New projections from Mercer indicate a substantial reduction in the number of super funds over the next five years, with smaller funds expected to be particularly affected.
In its inaugural Shaping Super report, Mercer said regulatory pressures to consolidate and achieve economies of scale are anticipated to lead to a more streamlined superannuation landscape, characterised by a significant increase in mega-funds.
Namely, over the next five years, the firm expects the total number of funds to reduce by another 30 per cent.
"This will likely spark more mega funds from a combination of organic growth from new members and investment performance, and inorganic growth from fund mergers," Mercer said.
By 2028, the firm anticipates the emergence of approximately 12 mega-funds, marking a significant shift in the industry's structure.
Looking further ahead, Mercer anticipates a halving of the total number of super funds in the coming decade, with the regulated sector evolving towards a model dominated by a select number of megafunds catering to the broader Australian workforce.
Additionally, a smaller number of niche providers and platforms offering unique services are expected to complement the market, resembling the structure of Australia's banking sector.
"The banking sector has a few large participants and a handful of smaller, competitively differentiated banks and other financial institutions, such as building societies and credit unions, that have maintained long-term market position," Mercer said.
The firm highlighted that small funds with less than $5 billion in assets have been reducing at a rate of 10 to 15 per year since 2015 – a trend it expects to continue.
"We expect this to continue until there are less than 10 niche providers operating at this size and competing by accessing scale through outsourcing," it said.
"There may also be a handful of insurance-only superannuation funds in this category providing only death and disability benefits."
Looking at funds with $5 billion to $30 billion in assets, Mercer noted that while numbers remained "relatively" stable between 2015 and 2020, since 2020 the number of funds of this size has started to reduce at approximately 10 per cent each year.
"This is likely a consequence of the introduction of the Your Future, Your Super regulation and more regulator action. This regulation has increased the ‘bar’ for being ‘too small to operate’ as a stand-alone fund," Mercer said.
Regarding the emergence of megafunds, the firm forecasts that one to two substantial mergers exceeding $100 billion will likely take place shortly, involving either existing mega-funds or the consolidation of two funds to establish a new mega-fund.
The Australian super sector has gone from more than 200 funds nearly a decade ago to 104 funds as of 1 January 2024, spread across 69 trustees.
According to Mercer, if super funds are to survive in this market, they will need to focus on growth, delivering exceptional services aligned with customer needs, addressing regulatory concerns to prevent brand damage, and improving member financial outcomes while maintaining competitive fee structures.
