One of the great benefits of my role at Conexus Financial is the opportunity to canvas on a daily basis views across the super fund industry. I see a focus on member outcomes, but it is hard not to see allegiances, self-interest and antiquated ideologies.
Despite the insinuated negativity about the sector’s lack of innovation, I can attest that there is an ambition to innovate to deliver better outcomes. This ‘innovation conundrum’ is fascinating – probably due to a confluence of policy tinkering, regulatory impost, governance challenges and partisan battles.
It is through this lens that I feel we need to challenge the status quo on mergers.
Thanks to Naomi Edwards, the well-respected chair of Tasplan Super, for penning what has been considered a bit of a controversial opinion piece about further consolidation in the industry. Naomi suggests that there is no such thing as a bad merger and they may be the most cost-effective way to achieve growth. No argument from the government or the prudential regulator – Jane Hume and Heatmap-wielding Helen Rowell also likely sit in the “no bad merger” camp.
Scale and cost efficiency are the historic mascots of those who advocate for mergers. You can now add diversification of cohort risk to that team’s set of palm cards: while funds like REST and Hostplus have been closer to the furnace on this issue, there are many other funds who would surely be self-reflecting. This also extends to corporate super funds, where cohort risk is perhaps even more concentrated. Imagine the pressure on Qantas Super if all 20,000 of the airline’s staff who were stood down took advantage of the government’s early release provision.
But do mergers conveniently allow the industry to “kick the can” on innovation? Ask yourself what are the three best innovative changes that the industry has made over the last decade? Internalisation of asset management (maybe)? Retirement solutions? Effective engagement? Personalised default solutions?… nope, not really, and nowhere near.
It could still take 10 years for the merger game to play out. Over that time, around five million Australians will retire and likely into suboptimal retirement products. And what is the end game? Are a small number of mega-funds the panacea? Take Australian banks as a case study: does their culture, level of innovation, products and engagement model worthy of being placed on a pedestal? Does such a concentrated structure heighten or lessen systemic risk?
Perhaps all stakeholders are in a convenient comfort zone where the focus on mergers ‘works’ for everyone? Executives and boards get to focus on a low-risk strategy and defer higher risk innovation, while government and regulators get the safe outcome of cost reduction?
If creating scale is a key virtue, should it follow that even the Tasplan-MTAA merger once complete, combine with an even larger partner? Perhaps that is a question for Naomi, who will be speaking at our Fiduciary Investors Digital Symposium this month.
Colin Tate is the chief executive of Conexus Financial and publisher of Investment Magazine.
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Enjoying Colin’s recent “Food for Thought” articles immensely. In relation to the ‘innovation conundrum’ the Super’s have been quite innovative when it comes to “member experience/effective engagement” and are prepared to spend on this (and oddly, advertising). Yet many of the small to medium organisations continue to run their multi-billion $ FUMs off spreadsheets, especially those that still have their Funds Management predominately outsourced. The super industry spends about $30bill or about 120 basis points, give or take, of the super pool each year. That number needs to come down OR be justified by excess returns. Perhaps we will see innovation in this area when regulation decrees we must … CPG235 becoming more than a guideline for example. After all, necessity (APRA?) is the mother of invention. Just look at our ability to work from home when we absolutely had to.
Having been through many mergers in my time, I do not really agree with the notion that there is ‘no bad merger’. If we follow that notion through why then not all funds roll into one fund and be done with it? In the real world each fund has a different heritage, culture, member demographic, risk profile, investment strategy, cost structure, service providers, insurance etc. Just blindly merging fund A with Fund B and Fund C, and so on, could impose further costs and liabilities on members of those funds that were not there before. Cross subsidisation could also become a huge issue. Some members may actually be worse off through a bad merger. There are many pitfalls in any merger. Merging with the wrong fund might deepen some pits or actually add new ones – not a good outcome!.