The major accounting firm's annual Super Insights Report predicts industry funds will likely move towards offering non-super products as well as aged care solutions and banking options over the next decade, while retail funds will likely be considering the viability of their wealth business arms.

These findings are based on the Australian Prudential Regulation Authority’s (APRA) 2016-17 super figures.

These figures noted that larger funds saw “materially higher” increases in assets under management (AUM) over that period, while smaller funds experienced net outflows. This is the first time this trend has occurred and is the result of smaller contributions and greater transfers out, KPMG claimed.

Despite the average fund losing 1 per cent of accounts, the continued growth in retirement products indicates the importance of competitive products.

“Our analysis shows an increasingly two-tiered super fund industry in Australia – not so much between retail and industry funds but by larger and smaller funds,” said KPMG head of asset and wealth management Paul Howes.

“The Productivity Commission’s (PC) review into the efficiency of the system will place significant challenges on smaller funds – and should it recommend a limitation of existing default awards then this could spell the end for many small funds.

“While rationalisation has happened very slowly, we believe the pace will quicken sharply in the next few years.”

He said the corporate fund sector, which currently has 26 funds, is the most likely to face the greatest consolidation push, and could be whittled down to six funds by 2028.

The industry fund sector will see funds fall from 40 to 18, public sector funds will see the 37 funds drop to 16 and retail funds will fall from 125 to 68.

That means the number of APRA-regulated funds together will be cut from 238 to 108 by 2028.

Meanwhile, the 598,596 SMSFs will increase to 886,900. 

2018 to be ‘key year’

KPMG superannuation advisory partner Adam Gee said the royal commission’s scrutiny of banks’ vertically-integrated wealth businesses will place pressure on some parts of the super sector.

He noted KPMG’s last report called for the government to enshrine super’s purpose in legislation.

“It now seems unlikely that there will be any immediate end to the regulatory changes – we need to be careful that complexity and unnecessary costs which undermine member confidence and act as obstacles to innovation are not the result,” Mr Gee said.

“We must hope that nothing happens which would run counter to the interest of fund members – and possibly prejudice the ability of funds to meet the new ‘member outcomes’ requirements.”