First State Super will merge with VicSuper to create Australia’s second largest profit-to-member super fund, managing $120 billion in retirement savings for more than 1.1 million members.

The boards of both funds on Monday signed a binding heads of agreement, allowing them to carry out due diligence ahead of reaching a final decision by year’s end.

The deal will see the combined group inching closer in size to AustralianSuper which manages $165 billion of members’ assets and is Australia’s largest super fund.

The announcement comes as the prudential regulator ramps up the pressure on trustees to ensure that funds are working in the best interests of members. In essence this means APRA thinks members should benefit from economies of scale.

First State Super’s chief executive Deanne Stewart, who will take the reins of the merged fund once the deal is completed in June 2020, said “Our shared objective is to help our members to make the most of their retirement. A merger between our funds would make us the pre-eminent fund for retirement and advice. The merger business case has confirmed there is strong cultural alignment between our funds and we’re confident we could generate significant benefits for our combined membership.”

Stewart argued that First State and VicSuper had a strong competitive edge given the funds maintain advice and service centres in major cities as well as in regional Australia.

The First State chief conceded that not all mergers are created equal and not all mergers make sense. “We represent the carers, the educators, the protectors of society and a tie-up does give us more opportunity to be an advocate for them.

“While a merger will provide better opportunities on the investor side, the opportunity for thought leadership on the value of advice is also key,” said Deanne Stewart, adding the significant purchasing power would clearly provide the merged entity with better investment opportunities and far more choice.

“We would gain far more information which, ultimately does help the portfolio, so the scale benefit doesn’t just widen the opportunity set but gives you more insight into the markets themselves.”

VicSuper chief executive, Michael Dundon said: “We’re very positive about what this merger could mean for our members.  Over the coming months we’ll undertake a detailed review of each other’s operations, consider various operating models and discuss how we could best leverage our combined scale to deliver even better outcomes for members.”

On the cost savings side, Dundon noted the obvious synergies in combining two organisations but cautioned that the $120 billion merged fund see increasing inflows each year so management must ensure the merged fund is properly resourced.

Speaking of the industry consolidation currently underway, the VicSuper chief said significant inflows were predicted over the next few years. “Consequently, finding scale and passing scale benefits on to members is going to be critical.”

His views on the proposed merger echoed Stewart’s sentiments. “We have very complementary models in terms of advice and the way we interact with our members. Our product range and member demographic is also really similar so there are some very natural touchpoints that we can leverage and get scale benefits from very quickly.”

First State’s current independent chair, Neil Cochrane, will be appointed as chair of the merged fund.

The new board will continue to reflect equal member and employer representation with one independent chair and 14 directors four of whom would be from VicSuper’s nominating bodies.  By June 2022, the plan is to reduce the size of the board to include an independent chair and 10 directors, two of whom would be from the Melbourne superannuation fund’s nominating bodies.

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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