Pension partnerships Supporting Australia’s large and small superannuation funds

Years of merger activity in Australia’s superannuation fund market has created a handful of giant funds, and a host of mid to small funds

In this article, we explore how both large and small super funds can continue to explore investment opportunities and overcome challenges through the support of their asset servicing provider

Australia has experienced the highest growth in assets relative to GDP among the world’s major superannuation fund markets[1] , as a result of the Australian Government’s decision to introduce compulsory superannuation contributions. Since the introduction of the superannuation guarantee in 1992, contributions have grown from 3% to 11% and will increase progressively to 12% on 1 July 2025. During this time the number of superannuation funds have shrunk from 185 in 2014 to 97 during 2022, as a direct result of several large scale M&As. The top five funds now account for 34% of the market.[2]

This drive for size has evident benefits. Economies of scale help funds lower costs. Larger funds have more resources to invest in the latest systems, and greater investment power. Yet consolidation also brings challenges. Bringing separate organisations together, with their different cultures and infrastructures, is complex and time-consuming. On the other hand, small to medium funds may lack access to larger scale infrastructure so are often more reliant on support from outsourced service providers, and may have more bespoke requirements.

Irrespective of size, clients are seeking agile asset service partners who play a pivotal role in partnering with superannuation funds to deliver transformational projects, risk-reduced transitions and a high-quality experience for superannuation fund members. Finding the right partner with local expertise and global support is critical.

New opportunities: Australian superannuation industry looks to private capital

One area in which superannuation funds are increasingly looking to their service providers is to support their investment diversification ambitions. 2022 saw a 12% decline in equity and 6% reduction in fixed income allocations across the Australian market. Now, private capital assets account for more than 10% of investors’ portfolios, up from 2-3% a few years ago.[3] Along with the long-term performance potential, private market investments can better align superannuation funds’ time horizons and risk profiles, helping manage liquidity risks and optimise portfolio returns and diversification.

Some of the larger superannuation funds have now become of sufficient size to source and manage their private capital investments independently, and conduct private market deals.  Mid to small size funds, however, may lack the investment size required to access these opportunities.

Instead, small and mid-tier funds will often look to access private equity and infrastructure investments in the secondary market. To compete against the larger superannuation funds and take advantage of investment opportunities, smaller funds require a strong operational engine to provide the infrastructure to record and manage their investments. In-house monitoring processes, that historically relied on physical paper and spreadsheets, can no longer keep pace with the scale and reporting demands of the increased number of investment allocations into this sector, as well as the regulatory reporting required.

Smaller funds require a strong operational engine to provide the infrastructure to record and manage their investments

In addition, private capital assets suffer from a lack of standardisation, both in the reporting and accessible data required to perform the detailed and transparent analysis that investors are accustomed to receiving with listed assets.

At BNP Paribas, we help funds manage the full lifecycle of their unlisted assets; our dedicated private capital team in Australia works with the fund managers directly, and provides day-to-day management of cash flows, capital calls, fund distributions, investment portfolio monitoring and performance calculations. Our CapLink Private solution offers asset owners digital reporting through data visualisation, end-to-end workflow management, and risk and performance analytics capabilities for non-listed investments.

Operational efficiency and effective data management

Inflation and interest rate rises have heightened superannuation funds’ already intense focus on operational efficiency, and require them to gain greater visibility on performance, risk and liquidity in their investments. Super funds’ investment operations are also facing additional complexity from data related to increasing private capital investments, and from the integration of ESG data resulting from reinforced sustainability commitments. To integrate this data into an efficient operational model, large superannuation funds are developing increasingly sophisticated investment data management models aiming to maintain a golden source of investment data, with the help of new technology and their asset servicing partners.

Success will lie in striking the right balance between insourcing and outsourcing tasks across the value chain (particularly non-core middle and back-office functions) and managing the evolution of that balance. For many smaller funds, it is vital to partner with a provider with the right balance of specialist expertise and systems that they might not have inhouse, such as private capital, ESG reporting, data solutions and system integration. Increasingly, larger super funds may use a combination of strategic service partners to capitalise on their distinct strengths. But that raises another issue: how to standardise and consolidate the data from multiple providers? Here BNP Paribas is acting as a data aggregator for clients, consolidating multiple data strands into a single, real‐time view of funds’ inventory and positions across multiple markets.

Success will lie in striking the right balance between insourcing and outsourcing tasks across the value chain

New regulation for superannuation funds: CPS 230

The Australian regulator, the Australian Prudential Regulation Authority (APRA) has sharpened its focus on reporting in recent years , notably with the introduction of the APRA Superannuation Data Transformation programme, which aims to improve industry practices and member outcomes .

Through this programme, APRA have focused on more granular data for reporting and product performance.  For example, they have introduced a heat map, which uses colour coding to provide members of MySuper and Choice products insights into their investment performance, fees and costs and sustainability factors.

Another key regulation for superannuation funds is Prudential Standard CPS 230, introduced by the APRA in July 2023. CPS 230 addresses operational risk control failures and disruptions in superannuation funds and other APRA-regulated entities[4] . Super funds will need to focus on these new measures and work closely with their asset service providers ahead of the first set of deadlines in 1 July 2025.

Given the pace and complexity of regulation changes, superannuation funds, particularly smaller funds, are looking to their asset service partners to follow these developments closely and support them in their new and changing reporting requirements. BNP Paribas understands the shifting regulatory environment and has a strong track record of supporting clients with their reporting needs by providing quarterly updates and regulatory reporting.

The way forward – evolving together as partners

Regulation, the search for performance and drive to enhance sustainable member outcomes are transforming Australia’s superannuation funds industry. The needs of all super funds, large and small, are changing. And they need strong, stable, sustainable and flexible partners to meet them.

Delivering the core foundational services of custody, safekeeping, settlement, fund administration, FX and reporting to an exceptional level day in and day out has become a prerequisite. Where super funds can now most benefit, and require specialised help, is in the value-added differentials that a full-service partner with local expertise and global resources can offer.

BNP Paribas is a key partner for the superannuation industry in Australia

BNP Paribas has been a key partner for superannuation funds in Australia for over 20 years. During that time, we have developed into one of the most respected and committed financial institutions serving the market. Our 400+ dedicated local staff support two of the top 10 super funds, along with a large number of small- to mid-tier funds, with assets under custody totalling more than AUD 640 billion. BNP Paribas’ comprehensive service suite, combined with exceptional knowledge of local market nuances and the evolving regulatory landscape, provide the support that super funds of all sizes need today and tomorrow to grow their assets and deliver high-quality service for members.

[1] Global Pension Assets Study – 2022 – Thinking Ahead Institute

[2] https://www.top1000funds.com/2023/05/what-does-it-take-to-succeed-at-scale/

[3] PE Investor Report PEI, FY 2021

[4] https://www.corrs.com.au/insights/apras-new-cps-230-key-requirements-for-regulated-entities-and-their-service-providers