The key players in the merger between AGEST and AustralianSuper revealed some of the secrets of the deal to delegates.

AustralianSuper took four years to earn back the $11 million costs of its merger with AGEST it was revealed in a session entitled ‘To Merge or Not To Merge’ at CMSF 2015.

The figure was revealed by Paul Schroder, group executive membership of AustralianSuper, in response to questions made during a presentation given by Cath Bowtell, former chief executive of AGEST and current director of Industry Fund Services.

Bowtell had revealed that the cost of merger to AGEST was $1.4 million or 10 per cent of the trustee office budget.

Schroder, who was sitting in the audience, said the costs of the merger were what AustralianSuper had projected, but that the merger had hit home how a suitable merger partner needs to be sufficiently large to justify such costs.

“We went into this thinking that we should merge with anyone who wants to merge with you, but that is fundamentally untrue,” he observed. One of the surprising consequences of the merger were the learnings a fund the size of AustralianSuper ($33 billion at the time, compared to $3.8 billion for AGEST) could gain from a smaller fund. Schroder noted AGEST’s website was superior and that the successful format for AGEST member briefings became the AustralianSuper model.

One of AustralianSuper’s major costs was the provision of administrative support for AGEST, while a chunk of AGEST’s costs were for a due diligence report from PwC.

The criteria AGEST used for choosing a fund to merge with were matching providers and a healthy members growth rate. An additional source of comfort was that AustralianSuper could demonstrate that they had successfully completed a merger previously.

In hindsight, Bowtell justified the merger by revealing that the $1.4 million cost to AGEST was dwarfed by the $15 million of savings on investment fees for most of AGEST’s 168,000 members in the first year following the merger.

A major stress in the merger had been the process of switching investments. AGEST switched to AustralianSuper’s custodian three months prior to the merger and then in a separate exercise switched investments to AustralianSuper.

This led to a heavy workload for the fund’s 1.5 person investment team and in hindsight Bowtell said extra help should have been sought.

Linda Rubinstein, who was the last chair of AGEST, and who was in the audience for Bowtell’s presentation was asked to comment on the issue of trustee self-interest derailing mergers by Colin Tate, chief executive of Conexus Financial, who chaired the session. She replied that either consciously or unconsciously such self-interest had led to the failure of many proposed fund mergers. She said the excuse of “cultural differences” given by trustees in failed mergers was often code for self interest.

Bowtell’s presentation also contained a gloomy message to delegates that the tide was turning against many funds viability and of how trading conditions were tougher than when AGEST merged with AustralianSuper.

One of the new pressures is on the collaboration between industry funds. This has brought economies of scale on services when funds were smaller, but as funds grow many are questioning the logic of this. “The dynamic for collaboration is breaking down,” she said.

Bowtell presented a chart that showed the industry sectors most likely to lose workers and those most likely to grow, to highlight funds that would be vulnerable to losing members.

Her chart showed manufacturing and mining would have a declining workforce in Australia, but that healthcare, retail and education would grow.

Lastly she challenged the audience to honestly reflect on the competitiveness of their fund. “It is a good discipline to ask if you would win a default tender against another fund’s default,” she said. She concluded that it was not enough for a fund to justify its existence by saying it was viable – it had to be flourishing, she said.