Next year is shaping up to be a busy one for mergers in the Australian superannuation industry.
QSuper’s potential tie-up with Sunsuper to become a $180 billion fund is said to be just one of a number of deals that will be announced in the next six to 12 months. And while consolidation is nothing new for the industry that at one stage had over 5000 funds, the pace and volume of transactions this year have caught many by surprise.
Consultants and lawyers say that this is just the start of a wave of consolidation to hit the industry that will see around 10 to 12 large funds emerge from the flurry of deal making, including a handful of mega funds that could have assets north of $500 billion.
“We have never seen the level of activity that we have seen in the market at the moment,” said David Bardsley, a partner at KPMG Wealth Advisory, who is working with several clients about possible tie-ups. “For the first time in probably quite a number of years, funds are genuinely trying to understand what merger opportunities exist for them.”
QSuper and Sunsuper earlier this week confirmed that they were in the “early stages” of a potential merger that would create Australia’s largest super fund. They started talks in July around the same time that First State Super and VicSuper were getting ready to announce their $120 billion tie-up. Others include Hostplus’ merger with Club Super, Tasplan’s tie-up with MTAA Super and Equip Super and Catholic Super’s landmark $26 billion deal.
“The rate that consolidation is happening is much quicker than we had anticipated,” said Bardsley, who is based in Melbourne. “Most funds two or three years ago would have considered an inorganic strategy, but it’s now a key part of the conversation about what their future growth strategy looks like.”
Last year’s raft of legislative changes and regulatory reviews are said to have accelerated the discussions. So much so that KPMG now expect the superannuation industry to halve through consolidation much sooner than the 10 year-period they forecast in 2018. They cited a number of tailwinds including increased regulatory scrutiny of member’s outcomes and the pressure on funds to reduce fees and costs.
As of June 2018, there were 24 corporate funds, 18 public sector funds, 38 industry funds and 118 retail funds that are overseen by the prudential regulator. Corporate funds have seen the biggest reduction since 2008 dropping to 24 from 143, according to their most recent available data.
David Coogan, the national leader for PwC’s superannuation practice, said there will be a “50 percent consolidation” among industry funds alone and a flurry of activity among retail funds, particularly after the Royal Commission into misconduct saw billions of dollars of retirement savings being pulled from the likes of AMP and others.
Coogan said that with so many super funds in varying stages of merger discussions, more deals will be announced in 2020 including among the bigger players. His team alone are currently working on three, including the First State and VicSuper deal, which is expected to be completed early next year.
“We will eventually have five to 10 funds and maybe a few really big ones,” said Coogan in an interview. “In five years’ time, AustralianSuper will have $300 to 400 billion in assets, and a lot of the others will not be too far behind.”
KPMG’s Bardsley said he expected to see a “break away” of nine to 12 funds where there would be a “substantive difference” in size between the so-called mega funds and everyone else. He added that with assets set to double every four to six year, thanks to Australia still being in its accumulation phase until at least 2030, the country could have funds that are comparative in size to those in North America, Canada and continental Europe.
For now the country’s biggest fund remains AustralianSuper with $170 billion in assets. Chief Executive Officer Ian Silk said earlier this year that underperforming funds should either merge with a competitor or be wound up.
“There is a bit of musical chairs going on at the moment in the industry,” said Michael Vrisakis, a partner at Herbert Smith Freehills in Sydney. “There may be an element of people feeling that if they don’t move now, they might jeopardise finding the right partner.”
He said there was a lot more for trustees to think about beyond fees and the cost of insurance, adding that extensive due diligence needed to be done around director liabilities and duties as well as the investment profile of the funds. He said that $40 billion in assets would probably be the benchmark from which funds will be able to survive in the future.
As a result, much of the deal making is expected to be at the smaller end of the market as funds grapple with rising costs, regulatory pressure and an increasingly competitive investment landscape. Mark Bland, a financial services partner at Mills Oakley, said that some of the larger funds were likely waiting for the smaller funds to consolidate before they started to engage.
“The pressure is much greater on the smaller funds to try and justify that they are better off as a standalone fund,” said Bland, who is working on three potential mergers. “There are a lot of discussions going on and you can expect to see a dramatic increase in announcements over the next 12 months.”
While the pace of consolidation will accelerate next year, Bland said that it would still not be fast enough for the regulator. He said law reform may be necessary to incentivise the bigger players to mop up the smaller funds. He also said that many merger discussions will not see the light of the day as trustees decide on what is in the best interest of their members.
“These deals take around six months or more to complete,” said Bland. “So it could still be a another three to five years before we see significant (structural) change, particularly if they don’t make changes to the law to help smooth the path.”