SMSFs to emerge from COVID-19 as largest super sector

Conversely, rollovers into the industry fund sector increased by $7 billion, and going into 2020, the industry fund sector was poised to overtake the SMSF funds as the biggest sector in the market.

But that has now been stopped by the COVID-19 crisis, KPMG said.

KPMG head of asset and wealth management Linda Elkins said the arrival of the COVID-19 era “has thrown everything into the air in the super sector”.

“For example, at the end of the 2019 financial year, we believed industry funds would overtake SMSFs as the biggest grouping, just as they had moved ahead of retail funds in the first three years of this study,” Ms Elkins said.

“But given the particular challenges now facing the industry funds — in particular resulting from allocations to illiquid assets and the expected increase in benefit payments under the early release scheme — we now predict that SMSFs will again move significantly ahead of the other sectors.”

APRA released its inaugural MySuper Product Heatmap at the end of 2019 which publicly called out the products the regulator had found wanting.

KPMG said it was expected this would drive consolidation at the “tail” end of the market, among the 70 sub-$10 billion funds.

However, it found that, in reality, many of these smaller funds have stacked up well against the Heatmap metrics and are continuing to attract new members, and that instead the greatest merger activity has been at the larger end, driving the rise of the so-called “mega” fund and opening up a void between these funds and the “tail”.

What is ahead for the rest of 2020?

Looking ahead to the rest of 2020, and the impacts of the COVID-19 pandemic, KPMG estimated that the impact on salaries and wages for employees impacted by the change in trading conditions is likely to lead to reduced super guarantee contributions of around $0.7 billion per month.

It said this will impact flows to the superannuation sector as a whole, but will particularly be felt by funds whose memberships are concentrated in industries suffering the greatest impact on employment.

The government has previously estimated that its early super release measure may lead to an overall increase in superannuation fund outflows of approximately $27 billion.

But KPMG predicts that the longer-term effects of this measure, coupled with a bear market, is that many Australian superannuants will be further behind their savings objective than previously predicted.

KPMG superannuation advisory partner David Bardsley said that at a portfolio management level, there has already been a strain on liquidity, with portfolio managers finding it hard to sell their fixed interest assets to any buyer other than the RBA.

“The RBA has commenced quantitative easing and has been actively buying Australian Commonwealth government bonds and semi-government securities,” Mr Bardsley said.

“However, this is not creating the volumes that institutional fund managers need to de-risk and rebalance exposures and raise cash. As a result, we have seen a significant increase in buy/sell spreads, making it much more costly to rebalance portfolios.

“The challenging liquidity conditions are expected to continue while governments work to contain the spread of COVID-19 and global economies can start to recover.”