When it comes to most things financial, we are accustomed to thinking that bigger is usually better. Understandably, being bigger is sometimes a reflection of success or the amount of resources available.

But when is bigger a disadvantage? Or when does big get too big?

The rise of industry Super funds

Industry super funds have seen remarkable growth in recent years and now account for 38% of the total superannuation market, valued at $3.8 trillion as of March 2024¹. These funds dominate in terms of both member numbers and assets under management:

• Australian Super: Over $311 billion in assets and more than 3.2 million members.
• Australian Retirement Trust: $264 billion in assets and 2.3 million members.
• REST: Over 2 million members.
• Hostplus: More than 1.7 million members.
• MLC Super Fund: A leading retail fund with 847,000 members.

Customer complaints and service failings

Recent data from the Australian Financial Industry Complaint Authority (AFCA) highlights some concerning trends for industry funds. Between July 2023 and June 2024, industry funds dominated complaint numbers:

• Australian Super: 1,550 complaints
• Australian Retirement Trust: 568 complaints
• CBUS: 493 complaints

CBUS, in particular, is under scrutiny as ASIC is suing the fund for alleged customer service failings, costing members at least $20 million². Broader governance issues have also emerged, including questions about the fitness of certain directors.

The challenges of size in investment management

The size of the superannuation system—valued at $3.8 trillion—is larger than the entire ASX market capitalization at $2.5 trillion. While this growth is impressive, it presents unique challenges:

• Investment scale: Funds like Australian Super, with $300 billion in assets, need to generate $21 billion annually for a 7% return. As funds grow, generating such returns becomes increasingly difficult.
• International exposure: Larger funds are turning to international equities for diversification and returns not available domestically.

However, size can also lead to mismanagement. APRA has warned that some funds are not revaluing unlisted assets regularly, potentially inflating customer savings⁵. Hostplus faced these issues when it had to shut property and infrastructure funds due to declining valuations⁶.

Governance and transparency concerns

Size can also amplify governance and transparency issues. Notable examples include:

• HESTA: Forced to compensate over 120,000 members due to delayed valuations of unlisted assets.
• Hostplus: Closed property and infrastructure funds, highlighting the risks of overexposure in certain sectors.

These examples underline the importance of effective management and transparency in ensuring positive outcomes for fund members.

Retail funds as an alternative

Retail super funds have become more competitive, particularly after the Financial Services Royal Commission. Key advantages include:

• Transparency: Clearer insights into how funds are managed.
• Control: Greater autonomy over investment decisions.
• Flexibility: Tailored investment portfolios for retirement income.

These attributes make retail funds an attractive alternative for retirees seeking to align their assets with their liabilities within Australia.

Conclusion: Informed decision-making is key

While industry funds remain a solid option for many Australians, understanding their limitations, risks, and alternatives is crucial. Whether you choose an industry or retail fund, staying informed will help you effectively manage one of your most significant financial assets.

References

1. Australian Superannuation Industry Insights – KPMG
2. ASIC Sues CBUS – AFR
3. ASIC Fines Australian Super – AFR
4. Morningstar Analysis of Industry Super Funds
5. Australian Super’s Loss – AFR
6. Hostplus Valuations – AFR