The Australian Prudential Regulation Authority (APRA) today released the results of research into the relationship between fund size and the performance of APRA-regulated superannuation funds.
The research, released in the APRA Working Paper Effect of fund size on the performance of Australian superannuation funds, examines three ways that members could possibly benefit from being invested in larger funds: better gross investment returns, lower investment expenses and lower operating expenses.
The Superannuation Guarantee introduced in 1992 significantly increased both the amount of money flowing into superannuation as well as the size of the average superannuation fund. This trend has been bolstered by frequent mergers between funds, with the trustees of many smaller corporate funds deciding to transfer members’ accounts to larger industry funds and retail master trusts.
The results of the research indicate that the performance of not-for-profit funds (corporate, industry and public sector funds) improves with fund size. The greatest benefits accrue when not-for-profit funds grow to a multi-billion dollar size.
Therefore, there is reason to believe that further growth in fund size and member balances will result in further economies of scale in the not-for-profit sector. However, fund size does not have an overall positive impact on the performance of retail superannuation funds.
The key findings of the research are that:
- From September 2004 to June 2010, larger not-for-profit funds earned higher risk-adjusted gross returns than smaller not-for-profit funds. These funds had higher allocations to asset classes where they were likely to have had a size-related advantage, such as private equity and real estate. However, there were no such economies of scale evident for retail funds.
- Larger not-for-profit funds benefited from lower investment expense ratios, which suggests they were able to negotiate more favourable fee schedules with external investment managers. As is the case for gross returns, these economies were not evident in the retail sector.
- Larger funds, both in the retail and not-for-profit sectors, had significantly lower operational expense ratios. This finding suggests that larger funds were able to spread fixed costs associated with administration and IT infrastructure over a larger asset base.
The research focuses on 280 superannuation funds with total assets of at least $50 million. These funds represent about 98 per cent of the assets in APRA-regulated superannuation funds.
The research is available via the historical snapshots of APRA's website on the Australian Government web archive.