7 eye-catching charts on the state of superannuation today

Besides property, super is the biggest and most important financial asset owned by most Australians. For many, it is their only exposure to investing.

Australia’s super industry has also become a globally significant player. With assets under management fast approaching $4 trillion, Australia now has one of the world’s five biggest pension pools despite its relatively small population.

Morningstar’s Manager Research team recently released a new report on the state of Australia’s superannuation industry – how it got here, what dynamics are shaping the industry and potential challenges that may lay ahead.

Here are seven visuals from the report that caught my eye.

Far more assets, far fewer funds

Rising markets, higher mandatory employee contributions and favourable tax treatment have seen super assets grow from A$150 billion in 1992 to almost A$4 trillion by mid-2024.

Assets within APRA-Regulated funds are four times bigger than they were in 2004. Yet over 90% of funds have left the sector over the same two-decade period. As a result, the average fund size (shown by the red line) has ballooned.

Figure 1: Number of APRA-regulated funds and average fund size. Source: APRA/Morningstar

Rise of the "megafund"

These trends have propelled several super funds past A$100 billion under management. The increases in assets under management, however, have been anything but equal.

Following a spate of acquisitions and their domination of inflows, eight industry funds – AustralianSuper, Australian Retirement Trust (ART), Aware, UniSuper, Hostplus, Cbus, Rest, and HESTA account for almost 60% of Australia’s super assets.

According to our researchers, there is a genuine possibility that we could see a $1 trillion super fund in the 2030s.

Figure 2: Market share of biggest eight industry funds. Source: APRA/Morningstar

Average fees grind lower

Bigger scale can bring efficiencies, and these appear to have been passed to investors in the form of lower fees. The report shows a 20 basis point reduction – from 0.59% to 0.37% - in average admin, investment and insurance fees paid by investors across the industry.

Fees in MySuper funds managing less than $10 billion average around 50% higher than larger funds, showing the effects of scale.

Figure 3: Average fees paid by super fund investors. Source: APRA/Morningstar

The flip side of scale

The dominance of the "big eight" when it comes to fund flows jumps off the page. They received over 90% of total super net flows in the 2022-23 financial year! Australian Super alone received almost A$20 billion in new funds to allocate for members.

Figure 4: Share of net inflows by fund. Source: APRA/Morningstar

With numbers like that, it isn’t hard to understand how super funds now own almost a quarter of ASX listed shares as of March 2024. And while we’ve seen that size can brings efficiencies, it can also make it hard for funds to make any kind of active bet in the markets.

Take Australian Super, for example, which has $300 billion under management. Let’s imagine – probably incorrectly - that roughly 20% of its FUM is in Australian equities.

If they wanted to be overweight WiseTech (ASX: WTC) versus the ASX200, they would need to have at least 2% of their Aussie equity portfolio in the stock. That would be a $1.2 billion position or over 9 million WiseTech shares at a price of $130 per share. On average, only 500,000 or so WiseTech shares trade each day. Imagine building that position quietly – and that’s for the 14th biggest company in the ASX200!

According to Dutka et al, this could see even more super dollars deployed into passive strategies. I think it could also partly explain continued demand for offshore equities to complement Aussie ones. The ratio of Australian to global listed equities held by super funds has almost switched places since 2013.

Figure 5: Super fund Australian and overseas equity exposure. Source: APRA/Morningstar

The sheer difficulty of deploying this much capital could also explain the big industry funds’ continued appetite for unlisted assets.

These deals, especially in infrastructure, often provide the opportunity to deploy large amounts of capital all at once without the need trade your way into a position. Industry funds continue to exhibit far higher allocations to private assets than the generally smaller retail funds.

Figure 6: Private asset allocations by super fund type. Source: APRA/Morningstar

Investor risk appetite increases

Inflow and outflow data from different asset classes and MySuper strategy choices can cast light on investor sentiment during a period. And over the six month and twelve months ending on June 30, the direction of travel was mostly one way: risk on.

Growth and Aggressive super options saw big inflows while Balanced and Moderate options saw outflows. At the asset class level, cash and bonds saw outflows while money flowed into global and domestic equities.

Figure 7: Superannuation flows to June 30 2024. Source: Morningstar Direct

Morningstar Investor subscribers can access the full Mergers and Megafunds: The Superannuation Landscape in 2024 report here.