Australia's mandatory pension regime has created a bonanza for the wealth management industry but the boom times are under threat from a new government plan.

Australia's mandatory pension regime has created a bonanza for the wealth management industry but the boom times are under threat from a new government plan for a “no-frills” type of pensions account for the vast majority of the population.

Since legislating to make employers contribute 9 per cent of an employee's gross wage into a superannuation ­ or pension fund since the mid-1990s, Australia has been lauded for building up the world's fourth largest funds management industry, with A$1.3 trillion ($1.2 trillion) currently in the national retirement savings pool.

Undeniably, this has driven the development of Australia's wealth management industry, fostering everything from the wealth management units of the major banks to industry pension funds and a thriving boutique funds management sector.

Now, however, a government appointed review of retirement savings ­called the Cooper Review after its chairman, former regulator Jeremy Cooper, ­ is threatening the goose which laid the gold egg for the industry (and not the investors).

Cooper is recommending a new low-fee regime for the vast majority ­- 80 per cent or so - ­of people who are disengaged from their pensions account and for whatever reason do not take an active interest in it. This is the mass market, of course, but the repercussions could be significant for the entire Australian wealth management industry across the board.

Cooper’s recommendation is for a “no-frills” type account with fewer features than existing funds and fees less than the current average of 1 per cent.

The Federal Treasury has predicted that the MySuper changes, as they are known, would result in a 40 per cent reduction in costs for average investors, saving a total of A$1.7 billion a year across the industry, and boost the average individual Australian nest-egg for a 30 year old Australian by A$40,000 at the retirement age of 65.

While that might be good for the consumer, the funds management industry has been severely challenged by the recommendations. Pensions giant AMP, for example, has been cited as a likely loser from the changes, largely from MySuper but also from other regulatory changes which move the financial planning industry from a commission-based model to one based solely on fees.

Macquarie Group’s research has analysed the potential impact on AMP, and has suggested that as much as 50 per cent of the $15 billon in the company's small corporate superannuation business could migrate to MySuper, cutting margins by at least half.

In a report entitled AMP: the Glory Days Are Over, CLSA analyst Daniel Toohey says AMP risks becoming marginalised as a low cost mass-market player in a lower fee world. Other brokers, such as Citi, immediately downgraded their valuations on AMP shares and cut their earnings forecasts.

Undoubtedly, A$1.7 billion in fee income is a significant amount for the industry to do without each year, particularly after 15 years of getting used to such income. How it will impact the sector and if it will turn it into a generic style commoditised industry across the board remains to be seen.

Australia has been credited with fostering considerable innovation in its wealth management industry as a result of its pensions regime. These challenging changes could demand even more innovation if the industry is to continue to thrive.