"You have to get more money out than you put in. Otherwise there is no point to super,"
The prudential regulator should refrain from shining the spotlight on superannuation funds purely on the grounds that they are suffering from net outflows because eventually the entire super system will be paying out more money than it receives through contributions.
In January the Australian Prudential Regulation Authority published a report showing that about 45 per cent of the largest super funds in Australia had negative member cash flows in 2015-16. In April last year APRA deputy chairwoman Helen Rowell noted in a speech to The Australian Financial Review's Banking & Wealth Summit that declining net assets had "potentially significant implications for the future strategy and viability of any fund".
But Jeremy Cooper, chairman of retirement incomes at annuity provider Challenger and author of the 2010 Cooper super report, said that while net outflows from a fund that was poorly performing and too small to operate efficiently was a concern, retirement schemes were not necessarily in trouble because they were experiencing large outflows.
"APRA shouldn't unduly focus on fund outflows being a cause for concern. Outflows in and of itself shouldn't be a cause for concern," Mr Cooper said.
"That is not to say that there aren't current-day issues of fund scale and viability that need to be addressed. APRA rightly identifies these as priorities but the future will increasingly involve net outflows. Systemically, super will still be viable, even though the annual net outflow ratio could be an eye-popping negative 200 per cent or more," Mr Cooper said.
Outflows occur either when a member starts a pension and draws down their savings or switches super funds.
Mr Cooper said the whole retirement savings system was designed for savers to withdraw more money than they put in, with the difference being accounted for by investment returns.
"You have to get more money out than you put in. Otherwise there is no point to super," Mr Cooper said.
In 2016 outflows were 70 per cent of the level of contributions, but it is expected that in the second half of this century the system will be paying out more money than is being injected because more people will have been contributing to super for their whole working lives. Total assets under management should continue to increase thanks to investment returns.
The result will be that fund boards will need to be sufficiently skilled to handle the net outflows and manage liquidity issues.
"No doubt such a mature super system will call for larger and well-governed super funds," Mr Cooper said.
Corporate funds in particular suffer from high outflows, partly because many are not open to the public and tend to have a high proportion of employees in the fund in any case, making it harder to attract new members.
APRA said it took into account a range of factors when considering the overall performance and viability of a fund, including investment performance, net returns, long-term returns relative to the objectives, member services, fees and business and investment strategies.