Fewer funds and stronger competition

In just four years time, the Australian superannuation industry will be a vastly different creature from today. All funds will be then licensed, fund choice will be well accepted, contribution splitting will create new opportunities and many older workers will be transitioning into retirement, receiving a combination of employment and retirement income.

Competition will be stronger than ever. There will be far fewer corporate and industry funds, and perhaps as few as five or 10 mega funds with brands as well known as the big banks. As an industry, we will need to be competitive, more flexible and consumer-focused. And the rest of the world will be watching all these developments closely.

Against this backdrop of a super revolution, the average fund member will be older, increasingly aware of their longevity and more demanding. Although much has been written about the greying of Australia, it is only now that the quickening pace of change and its effect on the workforce and superannuation is being truly understood.

In the 20 years from 2010 to 2030, the proportion of Australians aged over 65 will grow by more than 9 per cent to represent more than a quarter of the population. The economic impact will be considerable. If you think of the workforce as the engine of the country, that engine will be getting relatively smaller as people retire. At the same time, health costs will rise steadily and technology improve, increasing expectations and the size of the aged population. Although the Federal Government has introduced measures to combat this double whammy, including encouraging people to have children, this will not have a major effect on demographics during the next 20 years.

The strong economic growth in Australia during the last decade is likely to slow as the baby boomers begin to withdraw from the workforce. This is likely to slow corporate profit growth, reduce investment returns, and ultimately means that the baby boomers — the oldest of whom turn 60 in 2006 — may not have as much super as they expected. On the other hand, actual investment returns will increasingly depend on the experience of the Asian economies.

To maintain the affluent lifestyle that the boomers have enjoyed and expect to continue into their retirement, many will spend most of their super in retirement rather than leaving an inheritance for the kids. Some boomers will also need to keep working longer to maintain their lifestyle, and we will increasingly see a gradual transition to retirement rather than working full-time before suddenly retiring. For example, a 70-year-old shop assistant working during the day may well become an increasingly common observation.

The retired boomers are also likely to be quite demanding, requiring top-quality service and levers on their retirement income products so they have flexible income levels. They may want more money one year for a trip around the world or for the purchase of a new car. Many will want to be well informed about their super, without jargon, and the web will become more important and sophisticated as an interactive tool. In short, the boomers will want information, access and control.

Another major consequence of the ageing population will be longevity risk. With many people living into their 90s, the notion of retiring at 65 and living only 10 more years is now redundant. In addition, people in the AB demographic — who tend to have the highest superannuation balances — may well live the longest of all. With improvements in medical technology, many professionals could live to 95, 100 or beyond. So those who transfer their super from growth assets to fixed interest at age 65 are accepting a significant long-term risk, even though they are acting conservatively in the shorter term.

People will start to recognise this risk, but most boomers will not want to rely on the age pension or downgrade their lifestyle too drastically. They will realise they need to save rather than spend, work longer and perhaps take out protection in the form of an annuity from age 90 or an income stream that stretches to age 100.

During the next five years, fund choice will also cause significant changes in the superannuation industry. Although most funds report that the number of members switching since choice was introduced on July 1 is less than 5 per cent, the long-term impact is likely to be much greater.

Choice will become accepted as a fact of life, with members in control and employers merely acting as a conduit for contributions. The first fund that people join will be important, because when they change jobs they may well stay with their original fund, much like a bank account. So attracting and keeping younger members, although they are often costly to administer with small balances, will be vital. Those who do switch will often be prompted by an event such as a personal change (getting married or a new job), or bad publicity for a particular fund. Ratings agencies will also become more important in influencing how people choose their fund.

We will see the development of household accounts, where a couple share their superannuation. This will follow the changes introduced from January 2006, allowing a person to transfer contributions to their spouse’s account. This development will be popular for couples with one big earner who is hitting RBL limits or a spouse who has limited superannuation. The abolition of the superannuation surcharge has made this development even more attractive and we are likely to see a significant increase in superannuation contributions from many high-income earners.

Fund licensing by the regulator is another significant factor that is reshaping the industry. My best guess is that by July 2006, when fund licensing takes effect, only about 200 corporate funds will remain, down from 1,400 in June 2004. Industry funds will, over time, halve in number from 100 to 50, and many of the funds that remain will either be very big or in a niche market. Branding will become even more important, with the large super fund brands becoming as well known as the big banks, servicing hundreds of thousands of members. The five biggest funds are likely to have 20 per cent of funds under management, double their present 10 per cent.

So what creature will super be in 2010? A lumbering elephant? An ever-changing chameleon? A wise owl? A competitive Tassie devil?

My feeling is that the best analogy is the kangaroo. Powerful, always going forward, able to box when it needs to but also content to be relatively passive and bask in the sun, offering protection in its pouch and — of course — an Aussie icon. Australia is at the frontier of a superannuation revolution. If we get it right, the world will follow.

Dr David Knox, Mercer Human Resource Consulting.