The pace of deal discussions and merger announcements won’t let up while superannuation executives and trustee boards continue to feel their way through a new era of best financial interest duty, as-yet unknown ramifications of stapling and untested deal structures, a group of those involved in this new era of dealmaking have discussed.

Differing views on how funds quantify best financial interest duty under the new assessment requirements introduced as part of the Your Future, Your Super legislation was a major feature of the moderated conversation involving a dozen senior executives – all in some way involved in or have recently completed major deal discussions – as part of Investment Magazine’s ‘The Great Consolidation Trend’ roundtable held in late August in partnership with MetLife.

For its part, the insurer wants to ensure it’s not a reason for funds not to come together if they want to merge, Chesne Stafford, chief customer and marketing officer with MetLife, said.

“We’ve probably done about six of these are in the process of six different transactions over the last 18 months or so, in a short period of time, I think we’ve been exposed to quite a bit of activity,” Stafford said.


The insurer will have a very early and deep look at different component parts of a potential deal to make recommendations relating to strategy around whether to consolidate or harmonise product design, Stafford highlighted.

Shifting drivers of future value and longevity resulting from regulatory changes not yet implemented long enough to be measured and quantified is another facet occupying the minds of CEOs and group heads representatives from AustralianSuper, ClubPlus, HostPlus, LGIA, Rest and QSuper among others shared.

Time is money

“We do a very detailed business case to consider all of the elements of members best financial interests and we really need to cost that out because when you’re talking about a potential merger it costs money… the minute that you engage the lawyers the time starts ticking on to the business case,” Rose Kerlin, AustralianSuper’s group executive membership and brand said.

AustralianSuper this year has announced two deals with the $3 billion hospitality and community clubs super fund Club Plus and the $7.4 billion warehousing, logistics, pharmaceutical, manufacturing and food production industries super fund, LUCRF Super.

“It’s all well and good when we see various mergers going on potentially between smaller partners, but really what [these funds] have got to think about is also what’s their organic game going to be, particularly with stapling coming in,” Kerlin continued.


The challenges of predicting member behaviours and movements in light of regulatory reforms designed to address multiple account balances through stapling first funds to members was discussed in light of new requirements to measure and justify best financial interest duty.

The discussion was had on the eve on the news that NGS Super and Australian Catholic Super would abandon plans to merge after 12 months of formal discussions citing challenges relating to best financial interest assessment.

“In the work that we’ve done we see stapling as a game changer because you’ve got the top four funds with 48 per cent of the market share of under 25s, so everyone’s got to put that new overlay on because it’s not just going to be funds consolidating but it’s accounts consolidating too,” Kerlin said. Both the Club Plus and LUCRF deals bring a first fund profile to AustralianSuper, a top three fund by assets which measures 48 per cent of members joining via a choice arrangement.

Cost of acquisition

Indeed it’s the trade-off between organic acquisition of members and the costs associated with mergers fund executives and trustee boards are spending a lot of time focusing on to crack the formula for best financial interest duty assessment, a number of those who have worked directly on these deals shared during the conversation.

“Increasingly, management teams will start thinking about cost of acquisition, and the opportunity cost of not acquiring inorganically versus organically to know exactly what their cost of acquisition is,” Michal Pennisi, the incumbent CEO at QSuper who will make way for Bernard Riely to helm the merged QSuper/Sun Super Queensland-based behemoth when the ink dries on the deal later this year.

Benchmarking against all the other options and getting precise about the measurement of attracting new members was part of the process for assessing the deal with SunSuper, Pennisi highlighted.

Pennisi echoed Kerlin’s remarks that stapling is a gamechanger for funds considering mergers when it comes to assessing member best financial interest.

“[Stapling] is going to make the acquisition of members much, much harder… it will really I believe lead to the big retailisation of super meaning its will be a brand game – what you stand for, how you communicate that etcetera – because having a member choose to stay with you is going to be really, really valuable,” Pennisi said.

He added that despite the high costs of acquisitions larger funds could still justify deals with smaller funds that have the right membership profiles and positioning under recent regulation changes.

“I think you’re going to see many more large funds taking a much harder look at smaller funds. I think [stapling] is a very clever piece of legislation that’s not only going to reduce the number of duplicate accounts, but it’s also going to be a big driver of mergers as well,” he said.


Whether funds can arrive at a clear rational for deals at this moment in time is not altogether certain, as member movements following the first round of performance test outcomes and other knock on impacts from regulatory and legislative changes is still yet to flow through to the data, David Bell, executive director with the Conexus Institute noted.

“I’m still not convinced myself about how funds are consistently defining what best financial interest is, is it just purely member outcomes measured in what how the retirement income review is telling you to measure it which is a stream of cashflow? Or is it what accumulation is basically telling you which is returns… I’m not seeing funds being able to tie together that whole of like outcome that does account for risk and everything,” Bell said.

“Take that [best financial interest] framing and apply it to a fund acquisition or a fund merger and its very hard to see any consistent manner to see how [deals] fit into best financial interest duty,” he said.

Broadening best financial interests

Many of the participants in the discussion chose to take a broader view of best financial interests as it was applied to deal evaluation and consummation.

“The benefits of scale is a key element of members best financial interest duty, that can ultimately and should ultimately be passed on through fee reductions. But that’s not necessarily a direct linear correlation with outcomes for individual members,” Kate Farrar, CEO of LGIA Super noted. This year LGIA has formalised the acquisition of the $8 billion Energy Super as well as the acquisition of Suncorp’s local wealth business Suncorp Portfolio Services.

Farrar described in some detail the formulation and execution of the deals which she said were worked on simultaneously, adding complexity to the assessment from a member interest perspective.

“The real head bender for me was trying to do the members best interest test between LGIA Super and Energy Super pre our own merger and then… their merger. And then we had to do the members best financial interest and other interests test against Suncorp Super for their members as well.

“And that was all sort of pre-conceived that had to be done before either of the mergers were done. We had this five way benefits matrix across about 15 different dimensions, including a lot of financial dimension looking at fees, admin fees, admin costs per member, scale, we looked at the ability to invest for different cohorts. Given the nuances of member outcomes there was a whole range of elements that we used to determine where members would be getting benefit from the process,” Farrar explained, noting the Suncorp acquisition was funded with accumulated LGIA member reserves.


Interpretations from the group varied on the assessment and measurement of deal related best financial interest duty.

“I think the scales are tipping too far towards the obvious and narrow definition of best financial interests and that’s even been manifested in the ATO fund selection website where the two levers are obvious when you jump on that page – its admin fee paid and net performance return,” Paul Watson, group executive member performance at HostPlus noted.

Watson talked through the rational for Hostplus’s joint venture arrangement with Maritime Super bringing scale the Maratime’s investment strategy as well as touched on the fund’s deal with Statewide Super.

“The more holistic elements of members best financial interests – how they get appropriately picked up and measured and valued in the equation is the harder thing to do. But it’s probably the more important thing people in our industry know that one thing a person does that can make the biggest difference to their pot at the end of the day is probably asset allocation. I’m not talking about necessarily investment teams picking the right mix, but I’m talking about people being in the right option to maximise that with time in the market,” Watson said.

Stefan Strano, the CEO of the recently acquired Club Plus agreed that the narrow definition of best financial interest duty in the deal context ignores the contribution funds can make setting people on the right path and instilling the right education from the beginning when members will have lower balances and minimal engagement.


“Ultimately the intent of this test… is that we’re spending money members money wisely to get their best outcome, so I think the time horizon is a really interesting one, particularly when you’re looking at our job to entrust them from the beginning of their working life right through all the way past their working life is an interesting challenge when looking at some of these tests at a point in time at a particular instance and measuring it in too short a term can be really counter productive,” Strano said.

Constant fiduciary standard

Andrew Fairley, the former chair of Equip and Catholic Super and a consultant with law firm Hall & Wilcox, highlighted to the group that dealmaking continued to be judged by the same high standards it has always been before and in light of the latest government reforms.

“We’ve simply seen government put in place in the statute, something which certainly most of us always thought existed… go back to the principles of our fiduciary duty and particularly Cowan v. Scargill where this concept really has its roots.

“All [the new regulation] does is requires you to have a correlation between the expenditures that you undertake on behalf of members.. there has to be a correlation or a direct link between the benefit of that expenditure and the member financial outcomes. And I think as a responsible trustee, you pretty much did that anyway so I don’t think that we’re talking about a dramatic change here,” Fairley said.

The big difference between dealmaking before and after the recent reforms is the penalty consequences and the reverse onus on trustees to prove all duties and powers have been exercised, Kulwant Singh-Pangly highlighted, the recently appointed as Rest’s chief financial officer, formerly CFO at QSuper.

Singh-Pangly also noted that Rest, a beneficiary of stapling reforms and a large fund in its own right ranked in the top 10 by size, was not currently devoting resources internally to merger and deal activity.

“In the context of merger activity where there is significant, significant outlays of dollars involved, what is all the infrastructure that you need to articulate the benefits, to monitor the benefits, to report on the benefits and to adjust the strategies along the way to make sure the benefits are realised,” Singh-Pangly said.

“That whole monitoring framework, the reporting of that, it just brings a much higher level of scrutiny over expenditure than I’ve ever seen in the 20 odd years that I’ve been in the industry,” he said.

“APRA hasn’t really hasn’t opined at the level that we need them to at this point in time. And because of these complexities, I guess, you know, people are just making their own judgments.

“Everyone I think is guided in the right way that they are able to justify these expenditures in member’s  financial interest, it’s just that the law probably is a bit vague. And the prudential guidance at the level it’s needed I would say is probably subject to interpretation,” Singh-Pangly commented.

‘Darwinian times’

“It think it’s going to be interesting how future mergers are put together,” David Coogan, an experienced dealmaker in the superannuation industry previously with PwC, commented.

“It the past with mergers funds have more or less shared the cost 50/50 but whether that changes now and whether some opportunities come up in the retail [for-profit] sector where the size of the check is a bit bigger and funds will be able to use cash reserves and how they justify that,” he said.


“I think there is a business case for [larger acquisition by industry funds] but how these funds are able to put an asset on a balance sheet and amortise it over a period of time. It does seem that there is a blurring between [profit-for-member] with all funds becoming retail in a sense,” Coogan highlighted.

“Some might say these might be interesting times, I think they’re Darwinian times,” Host Plus’s Watson commented.

“But not necessarily in the sense that the biggest will necessarily need to be the biggest and the strongest to survive,” Watson added.

While a conversation about mergers and consolidation will often leads into a stargazing exercise about mega-funds, many of the fund executives raised the potential for more boutique funds to exist and to explore their a point of differentiation, perhaps enabled by agreements to bring scale to investment outcomes a-la the Maritime/Host Plus joint venture.

Along the way the regulator is getting involved in understanding the rational for deals as well as motivations and appropriateness of arrangements; though there remains some scepticism among fund executives about the science behind some of APRA’s baseline beliefs, including Helen Rowell’s stated $30 billion ‘line in the sand’ minimum size.

Meanwhile, its not clear whether the APRA performance test letters about to hit the post will accelerate or otherwise mergers and deal negotiations.

“We are not just on the eve but we are batting though a very exciting and very interesting experiment in our superannuation existence,” Watson summarised.

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