Australia’s rapidly consolidating superannuation sector has become a double-edged sword for financial stability, with APRA warning the growing influence of a handful of mega-funds could amplify future crises even as the industry’s scale helps cushion the broader financial system.
The regulator’s inaugural System Risk Stress Test found Australia’s largest banks and super funds were resilient to a hypothetical “severe but plausible” market shock, with all participating institutions able to withstand extreme liquidity pressures and rebuild their financial positions over the testing period.
The exercise, involving the four major banks and six large super funds, also found super funds could act as an important stabilising force by providing equity capital to banks during a broader solvency crisis.
However, APRA warned the same consolidation that has produced larger, better-capitalised funds is also concentrating systemic risk.
The regulator said decisions by a small number of large superannuation funds “could have outsized and more consequential effects across the system” as Australia’s retirement savings pool continues to expand.
It cautioned the risks would become more pronounced as more members enter retirement, increasing liquidity demands through pension payments and withdrawals.
Those findings align with Deloitte’s latest Dynamics of the Australian Superannuation System report, which argued Australia has entered a “mega-fund era” that will accelerate over the next two decades.
Deloitte forecasts the number of funds managing more than $100 billion will increase from 10 to 12 within the next few years, while Australia’s total super assets more than triple from around $4 trillion in 2025 to $12.4 trillion by 2045.
Already, the top 10 APRA-regulated super entities control 73 per cent of system assets, while the largest 25 hold 97 per cent.
Principal, superannuation, Diane Somerville said: “The industry has consolidated rapidly, and the largest funds now dominate both assets and member flows. The top 25 superannuation entities now hold 97 per cent of APRA-regulated assets, with the top 10 controlling 73%.
“We expect that there will be further rationalisation, with the few remaining corporate funds eventually moving into aligned public offer industry funds or retail master trusts. While some smaller funds will remain, we anticipate they will offer specialist investments or a targeted or niche member proposition to differentiate themselves.”
APRA chair John Lonsdale said understanding how increasingly large super funds would behave during periods of market stress had become critical as the financial system grows more interconnected.
“As our financial system becomes more interconnected, decisions made in one part of the system not only impact other financial institutions in the same sector, but those in different sectors as well as service providers.
“With superannuation expected to keep growing its share of the financial system in coming years, it’s essential we gain deeper insights into how super funds are likely to respond to a severe stress event – and how their decisions may impact other parts of the financial system.”
The stress test found super funds’ actions during a crisis could either amplify or dampen financial instability.
Large-scale withdrawals of bank funding during a liquidity event could worsen pressure on financial institutions, while injecting capital into banks during a broader downturn could support confidence and reduce systemic risk.
Beyond concentration, APRA identified common dependencies on major service providers, mismatched behavioural assumptions and liquidity management as vulnerabilities requiring greater attention.
It said super funds would need to strengthen stress-testing capabilities to reflect their growing systemic importance, while banks could also improve aspects of their liquidity planning.
The regulator further stated the findings would inform proposed changes to bank liquidity requirements and future supervision of both banking and superannuation.
The report immediately drew criticism from the ACTU, which accused APRA of warning about risks created by its own long-running consolidation agenda.
ACTU assistant secretary Joseph Mitchell stated that APRA “told funds that bigger was always better and branded smaller funds uncompetitive” for a decade.
“Now it warns that the concentration it pushed for is a risk to the financial system. The regulator cannot have it both ways,” Mitchell added. “Once again, APRA looks everywhere but in the mirror. Its own stress test describes a risk of its own making, yet the only party asked to lift its game is the funds.”
Mitchell said APRA had encouraged mergers for years before acknowledging that the growing dominance of Australia’s largest super funds could itself become a financial stability concern, arguing the findings strengthened the case for a dedicated Retirement Incomes Commission.
