Latest analysis of Australia's superannuation industry shows COVID-19 may prove the catalyst for small superannuation funds to finally pull the trigger and merge.
Rice Warner believes the turmoil experienced across financial services will soon force small players in the super industry to accelerate merger discussions, even though the environment is more difficult to successfully execute a fund marriage than 12 months ago.
Explaining how it anticipates the pandemic will impact Australia's super funds, the research firm said funds would be forced to cut costs as the asset-based fees or indirect costs charged to their investment portfolio fall.
Making things even more difficult, members are now scrambling to get in touch with their super fund, especially after the government allowed early access to superannuation for Australian's under financial stress amid the crisis.
"These contributions to fee income will have fallen considerably, and several funds will now be in a position where they will need to cut services or increase member fees or their indirect costs," Rice Warner said.
"At the same time, demand from members for some services is spiking.
"We expect this might tip some of the smaller funds into merger negotiations - but they may find the climate a lot less amenable than a year ago."
Conversely, the firm said large super funds and their consultants would continue business as usual.
"While the nature of the work and some priorities have changed, the industry has a list of requirements to comply with new and pending laws," Rice Warner said.
"Focusing on getting this done efficiently will benefit funds as they emerge from the gloom late this year."
However, the firm noted funds with a high unlisted asset and infrastructure exposures would need to avoid the mistakes made by funds during the GFC, whereby several super funds did not revalue their unlisted assets until APRA forced them to do so.
"The result is that some members switched their investments into portfolios which were subsequently revalued downward sharply after the equity markets had rebounded," the firm said.
Rice Warner said the experience led to "more robust and transparent processes" for the valuation of unlisted assets being put in place, which funds will need to ensure they follow to avoid repeating the errors of the past.
"The high levels of unlisted assets will smooth the reduction in unit prices for some funds. The unlisted assets will likely fall in value too, though the extent will depend on levels of economic activity," Rice Warner said.
"As the annual valuations of airports, toll raids and conference centres are made they will be reduced to reflect lower revenues."
The firm also underlined the importance of super funds supporting their members through the crisis, particularly those more sensitive to investment markets, such as retirees or members anticipating retirement.
"They will need advice on asset allocation, how much to withdraw as pension payments, and how much to spend," Rice Warner said.
However, the firm said Australia's "outdated" legislation made financial advice too costly and slow to deliver, leaving the messages funds deliver to members "bland and related to personal circumstances".
"Those funds which use bucketing strategies with their retirement products are better placed. Members can continue to draw pensions from cash and not panic about the fall in the rest of their portfolio at least for the next six-12 months," the firm said.
"We might find the normal frugality of retirees tightened further due to increased uncertainty."
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