A wave of consolidation will see Australia’s superannuation industry emerge with a handful of jumbo funds and a clutch of niche players.
Speaking at a dinner in Sydney, chief executive of First State Super, Deanne Stewart said the bigger super funds will use their scale to drive down fees and costs for members. She said the smaller funds will have to differentiate themselves in the segment they serve in order to survive.
“There needs to be a degree of competition in the market and our view is the market is likely to bifurcate that way,” the chief executive said. “There is room for both. The problem with the top ten ‘best in show’ proposal is that it doesn’t allow for that point of differentiation whereby members get served well by the niche players.”
This message was delivered by Stewart and VicSuper chief executive Michael Dundon at a fireside chat conducted by Colin Tate, chief executive of Conexus Financial. They were speaking at a dinner for the Investment Magazine’s Absolute Returns Conference on Tuesday night.
The two chief executives discussed the merger of the two funds which will create Australia’s second largest profit-to-member super fund, managing $120 billion in retirement savings for more than 1.1 million members.
“It’s not that scale has all upside and no downside,” said Stewart, who will take the helm of the merged entity once completed at the end of this year. “As you scale up, you have to be very aware of having a meaningful impact on the portfolio versus wasting time and energy when it’s not going to move the dial.”
Asked whether super funds could become too big, Stewart pointed to a McKinsey & Co. study that showed that the world’s top pension funds were the top performers in their markets.
Gerard Noonan, the chair of Media Super, which has $5.5 billion in assets, weighed into the debate, saying that were very few exceptions where the very big funds didn’t outperform their smaller peers.
Asked whether smaller funds can survive? Noonan said “probably not over a long period of time”. He added that the sole purpose of a super fund is to provide a substantial amount of money for people in their retirement.
“Can the smaller funds do it? The answer is they can sometimes,” he said. “But over time, can we be an owner of an airport or a toll road in our own right and can we actually clip the ticket in the best possible way? The answer is probably not.”
Noonan said that with funds reaching $500 billion or more it was “pretty hard” for the smaller players who either had to be “lucky or smart”.
First State’s Stewart said that while the superannuation industry might be “obsessed” with consolidation of the underperforming funds, there was far less talk about the mechanics of how mergers of large funds with their smaller counterparts could occur.
“Government and regulators are focused on the tail of poor performers,” added VicSuper’s Dundon. “But given the massive resources and the time involved in completing a merger, mopping up small players is very hard to do given the members’ best interest obligation and equality of rights.”
As for the First State/VicSuper tie-up, Dundon said the decision of whether or not to merge depends on one’s views about where the industry is going. He said that VicSuper would not have made the cut for Productivity Commission’s proposed top 10 funds.
“Industry consolidation could have left VicSuper drifting in the middle so we wanted to be part of a much larger organisation,” he said.
Dundon said First State’s move to internalisation of some of their investments was one of the reasons they were keen to merge.
“We are not sitting here saying we will completely internalise,” said Stewart, adding that a hybrid model is more likely. “We absolutely want the benefits of scale with an internal team to drive costs down, but for private equity we are looking at co-investment opportunities. We recognise that GPs in different markets will be much closer to where action is taking place.
“Keeping large teams in every market means going against the benefits of scale,” she went on to say. “So we are working out where to co-invest and where to work with managers that have a particular skill or capability,” she said.
Stewart warned that those managers that are either vanilla, hug the index or don’t produce what they promise, will be left behind.