The superannuation sector is becoming dominated by a small number of megafunds that are presenting some difficulties for efficient funds management, Morningstar research reveals.

At the top of the tree are AustralianSuper and Australian Retirement Trust, which have drawn away from the field with a combined $627 billion between them at last count.

Looking at official figures in June 2023, the two were investing 23.9 per cent of the money in APRA regulated super funds.

As time goes on the superannuation market is becoming more and more concentrated, with bigger players swallowing their small counterparts.

That is clear from the chart above, which shows the average fund size moving to $20 billion from a billion or two.

Numbers shrinking

At the same time the number of funds has fallen dramatically to 118 from almost 1600 20 years ago.

And the numbers have fallen most heavily among the corporate funds, which are increasingly not expected to survive as an asset class.

As the table above demonstrates, industry funds are where the growth is and corporate funds shrinking.

Kirby Rappell, research director with SuperRatings, said the growth of super funds would inevitably lead to “growing pains”.

Such pains would emerge as funds were forced to find new ways to invest their ever-growing investment balances that were not “too complex and defensive,” Rappell said.

There were difficulties for megafunds in dealing with their membership.

Although large investments can be dealt with relatively easily with efficient policies, “administering the accounts of three million people can be difficult as funds were not designed for that purpose,” Rappell said.

However, a number of strategies were coming to the fore with “more offshore investments being made and the use of more in-house investment specialists,” Rappell said.

Already megafunds are accounting for 48 per cent of the APRA regulated super funds market.

This move was not necessarily a bad thing, said David Bell, executive director of the Conexus Institute.

A paper produced by Conexus did not give carte blanche to size.

Instead, it said “scale affords opportunities, but you have to be really quite disciplined and effective to make the most of those opportunities”.

Small is good too

Small funds were not dismissed.

“Smaller funds do have opportunities, but if a big fund gets everything right then I would say it can deliver better outcomes,” Bell said.

The growth of mega super funds in the Australian market was also driving reductions in equity investments.

“Your footprint in the equity markets becomes larger and you see allocations to domestic equity risk assets has been trending down for 10 years.”

The superannuation market is growing so dramatically that Australia now has the fourth-largest pension market in the world. And it’s going to keep growing.

Superannuation funds growth

Super assets are 145 per cent of Australia’s GDP, compared to 108 per cent a decade ago – the fastest growth versus GDP of any country.

Consultants Deloitte projects that super assets will grow to about $11 trillion by 2043, or close to 200 per cent of Australia’s GDP.Bell points out that the 14 top super funds now account for 84 per cent of the super sector.

More hitching up

“Then if you look at the two mergers that are happening now – TelstraSuper and Equip Super along with Spirit and CareSuper – that will create a big 16, which will probably have 88 per cent of superannuation assets in them,” Bell said.

“That will leave another 30 funds making up only 12 per cent of the industry, so you have to start asking are their models sustainable?”

Australian Retirement Trust’s head of investment strategy Andrew Fisher said the move to megafunds meant “it’s ‘not going to be practical’ for the larger funds to continue to maintain the current level of domestic allocations.

“I’d be lying if I said $280 billion of assets to invest is not a challenging task at times,” Fisher said.

“It is a lot of money and we’re forecast to go to $500 billion by the end of the decade. Those are the internal numbers we’re dealing with.

“Realistically, those changes will lead ART away from domestic equities and into more complex direct investment exposures.”

This article first appeared in our sister publication The New Daily, which is owned by Industry Super Holdings.