The chief executive of First Super, Bill Watson, says superannuation fund members are in danger of being disadvantaged by trustee boards that have “drunk the ‘mergers are good’ Kool-Aid”.
The boss of the $3 billion fund with links to the paper and timber industries said the “general proposition” from big funds, some regulators and media commentators that mergers were in the best interests of members was incorrect.
“We don’t agree with that,” he told Investment Magazine. “You’ve got to look at the particular circumstances of each merger to work out whether it’s in the members’ best interests. Creating large super funds that have what is believed to be scale doesn’t necessarily benefit members.”
There are 248 Australian Prudential Regulation Authority-regulated funds, a number the corporate regulator has made no secret of wanting to see reduced. In August last year, it wrote to the boards of the worst performers, saying they should make changes or they risked being shut down.
The landmark Productivity Commission draft report into the $2.6 trillion super sector released earlier this year states that some mergers have fallen down because trustees are looking after their own interests and urges the corporate watchdog to investigate such cases.
“Little is known about mergers that have been broached but not completed. Yet anecdotes abound of mergers not proceeding for reasons disparate to members’ interests,” the report states.
It recommended the creation of a “best in show” shortlist of the 10 top-performing default superannuation funds. A notion that has received mixed response from the industry.
Royal commission didn’t focus on failed mergers
The failure of fund mergers was expected to raise the ire of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. But in closing submissions for the hearings at the inquiry on super, issued on Monday, counsel assisting Michael Hodge said the scuppered merger between Energy Super and Equip Super did not fall short of community standards and expectations.
Catholic Super drew some heat during questioning for the collapse of its merger talks with Sydney Catholic Super but this also did not amount to misconduct or conduct falling short of community standards, the closing submission stated.
“Why didn’t the royal commission spend much time looking at industry funds? The royal commission didn’t look at failed mergers because there were a ton of other more important issues to consider related to the conduct of the retail sector,” Watson says.
Hodge said in the closing submission that it was open to Commissioner Kenneth Hayne to find that National Australia Bank’s instances of charging fees-for-no-advice amounted to misconduct. He also detailed a number of possible breaches of superannuation and corporations law by NAB.
Counsel assisting’s submission also stated it was open for the commissioner to find AMP, IOOF and ANZ may have breached the law, while Commonwealth Bank may have engaged in misconduct.
Mergers and returns
The potential impact on returns was another area Watson said was necessary to consider with regards to mergers.
“Why would a board of trustees want to disadvantage their members? Because they’ve drunk the mergers are good Kool-Aid,” Watson said.
On Thursday, First Super, which has 64,000 members, reported annual returns of 10.68 per cent in its balanced or default option and 11.9 per cent in its growth option – outperforming most other super funds in the market.
Hostplus’ Balanced (MySuper) option delivered a 12.5 per cent return for the 12 months to June and topped both the Chant West and SuperRatings surveys.
The 1 million-member Hostplus industry fund has produced the best return of all “MySuper” balanced investment options for the last financial year, at 12.5 per cent.
Watson said APRA has raised the prospect with the fund during prudential reviews.
“So we respect their position with relation to that,” he says. “But I do circle back to us – the returns we are providing our members. We are in a pretty good position to say our members are being well-served by the current arrangement.”
Watson estimated the fund had been approached five times about mergers since he joined the fund in 2013. He said this was about average, and that none the fund had not pursued them.
“We’re not any different to any other funds in terms of merger approaches. It’s one of those things that occurs – but it’s got to be in the members’ best interest.”