Innovation in deal making is an essential and perhaps underrated component of a superannuation fund executive’s skillset, says Andrew Fairley, a deal expert and the founding chair of Togethr, the shared trustee of Equipsuper and Catholic Super.
Refusing to innovate or not thinking laterally about tie-ups could leave many modest-sized funds on the shelf as the next leg of voluntary consolidations play out, Fairley says. He adds that these funds could get caught up in future involuntary fund mergers forced by the hand of APRA should the flow of consolidation dry up.
Fairley categorises funds under $15 billion as modest in size, many of which he says now have a “scale problem” because they’re not able to compete with the larger funds on any level, either in terms of investment outcomes, administration or investment cost ratios.
“What some of these funds don’t realise is if they don’t do something now they might be left on the park bench… Large funds are already becoming increasingly selective about justifying mergers with smaller funds because they might find it hard to justify being in the member best interests,” he says.
It’s in this kind of environment Fairley says chairs and executives can look for ways to forge deals by thinking outside the box.
The extended public offer licence that allows Equip and Catholic Super to maintain their respective fund arrangements via a joint venture partnership while rationalising administration and investment management operations is example of this kind of innovation, Fairly points out. He also points to Togethr’s recent rollups of Rio Tinto and Toyota corporate super plans as examples of how schemes can forge ahead with consolidation despite the hurdles associated with doing so.
Demise is nigh
“Self interest is still alive and well in the sector,” Fairley notes in conversation with Investment Magazine, highlighting that some fund trustees and executives might be missing merger opportunities through inaction or an unwillingness to push the envelope within the bounds of what’s acceptable.
“There are less and less easy targets and there aren’t very many at the moment who realise their demise in nigh. I think as more of these regulatory requirements are embraced, more and more of those funds will actually realise the writing is on the wall and they have to do something,” he says.
Member outcomes tests including APRA’s heatmap and the government’s proposed Your Future, Your Super performance test is bringing more transparency to fund quality and performance, says Fairley, who started out as a superannuation lawyer in the 1980s and founded the industry’s specialist superannuation law firm in early 1990s.
At the end of June this year Fairley will retire from his position as chair of Togthr after more than a decade as chair of Equip Super; he continues on as a consultant with law firm Hall & Wilcox.
Fairley can draw on failed merger attempts of years gone by, including well documented proposed deals with Vision Super and Energy Super as reminders to the impediments of tie-ups in an industry that’s simultaneously compelled by government and regulators to shrink further.
In addition to the scourge of self interest Fairley points to the obligation of funds to prove equivalency with potential merger partners as an over arching and ever present deal impediment.
For funds holding out on entering discussions Fairley predicts there could be a wave of involuntary mergers forced by the hand of the regulator coming towards them.
“In the event the funds can’t find a home, APRA has the right to give the direction and order the merger,” Fairley notes, referencing 131E of the Superannuation Industry (Supervision) Act in which APRA can direct trustees to relinquish control over a license.
“They have these powers, they just haven’t exercised them yet and I’m sure it’s only a matter of time before they do,” he says.