Building scale and operational capability, and new regulations are driving the desire for more superannuation fund mergers, according to a recent report by State Street.
The paper, ‘Super fund mergers: Benefits, challenges and keys for success’ features a roundtable debate with representatives from institutional super funds Prime Super, AustralianSuper and Media Super, and is contained in State Street’s paper, ‘Evolving Superannuation Funds for the Future’.
AustralianSuper investment manager Alistair Barker said adding to the scale of the fund and operation will deliver “tangible benefits” to members.
“The motivations for merging with us vary for each merger partner, but comes back to being in the members’ best interest.”
AustralianSuper recently announced an in-principle merger with Aust(Q), a Queensland-based industry fund specialised in the construction, engineering, maintenance and allied industries.
Barker said costs savings and member value tangible benefits are two major benefits of mergers, noting they touch on service delivery.
“This is true particularly in the post-retirement phase, but also with other products. It is difficult to strike a balance between having too many products and not enough. We do hope that we will have the scale to expand our offering as needed.”
Barker added that the fund’s move to increased internal portfolio management is due to significant cost savings, allowing it to operate and add value in a lower-cost environment.
For Prime Super CEO Lachlan Baird, new regulation and “its increasing complexities at the smaller end of the market” are a major driver for merging. He argued it leads to extra cost in expanding existing resources, but it’s through mergers that funds will grow.
“The only way that you can achieve cost efficiency is to merge with another fund. Broadly, there hasn’t been significant growth in super member numbers, as most of the real growth is coming through mergers,” he said.
Baird argued that super funds will require greater scale over the next five to 10 years in order to deliver the complexity members will be requesting, which will cost money.
Former Media Super CEO Ross Martin said the super fund does not want to merge with funds outside of the media industry.
“You shouldn’t override the particular business plan of the fund to any merger strategy,” he said.
Current CEO Graeme Russell confirmed the sentiments, saying Media Super is actively looking for mergers within the media, print and allied industries.
Martin said the perception that costs will go down for members isn’t true, noting that when Media Super merged Print Super and JUST Super four years earlier, only the JUST members benefited from reduced administration fees.
“The benefit of a merger is that it defers the potential to increase costs, but it doesn’t necessarily reduce costs,” he said.
“With a number of mergers, you also take over illiquid assets, which may be the worst performing assets in the portfolio.”
Baird said that there may be a “marginal change” in terms of investment, but doesn’t believe there are significant savings.
“You can share out the costs across a larger membership so that maybe you defer some of those increases for a little bit longer. With MySuper and Stronger Super, we are seeing a lot of new costs.”
Meanwhile, Barker said insurance costs are a beneficiary in terms of costs, saying insurers are more likely to take a broader view.
“Certainly members who have merged in from other funds have seen significant changes in their insurance costs, or in items such as automatic acceptance limits, because of having a greater pool of members for spreading the insurance risk.”
Read the full roundtable transcript here.
For a State Street report, ‘Why Funds Join and What Makes Mergers Work’, see Evolving Super Funds for the Future.