The ongoing pressure for superannuation funds to merge, has prompted Equip Super to develop a way for smaller funds to outsource their back-office operations while still hanging onto their brand and member engagement functions.
The $15 billion profit-for members fund has created the extended public offer (EPO) model in a bid to increase its investment and operational funds under management, hoping it will also appeal to other smaller funds wanting to keep their distinctive front office presence.
“Part of my job is to find new potential partners for Equip, which means mergers,” said John Farrington, Equip executive officer, growth and corporate development. “In the early days, one of the big problems with trying to find merger partners was that some funds had very unique things that they offer to their members that couldn’t be replicated in a merger, so they’d drop out.”
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 EPO model lets funds outsource trusteeship, administration, custody and investment operations. The funds retain responsibility for strategy, brand development and member and employer relations, under the control of a service company with its own board of directors, executive and staff.
“We changed the structure of the trustee so that Equip Super Pty Ltd can be trustee of multiple funds,” Farrington said.
This can be of assistance for sub-$5 billion funds targeting members in a specific industry.
“They have a view that they can provide unique insight to those members because they’re used to dealing with that group and that members,” Farrington said. “However, they realise that with $2 billion, they can’t access the scale in investment and administration that larger funds can. Under the EPO model, they can keep their fund exactly as it is.”
Equip was not seeking to cut into the business of trustees for hire, and was not considering taking on start-up retail funds like recent entrants that focus heavily on their tech offering to younger workers, Farrington said.
“We are looking to get other potential corporate funds or smaller industry funds that are looking for getting better access to scale,” he said.
“The newer funds that come in – they’re not scale plays as such, and there are not enough members. “ The EPO model launched in April of this year; thus far, Equip has not had any takers.
“But it’s been a fantastic talking point in our discussions with other funds,” Farrington said. “I suspect that part of it, and the reason that a lot of mergers don’t happen in the first place, is that funds don’t want to lose their influence. EPO lets the fund retain its member-facing functions, but they don’t get to choose the fund manager, that’s been the single biggest thing.”
Equip could potentially take on as many as three partners, and Farrington said the fund could scale up to $35 billion in assets under management with its current governance and staff.
The fund has increased its risk management and governance resources, increasing those staff members for those tasks from three to nine. “
The whole industry is certainly looking at a bigger focus on risk management and governance,” Farrington said. “It’s basically tripled in the last 12 months, and…the EPO puts another layer on top, because we have more stuff that’s outsourced as well. All the member servicing and member education would largely be done by the old trustee office, but there is a service level agreement that needs to be signed.”