Minnow super funds left behind by the giants

A businessman is leaning back with his hands in his pockets. He is looking up at a much larger businessman above him. There is room for text.
big and small. concept. businessman.

A businessman is leaning back with his hands in his pockets. He is looking up at a much larger businessman above him. There is room for text. big and small. concept. businessman.

Australia's largest super funds are rapidly working their way up the world rankings by size, but where does that leave the members of minnow funds?

Research indicates that larger funds often produce better returns than smaller ones.

And a report by Willis Towers Watson shows 16 Australian funds were among the largest 300 super funds in the world it covered, with 12 local funds improving their ranking during 2016.

The biggest movers include the not-for-profit industry funds Hostplus, Rest, Sunsuper and Hesta.

The average annualised compound growth rate of Australia's largest funds in Australian dollars over the past five years to the end of 2016 was almost 14 per cent.

That's an impressive clip, fuelled by compulsory super and rising investment markets. Another reason for the bigger funds getting even bigger is that some have merged with smaller funds over the years.

The Willis Towers Watson analysis is mostly in US dollars, but the overall picture remains the same in Australian dollars, with AustralianSuper by far the biggest Australian fund with about $120 billion.

The next biggest include QSuper, First State Super, Rest and UniSuper, each with more than $50 billion.

It's a reasonable bet that our smaller funds are growing at nowhere near the pace of the big funds, which have the advertising budgets and good returns to attract new members.

The ever-increasing scale of the biggest funds allows them to keep fees low as well as access investments usually available only to those with big slabs of money to invest. It means the performance gap between the biggest and smallest is likely to widen.

It's something the regulator, the Australian Prudential Regulation Authority (APRA) is onto.

A couple of weeks ago, APRA asked for meetings with the boards of super funds that are failing to deliver "quality" outcomes for members, raising pressure on poorly performing funds to lift their game or merge with a rival.

APRA compared data on how funds are performing against a range of criteria including returns, costs to members, insurance costs and changes in member numbers. While it did not name names, the regulator has doubts about whether some funds have adequate plans to improve the situation for their members.

Of course, the concerns of APRA may not result in action for some time. Members of poorly performing funds, not just those in funds struggling to get scale, should take their cue from APRA and see how their fund compares to others.

SuperRatings can give you a good idea of what is a competitive rate of return over the past 3 and 5 years as well as assessments of other important criteria like life insurance.

Follow John Collett on Twitter.

This story Minnow super funds left behind by the giants first appeared on The Sydney Morning Herald.