Super fund executives and directors have identified regulation as their greatest challenge in a new report from J.P. Morgan, as the industry braces for further mergers.

The report, compiled on the basis of an industry-wide survey and interviews with 12 superannuation fund leaders, who collectively manage $1 trillion in assets, revealed compliance and the overall regulatory burden as the top challenge facing super funds over the next three years. Next up was retaining or attracting new members and net investment performance.

After a record 15 mergers and alliances were announced in 2021, half of those surveyed said they expect the pace of mergers within the industry to continue to accelerate.

Nearly a quarter of respondents tipped that the number of funds would shrink to fewer than 50 by 2025.

This would mean that two-thirds of today’s funds would disappear, and the industry could consistently see 20 mergers or more per annum.

“My sense is that, just like most markets that evolve to maturity, the top five to ten superannuation funds will end up with perhaps the majority of the investment market share. Then, absent regulatory constraints, it’s likely that there will be a fairly long tail of much smaller funds,” said State Super chief executive officer, John Livanas.

The creation of scale was cited as one of the main reasons to merge by 84 per cent of those surveyed, followed by maintaining long-term sustainability (59 per cent) and regulatory pressure (54 per cent).

Commenting on UniSuper’s merger plans, chief executive officer, Peter Chun said the fund believed scale was a significant driver of member benefits.

“Scale gives us a lot of those really strong investment opportunities,” Mr Chun said.

“It also helps us generate greater surpluses and that enables us to pass on either fee reductions or enable us to invest in stronger capability for our members in areas such as digital”.

Regulatory burden

Many of the super executives interviewed by J.P Morgan regularly cited the impact of regulation - including Your Future, Your Super, APRA’s Superannuation Data Transformation project and portfolio holdings disclosure - as a popular reason for mergers.

APRA has previously said that funds with less than $30 billion in assets will become increasingly uncompetitive against mega-funds.

“What would be helpful from a regulatory perspective, or even a government perspective, is what are we actually driving towards?,” said Mine Super chief executive officer, Vasyl Nair.

“All we know right now is that we’re being told to just drive in this particular direction at a certain speed in a certain way, but we haven’t been told where we’re going.”

According to the survey, the impact of regulation is far-reaching with survey respondents citing cost increases across infrastructure; governance and disclosure, including design and distribution obligations (DDO); and resources for activities.

In fact, 62 per cent of super executives and directors said that the Superannuation Data Transformation (SDT) was expected to drive costs higher.

Moreover, portfolio holdings disclosure was not seen as an accurate or useful measure in member decision-making according to 83 per cent of respondents, while 75 per cent said that it would not be in the best financial interests of members.

As for the new requirement to act in member’s best financial interests, rather than “best interests”, Cbus chief investment officer, Kristian Fok said that the legislation would force a rethink about procurement processes and could dampen innovation.

The new requirement asks trustees to justify the costs and benefits of all actions, and to demonstrate that the anticipated financial outcome is in the interests of members.

“There’s no threshold amount, so you need to have a process around every small thing because it could at some point in the future be deemed to be non-compliant – that reverse onus of proof does make for a lot of red tape,” Mr Fok said.

“The regulatory requirements require a different level of capability, resourcing and alignment with good processes and technology because you just can’t keep throwing bodies at the problem to report. You need to industrialise the way that super funds work.”

Survey respondents believe that funds will react by reducing sponsorship (55.4 per cent), corporate entertainment (42.9 per cent), and advertising (37.5 per cent).

Lastly, about three-quarters of funds surveyed said that the Your Future, Your Super (YFYS) annual performance test will result in more benchmark-like returns.

The composition of the indices in the benchmark has also been criticised.