OPINION | Amidst all the clamour about whether the regulator should be forcing smaller superannuation funds to merge, it was refreshing to hear a respected source provide support for this sector.
Association of Superannuation Funds of Australia chief executive Martin Fahy said recently there was no reason for smaller funds (defined by Rice Warner as those with less than $2 billion in funds under management or fewer than 100,000 members) to merge based on their size.
“ASFA does not believe there should be any set, arbitrary threshold in terms of assets under management or number of members under which funds should necessarily merge,” Fahy said. “Merger decisions by funds both large and small should be taken in light of all of the circumstances of the funds and members involved.”
Smaller, niche funds access the benefits of scale through outsourcing, and are able to serve groups with particular needs, such as industry-specific insurance, or interests, such as ethical or sustainable investments.
Why the push for mergers?
It cannot be certain that the current push to force smaller funds to merge, often presented as an essential element in the cleansing of the superannuation industry, comes from a purely altruistic perspective. Mergers are big business and can be a lucrative source of consulting work, in the same way that the conversion of defined benefit plans to accumulation plans was in the ’90s and ’00s.
Why this push for mergers persists needs to be addressed. Particularly given such a small proportion of workers are in small funds.
According to the latest available Australian Prudential Regulation Authority figures, as at 30 June 2016, the number of member accounts administered by MySuper fund providers with less than $2 billion under management was a mere 3.7 per cent of all MySuper fund membership accounts. The majority of small funds are not part of the default system at all; they are Choice funds.
SuperRatings chief executive Adam Gee says the scale assessment that the research house undertakes is a fund-wide metric and does not take into account specific products.
Little to gain in efficiency
“It is fair to say that the majority of MySuper products in the market are sustainable, given many of these remain in net inflow, whereas many of the legacy Choice products’ sustainability is more questionable, given they are not subject to the same positive flows,” Gee said.
Additionally, Gee confirmed “the scale test SuperRatings undertakes has little regard for the level of funds under management or size of a fund’s membership, which supports the fact that many small funds do continue to be very competitive”.
It is, therefore, exceedingly difficult to conclude that forcing funds to merge will have any real or tangible effect on increasing the overall efficiency of the default superannuation market. Nevertheless, there continues to be an inordinate level of discussion on this issue.
Small (and large) funds need to be efficient and act in the best interest of members but we must allow the APRA to do its job in an orderly and structured way, rather than pressuring smaller, niche funds into a merger process.
The Productivity Commission is examining the means by which default superannuation contributions are allocated. Serious consideration must be given to the possibility that forcing well-run medium and small default superannuation funds out of the market by starving them of default contributions will reduce competition and choice. The industry is likely to consolidate and become harmonised and undifferentiated, much like banking.
Using the coffee analogy, I believe there will always be a place for the friendly, independent café where the owner knows your name and exactly which coffee you like. Do we really all want to be drinking our coffee at Starbucks?
Angie Mastrippolito is the chief executive and fund secretary of NESS Super, a $670 million Sydney-based industry fund for the electro-technology sector.