The superannuation industry is consulting with the prudential regulator to figure out ways to bring funds together where the cost of merging might otherwise be preclusive, Catherine Nance, a partner with PwC focused on superannuation fund mergers has revealed.

“A few of us are talking to APRA about finding a lower cost option, particularly for smaller funds moving into larger ones,” Nance said during a panel discussion on Thursday as part of the Australian Institute of Superannuation Trustees 2020 digital conference.

Nance joined Damian Graham, Aware Super’s chief investment officer and Justine Hickey, Togethr Tustree’s independent director for the discussion chaired by former Media Super CEO Graeme Russell on the topic of super mergers.

Costs of mergers was brought up as an important consideration by the panel, especially among smaller funds.

“I think [costs to merge] is an impediment for smaller funds because they can basically wipe out their reserves over night by doing a merger,” Nance said, noting that lower cost options for mergers need to be explored.

The cost of a merger is likely to be around 10 basis points of the size of a fund, Nance said, who noted her experience working directly on 14 mergers of superannuation funds.

“That’s actually quite a lot and that would be more for smaller funds because they have a smaller base to put a dollar cost against it,” she said.

Nance added that cost could be an impediment too for large funds looking to acquire smaller funds.

“If they are going to go through all the costs and the merger is like an elephant swallowing a pea, then it’s hard to justify because they are not going to see benefit to members,” Nance said.

At what cost?

While regulators and the government have continued to point to ongoing consolidation of super funds as an important aspect of lowering the industry’s cost base, there needs to be more focus on the wasted capital going towards these mergers.

“If you are talking about having $1.5 trillion in play [the amount of member funds expected to be consolidated in mergers during the next three to five years], then 10 basis points is an awful lot of money to wash up against the wall to get a consolidated and rationalised industry,” Nance said.

In January David Bell from the Conexus Institute similarly highlighted that if regulators and the government continue to push funds to merge then some solution needs to be created to absorb funds which are unattractive to merger partners once factors such as costs, membership profile and legacy assets are accounted for.

“The regulatory pressure is focused on cost reduction and greater scale. SPS 515 (Strategic Planning and Member Outcomes), the APRA heatmap, and additional regulatory requirements will maintain this pressure. Funds need to justify themselves and their activities like never before. At some point the focus will spread further to retirement outcomes, thereby increasing cost, complexity, and in turn, the merger squeeze perpetuates,” Bell noted.

The consolidation of the superannuation fund industry has continued at pace in recent years and the tie ups are expected to continue, the experts suggested.

Currently here are 180 funds in existence, half of which are custodians for less than $1 billion; of the remaining half, 60 funds have less than $10 billion, Nance said. In the next three to five years the super industry will comprise of fewer than 50 funds, up to 10 of which could be in the “mega fund” range with more than $100 billion in assets.

CEO of IOOF Renato Mota noted the local superannuation industry will be dominated by five or six large funds including one mega fund responsible for half a trillion dollars within the next five years during the announcement of the group’s acquisition on MLC in late August.

“We have an aspiration to be one of those large funds,” Aware Super’s Damian Graham commented during the panel discussion referring to 10 largest ‘mega funds’ prediction.  “We want to get to around $200 billion over the next two to three years,” he said.

Following the Vic Super, State Plus and soon-to-progress WA Super deals the newly rebranded Aware already manages in excess of $135 billion in member funds, Graham noted.

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