Several new potential mergers have emerged since the outbreak of the coronavirus after billions of dollars were erased from financial markets, placing further pressure on superannuation funds who were already struggling to boost performance and reduce costs.
David Coogan, the national leader for PwC’s superannuation practice, said the government’s early release provision which has seen the industry payout more than $7 billion so far, had accelerated informal merger discussions into more serious negotiations among some funds. He added that those involved had assets around the $20 billion range.
“A couple of (mergers) have come up since the crisis began,” said Coogan in an interview with Investment Magazine. “We’ve been appointed on a lot of jobs in the last month. We will see more deals. The big question is will we see more as a result of COVID-19? I think the answer is yes.”
First State Super and WA Super were the last funds to reveal potential merger plans just before the market turmoil triggered a wave of members switching their assets into cash across the $3 trillion industry. Other deals yet to be completed include First State’s merger with VicSuper, QSuper’s tie-up with Sunsuper and Tasplan’s combination with MTAA Super.
All transactions are still said to be progressing, though Tasplan and MTAA have pushed out their completion date by six months into 2021 because of the virus. Equip and Catholic Super, which announced a joint venture in October, are conducting due diligence on other potential candidates, a person familiar with the talks said. Chief executive Scott Cameron of the combined $26 billion entity said discussions were are at various stages with some more advanced than others.
“We have no firm commitments or announcements to make at this stage,” he said, adding that they were open to successor fund transfers or other types of joint ventures. “We need to be bigger than we are today, but want to ensure that we are doing so with care to our membership base. If you get too big you start to lose that ability. We want to be in that sweet spot, a niche player where we can have scale but still deliver experiences and services.”
The last straw
Willis Towers Watson’s head of retirement Nick Callil said at an Investment Magazine conference last month that the liquidity crisis triggered by the pandemic would be the “last straw” for many funds who were already looking to diversify their membership base. Member cohorts have also been flagged by the government as a systemic risk that they would look to address in the future.
The Australian Prudential Regulatory Authority, which has publicly pushed for more consolidation prior to the outbreak, is also said to have stepped up its consultation with the industry to look at what can be done to remove any barriers that may be delaying or preventing mergers between funds from taking place. A spokesperson for the regulator declined to provide comment.
Despite the flurry of deals that have already been announced in the last 12 months, the latest numbers provided by APRA show there are still 18 corporate super funds, 37 industry funds, 37 public sector funds, 112 retail funds and more than 500,000 funds with less than five members.
PwC’s Coogan said increased regulation had made it even harder for boards to manage the fixed costs of running a fund. He added that if a fund were to lose 20 per cent of their membership base, from unemployment or early withdrawals, the average cost per member goes up. He added that it was also getting harder for funds to differentiate on service.
“Trustees will focus more on (costs) over the next six to 12 months as they try to bring about more efficiencies,” he said, before adding that boards would also be questioning whether there were better ways of doing things from a service and operating model point of view.
David Bardsley, a partner at KPMG Wealth Advisory, said his team were working on several merger opportunities, including one transaction which had been accelerated since the crisis with due diligence now scheduled to be completed next month. He cited another deal that had been pushed out into 2021 as the boards manage more pressing issues such as liquidity management.
“The environment in the last three months has become more complex for funds and is likely to see trustees more open to mergers and or consolidation discussions in the near term,” Bardsley said. “Most transactions we are seeing involve medium-sized funds.”
The KPMG executive added that the early release provision that allows financially-strapped Australians to tap up to $20,000 of their super could result in account closures for those funds whose members have saved more than $6,000 but less than $20,000. That, he said, would “potentially impact the sustainability of current business models as the number of members paying administration and insurance premiums is expected to fall.”
The Association of Superannuation Funds of Australia said Friday that the industry had so far paid out an estimated $7.1 billion to members and made 855,000 individual payments. It said the average withdrawal was around $8,200, less than the maximum amount of $10,000 that is allowed to be withdrawn in the first year because a substantial number of applicants have lower account balances.
Rice Warner’s executive director Michael Rice said he expects the pandemic to serve as a catalyst for positive change in the industry.
“People will come out of this crisis realising that liquidity is important,” he said. “Funds that have prepared for a black swan event will sail through this. For some smaller funds, it will be a catalyst for them to finally give up, which they should have done 10 years ago.”