Choosing a super fund: Does size really matter?

When you’re choosing a super fund, it’s natural to think big is better. After all, it’s a handy rule of thumb to simplify the task of choosing between lots of complex options.

But when it comes to super funds, is big really any better?

It’s the argument being used to support the current spate of mergers occurring among super funds, with the industry increasingly dominated by giant funds. 

Of the remaining 141 super funds regulated by the Australian Prudential Regulatory Authority (APRA), 104 have less than $10 billion in funds under management and 78 have less than $2 billion, which is less than 1% of the assets in some of the largest funds. The 16 biggest funds each have more than $50 billion in funds under management and represent well over 70% of all super assets.

APRA supports the industry trend of consolidation, so it seems the days of a proliferation of smaller super funds are numbered.

Super funds: Do big funds perform better?

Unfortunately for the average fund member, the question of whether being in a bigger super fund is better isn’t easy to answer, as it involves issues around both investment performance and fund administration.

Even the relationship between investment performance and fund size isn’t clear cut.

Over the 12 months to the end of the 2021–22 financial year, only three of the top 10 performing super funds had assets greater than $30 billion (Hostplus with $90 billion, HESTA $70 billion and Australian Retirement Trust $200 billion). 

Five of the top performers held less than $15 billion in assets and several smaller funds were the only ones to post positive returns in an overwhelmingly negative year.

These results seem to indicate fund size is not necessarily a reliable predictor of the best investment returns – at least not in the 2021–22 financial year.

SuperRatings top 10 funds ranked by 1-year investment return at 30 June 2022

Rank	Option name	1 year %	10 year % pa
1	Hostplus – Balanced	1.6	9.7
2	QANTAS Super Gateway – Growth	0.6	8.1
3	Christian Super – MyEthicalSuper	0.5	7.9
4	legalsuper – MySuper Balanced	-1.0	8.3
5	Australian Retirement Trust – Super Savings – Balanced	-1.0	9.0
6	Energy Super – Balanced	-1.2	8.1
7	Aust Catholic Super & Retirement – Balanced	-1.2	7.8
8	CareSuper – Balanced	-1.7	8.7
9	HESTA – Balanced Growth	-1.8	8.5
10	TelstraSuper Corp Plus – Balanced	-1.9	8.5

Source: SuperRatings

What about over the longer term?

Over longer time periods, however, there seems to be a stronger relationship between fund size and performance.

Looking over a 10-year period, the data appears to indicate a relationship between the size of a super fund and its performance. Funds holding over $10 billion in investment assets have a better than average performance, according to research undertaken by consulting firm Frontier Advisers.

Super fund investment option performance compared by option size over 1-year and 10-years to 30 June 2022

Source: Frontier Advisors Superannuation Performance Financial Year 2021–22; SuperRatings

Challenges for small and medium funds

Although annual investment returns are important, APRA takes a broader view when assessing the importance of fund size in delivering good member outcomes. It considers administration costs and fees as equally important factors when assessing a fund’s performance.

In March 2022, the regulator released research arguing smaller super funds were “more likely to struggle to deliver quality, value-for-money member outcomes in the future”. Its analysis indicated fund scale (or size) was an important driver of good long-term outcomes for fund members.

The study noted large super funds (with assets of more than $50 billion) can more easily spread their costs over a wider membership base, allowing them to keep their fees lower. Administration and operating expenses for large funds (0.33% of net assets) are also significantly less than those of small funds (with net assets less than $10 billion), which are 0.57% of net assets.

APRA also claimed half of all small super funds (net assets less than $10 billion) were facing immediate sustainability challenges due to declines in their net cash flows and number of member accounts. More than half of medium-sized funds ($10 to $50 billion in net assets) were assessed as having adverse trends in sustainability.

According to APRA deputy chair Margaret Cole, the findings prove size matters when it comes to boosting financial outcomes for super members. “While bigger isn’t always better, increased scale makes it easier for trustees to build an efficient and resilient business model that delivers strong financial outcomes for members. A fund that is losing members or has declining net assets will face challenges to keep fees and costs low for members.”

“With the largest funds growing solidly, either organically or through mergers, the sustainability and performance gaps between the industry giants and the rest will only widen further without urgent action by small to medium funds,” she says.

What about MySuper heatmaps and fund size?

In December 2022, APRA released its 2022 MySuper Heatmaps evaluating the performance of every fund’s MySuper option in terms of its investment returns, fees and costs. It found around 800,000 members’ super accounts are in MySuper products the regulator rates as having “significantly poor” investment performance. 

Five MySuper products received a ‘fail’ ranking by APRA in its 2022 heatmaps:

Super fund	MySuper product	Assets
BT Funds Management Retirement Wrap	BT Super MySuper	$21.2 billion
Australian Catholic Super and Retirement Fund	Lifetime One	$5.4 billion
BT Funds Management Retirement Wrap	Westpac Group Plan MySuper	$3.5 billion
Energy Industries Super Scheme-Pool A (EISS Super)	Balanced (MySuper)	$1.1 billion
AMG Super	AMG MySuper	$1.55 billion

Source: APRA 

Among the five funds failing APRA’s performance test, only one (BT Super’s MySuper option) is not considered a small super fund, reinforcing the APRA message that small super funds are likely to find the going increasingly tough in the years ahead.

Since the first APRA heatmap was released in 2019, a total of 28 MySuper products have closed, resulting in 1.5 million member accounts holding $51.6 billion being transferred to other – usually larger – MySuper products.

According to former APRA chair Wayne Byres, super is an “industry where size matters”. He argues, however, the heatmap assessments do not mean it’s simply a case of big funds are good and small are bad. “Our heatmaps identify large funds that must do better and small funds that are delivering well for their members. But, overall, the evidence is clear that size helps deliver better member outcomes.”

Is this the end of small funds?

Not everyone agrees big is better, with many industry figures arguing there is still a place for smaller, more nimble super funds.

David Carruthers, head of member solutions at Frontier Advisors, agrees being bigger has benefits but also notes there are disadvantages for large super funds. 

These can include complexity and internal delays when it comes to the fund’s investment process, as well as the inability of larger funds to make significant investments in smaller company stocks without affecting their price. Larger funds can also be less nimble when it comes to taking advantage of market opportunities that require rapid action and decision-making.

“Bigger is not necessarily better in all circumstances. We think there’s a place for small funds that can be nimble, can do things … quicker and in meaningful positions,” Carruthers notes. 

Even the government thinks small funds can still play an important role.

According to the Minister for Financial Services Stephen Jones, there are important macroeconomic reasons why super funds of all sizes should be allowed to flourish. “For the effective deployment of capital within the economy, we need a diversity of size of funds,” he says.

“Big funds do big deals; middle-sized funds are more attracted to deals that might not necessarily hit the scale and benchmarks that are required for the larger funds; and the smaller funds, same again at a smaller scale.”

What are the lessons for members?

All this can be very confusing if you’re a fund member, but the bottom line is that trying to ensure your super account is with the ‘best’ performing super fund is impossible.

No one can reliably predict which fund will turn in the highest investment performance, or even whether your fund will decide to merge with another fund in the future.

A more sensible strategy is to look for a fund with a track record of above-average returns after tax and fees over the long term. Also ensure you’re in the right investment option for your risk profile and goals. You should also check your fund has low fees and provides you with services you need and want, such as insurance cover, education and customer service.

To help you choose the right super fund for you, here’s some points to consider:

1. Returns fluctuate from year to year

A super fund’s investment performance varies from year to year, so some years the performance will be lower than others. Growth options (61–80% growth assets), where most Australians hold their super, typically have a long-term risk objective of one negative return on average every five years. 2. Check the fund’s performance over five-year, seven-year and ten-year periods

You will be saving for your retirement over many years, so looking at the performance results from short periods like one year or three years won’t tell you much. Instead, focus on a track record of superior long-term returns over at least five years.

2. Ensure you compare the same investment option

Check you are comparing like with like. The investment return for a Cash investment option can’t be compared with a Balanced investment option as they hold very different investment assets. A mismatched comparison tells you very little about how well your fund is performing.

3. Service is important too

When comparing funds, don’t forget to look at the member services it provides such as financial advice, insurance offerings, member communications, education and tools such as online calculators.