This year, while studying, I am effectively sitting on the bench, watching on as the super industry consolidates. It’s a situation which provokes a gamut of feelings and reflections. This wave of consolidation will affect many people in different ways, creating opportunities and challenges. The industry needs to be respectful and empathise with difficult situations that many people will encounter.
Superannuation, like banking, has an enviable business model. For instance, where manufacturing responds swiftly to changing demand levels, superannuation is different: it is a long-term, stable arrangement to provide retirement outcomes. A new member will contribute for many years and then move to a drawdown phase. Even if members have contribution breaks, the assets remain to be managed. Primary leakages from this model are member exits, pension payments (a good thing), and a negative shock to asset markets.
The industry will continue to grow, with ongoing contributions and slated SG increases that will benefit all funds. But the demographics and industry dynamics of many specific industry funds, and two trends in flows (one from retail to industry funds, the other from smaller industry funds to a collection of bigger industry funds) has culminated in a situation where more than half the industry is in net outflow.
Evidence of cost benefits to scale combined with the heavy focus of superannuation system reviews on fees (cost reduction is viewed as a tangible certainty in such reviews, so will always be heavily weighted), means the pressure to consolidate will be ever-present for many funds.
In parallel, other financial services sectors are also struggling. Many asset managers are closing, with pressure on fees and flows (less active management and more internalisation), while financial planning faces serious challenges in a post banking royal commission world.
Consolidation provides opportunities for super funds which are strongly positioned. There will be a larger pool of talent seeking roles, and the strong funds will be viewed as employers of choice. This provides potential for selective upgrading (from board and executive team down), and to broaden the talent base in anticipation of continued growth and future industry challenges. Of course, the challenge in all of this is balancing these opportunities against stability and culture.
Conversely, funds under consolidation pressure face challenges. How do they retain top quality people, who presumably have some insight into these industry dynamics? How do they attract the best talent to their funds? How does management provide assurances of certainty while maintaining credibility? Imagine the situation where a board/executive appeals for staff to stay for the member, while at the same time denying those same members the possible benefits of a merger.
Many good, talented people will be out of work through no fault of their own, perhaps for the first time. The degree of stress and anxiety will vary: some professions, such as accounting may more readily lend themselves to other industries compared to, say, investment roles. A change event creates opportunity, for instance, a break, family time, further education, or a career change. Respecting the talents and empathising with the situation faced by the increasing number of misplaced through mergers will hopefully be the response provided by people across the industry.
With greater seniority comes greater responsibility. We will likely see some boards and executives make a member-focused decision to merge up; effectively placing themselves out of work. While that is their duty and responsibility, at a personal level it can still be a difficult decision. People who make such decisions should be celebrated; hopefully their integrity is recognised and leads to other opportunities.
Undoubtedly there will be negative behaviours, as people seek to protect their own positions. This is where leadership will be crucial. Placing the member first is a straightforward guide.
Superannuation hasn’t experienced consolidation of this nature before. Ultimately consolidation should greatly benefit consumers through lower fees, higher quality investment management, and better outcomes. However, many individuals will be impacted. Respect, empathise and, if you can, help those outplaced. And celebrate those boards and executives who make the tough decisions.
Superannuation has always been a pleasant industry, through largely comfortable times. Now will be a good test of its character.
David Bell, is a former CIO of Mine Super