stopped forcing their members to quit the fund at retirement (a practice that is effectively still prevalent amongst retail corporate funds). There isn’t one development that has resulted in them winning share, it is all these small steps combined.
And at the same time, their retail counterparts have in many ways stood still, paralysed by regulatory change and an inability to commit to the market. The retail offerings were arguably already much better developed, but as industry funds have improved the gap between them has narrowed.
To say that industry funds are now the incumbents is overstating the situation – there remain many strategic challenges (eg retention at retirement has improved but is still far lower than for retail funds) and there is more capex investment coming online in retail. Whether the retail funds will outfox those hens remains to be seen, but industry funds can expect to contend with a more active competitor set in the next few years.
Where to now?
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