Margaret Cole, Member of APRA

Margaret Cole, Member of APRA

APRA Leaves Door Ajar to Smaller ESG Funds

Regulator Assesses Fund Sustainability

A handful of super funds have bucked the trend that small funds do not score well on sustainability metrics, APRA says. These funds tend to offer niche products, including ESG options.

Most superannuation funds with assets under management of less than $10 billion are facing sustainability issues as they are experiencing declining cash flows and member accounts, while charging higher fees than the very large funds, those with assets over $50 billion.

Even small to medium-sized funds, those with assets between $10 billion and $50 billion, are struggling. More than half of these funds surveyed by the Australian Prudential Regulation Authority (APRA) showed adverse trends in sustainability metrics, the regulator said in a technical paper, “2021 Heatmaps – Sustainability of member outcomes”, published last week.

“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,” APRA Member Margaret Cole said at the publication of the paper.

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APRA will continue to encourage trustees facing performance or sustainability pressures to seek a strategic merger that can quickly deliver improved outcomes to their members

“It’s for this reason that APRA will continue to encourage trustees facing performance or sustainability pressures to seek a strategic merger that can quickly deliver improved outcomes to their members.”

Yet, a handful of funds are bucking the trend.

Of the 78 registrable superannuation entities (RSEs) in the prudential regulator’s heatmap, eight showed growth on all sustainability metrics, while six demonstrated growth in net cash flows of more than 10 per cent.

“These RSEs generally provided new or niche product offerings, such as environmental, social, governance (ESG)-focused products,” APRA said.

To assess a fund’s sustainability, the regulator looked at three key metrics: the Total Accounts Growth Rate, which is the rate of growth in member accounts relative to total member accounts, the Net Cash Flow Ratio, the rate of growth in net cash flows relative to net assets, and the Net Rollover Ratio, the rate of growth in net rollovers relative to net assets.

In total, 38 (49 per cent) RSEs are declining across all three sustainability metrics: 35 are small or medium sized, while three are large funds.

In the paper, the regulator only mentioned the 24 small funds that didn’t make the cut by name. This list included funds across the spectrum: industry, retail and corporate funds.

Since APRA published the first heatmap in December 2019, 19 MySuper products have closed. The regulator said that in general these closures had led to better fees for members.

“Mergers where large RSEs are the successor RSE delivered the greatest fee savings, especially in administration fees.” it said.

Members in a fund that merged with a large RSE saved on average 30 per cent in administration fees, whereas those that merged with a small to medium-sized RSE saved 11 per cent.

For the full technical paper, please click here.


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