Australia’s superannuation landscape is on track to have less than 20 funds remaining within five years, according to Andrew Fairley AM, Chair of Togethr Trustees, as pressure rises on smaller and underperforming funds to exit the industry or merge.

In a conversation with Ian Fryer, general manager of super ratings agency ChantWest, Fairley topped Fryer’s prediction that there would be 40 or less funds still standing in the near future.

“I think that we will be lucky to have 20 funds within five years,” Fairley said. “I think that the rate at which there is negative cash flow in a number of these funds will mean that the trustees just simply have to take the tough decisions.”

Hosted by Matthew Smith, managing editor of Conexus Financial, the discussion looked at consolidation trends and projections, and some of the deal-making taking place under rising pressure from the Australian Prudential Regulation Authority. Investment Magazine produced the Future of Super series in partnership with AIA Australia.

With the Federal Government’s Your Future, Your Super legislation aimed at pushing the trend further, Fryer said APRA’s current approach of using heat maps and outcomes tests is already working.

“It’s already driving mergers, it’s already driving consolidation, already encouraging strongly under performing funds to do something about it and we’re seeing them leave and joining with better performing funds which is what should be happening,” Fryer said.

With the pressure rising on smaller and underperforming funds to merge or close, and inorganic growth a crucial component of quickly rising to efficient scale, a range of deal-making possibilities are being explored.

Togethr Trustees, formerly known as Equip Super Pty Ltd, is the shared trustee for Equip and Catholic Super. Its Extended Public Offer license is one of the more novel arrangements out there, allowing it to act as trustee of more than one fund. Recent mergers and successor funds transfers have brought funds under management above $30 billion–a level APRA views as a minimum efficient scale.

Togethr views $50 billion of funds under management to be the minimum level of efficient scale, said Fairley, and is keen to push FUM past this point in short order. But “risk aversion” towards new arrangements has been an obstacle, Fairley said.

“It was always frustrating to us when we would go and talk to funds that we thought were really appropriate to have a conversation about the EPO model and they would all congratulate us on our innovation but say: ‘Come and see us when you’ve done the first deal,’” said Fairley. “We’ve now done the first deal so we’re ready to talk to anybody else.”

The tinkering with new arrangements doesn’t end there. LGIA Super’s possible purchase of Suncorp’s superannuation business could see a profit-for-member fund buying a retail fund.

Fairley said while he did not know whether or not member reserves were to be used in this deal, it would not be an appropriate use of member reserves in his view.

“The prospect of using a reserve to fund an acquisition…to me would be anathema,” Fairley said.

Smith said his reporting suggested LGIA’s large accumulation of general reserves were to be used. Fryer was more equivocal than Fairley but still had concerns.

“I think what they would say is that look, by getting more members and more assets, we will be able to lower our fees over a period of time,” Fryer said. “And we believe that over five years then they should be able to make the money back through the fees that they’re charging to these new members who are coming in.”

But there was a question of inter-generational fairness, he said. “If someone leaves before that, before those five years’ time, they probably won’t get the benefit. So fascinating that we’re seeing deals like this, and I’m really interested to see how the industry progresses and I’d imagine there’ll be lots more surprises.”

Smith asked if rising pressure on funds could lead to zombie funds in the market that other funds don’t wants to touch for fear of infecting their own performance track records, and if this could lead to APRA using its powers to force mergers.

Jawboning–the selective injecting of pressure and fear by regulators–is working well for the moment, Fairley said. Funds need to carefully assess mergers to see if the culture, investment beliefs and member cohorts of both funds can be successfully melded.

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