The government’s decision to formalise capital-gains-tax rollover relief to help super funds merge removes a key obstacle for those organisations looking to join forces with others. However, even with this change, merging two super funds is no walk in the park.

Just how challenging the process can be was highlighted in late May when Equipsuper and Vision Super discontinued their planned merger after three years of discussions. That said, it is also possible to point to numerous successful deals, including last year’s tie up between First State Super and Health Super. Furthermore, there are other formal discussions still underway, such as those between Asset Super and CareSuper.

The overriding reason for funds – especially not-for-profit groups – to consider mergers is to find scale ahead of the government’s coming Stronger Super reforms. Indeed, Rice Warner forecasts that the number of industry funds alone will fall from 65 in June 2011 to 42 in June 2016, even as the sector’s total funds under management rise.

By teaming up with others, smaller funds can better invest in modernising their back-office processes, expanding their secretariats, applying greater resources to developing new member benefits (including a MySuper product) and ensuring regulatory compliance, which involves an obligation to set aside new levels of risk reserves.

In addition, scale can also help superannuation funds begin to introduce more compelling insurance products as well as to pursue better investment strategies.

Valuing a merger

However, size isn’t everything. Particularly when it comes to not- for-profit funds, there are important questions of mission and culture to consider. To understand how funds can navigate this minefield, I spoke to KPMG partner and superannuation specialist Guy McAliece.

The first thing to keep in mind, says McAliece, is that the merger of two not-for-profit funds is not a typical commercial deal. In the merger of two for-profit businesses, the negotiation is heavily focused on the value of each enterprise and getting the best deal for the respective shareholders. It’s inherently adversarial, even if the transaction might present synergies.

In the merger of two non-profit superannuation funds, there are only members, so the key question is whether a merger would add or subtract value for those individuals. The key to answering that is to know what the merged fund would look like and how it would work.

Without forming this vision and modelling associated costings, budgets and implementation times, the respective due-diligence teams cannot advise their boards. As McAliece puts it, “You’ve got to know what the final merged entity looks like to be able to say to the existing funds that they’ll be better off.”Another helpful tool is to establish a joint working group that has the sole purpose of helping the two funds work together – as partners rather than as adversaries. That working group would typically comprise executives from each fund and at least one neutral adviser, typically an accountant.It’s also vital to get the boards of both funds involved early and to reach the point of being able to sign a memorandum of understanding that sets out key points, such as the number of directors and their roles in the final fund.

If the funds can agree that a merger makes sense, it becomes the job of the working group to help executives and others from both sides work through the planning. According to McAliece, this working group plays an essential part in maintaining momentum, especially when the teams hit thorny questions stemming from differing histories and cultures.

“If you have a strong group in the middle that is focused on making the merger work and you hit roadblocks along the way, then you’ll have a method for thinking about those roadblocks and working through them,” he says.

“You will also have a mechanism to respect and work through the requirements of both parties.”

Michael Baldwin is chief executive of the Fund Executives Association Limited. This initiative is made possible by the support of BNP Paribas Securities Services. 

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