NGS Super is not going to rush into any new merger talks after it decided not to go ahead with the merger with the $11 billion Australian Catholic Super in August according to NGS chief executive Laura Wright.
But the boss of the $14 billion fund said she doesn’t rule out more deals going into the future given the potential advantages of economies of scale for super funds in reducing costs.
“Having just gone through extensive due diligence with a fund we are not rushing in (to any more mergers),” she said.
“Our directors are regrouping at the moment and looking at what we believe could be our future.”
Wright said the new formal requirement for super fund trustees to show they were acting in the best financial interests of members in their decisions was adding a new stricter lens to decision making around mergers.
After extensive due diligence, she said the NGS board had found that the potential merger with Australian Catholic Super “didn’t stack up financially.”
“In terms of members’ best financial interest, there was going to be no room to move on the administration fee and limited opportunity [to reduce costs] on investments [from the merger]. We were already doing a lot in terms of the investment fee.”
“Even though the idea of acting in the financial best interests of members has always been fundamental to the industry fund sector, now it is codified and is a new duty there is a heightened awareness of the importance of that in decision making [by boards].”
(On December 1, ACS announced plans to discuss a merger with the much larger $105 billion UniSuper.)
The Sydney-based NGS Super fund was originally the superannuation fund for workers in non-government schools.
The fund now has some 112,000 members with a staff of around 80 people.
Wright was an inaugural director of the fund when it was set up in 1988, serving as a director until 1995 including a stint as chair from 1993 to 1994.
She took over as chief executive in September 2018.
History of mergers
Wright says the fund has grown in recent years as a result of several successful mergers.
“We had two mergers about ten years ago. One with Cuesuper, which was a small credit union fund, and then UC Super which was Uniting Church super.
“Our last merger was with QIEC Super, which was our equivalent in Queensland, about three years ago.”
She said that merger with a substantial reduction in administrative fees for QIEC members coming into NGS and the combined fund had also been able to reduce its investment fees because of its larger size.
She said the members of the other two smaller funds had also got the benefit of lower administrative fees when they merged with NGS.
“I still think there is scope for that to happen [with future mergers],” she said.
“But in the case of Australian Catholic Super and ourselves, we were two very similar sized funds, so there were different dynamics at play.”
Wright said super funds looking at mergers also had to consider how they might change the nature of their fund.
“You have to run an efficient, very member-faced organisation and try and define what your point of difference might be to attract and retain members.”
Small can be beautiful
“There is still going to be a role for niche, very sector specific funds.”
“Our fund is a strong niche player, but if we believe that, at some time in the future, we could do better if we joined with another fund, we would have to think about it.”
“But we would also have to think about what it means for our close alignment with our sector and how we could continue that as part of whatever entity we might be.”
Wright says NGS Super has “never pretended to be a multi-industry fund.”
“The mergers with Cuesuper and UC Super did broaden our member base, but we still felt that we represented people in the community sector.
“There is some alignment in terms of the caring professionals. You can put teachers in that category as well.”
While she is expecting more consolidation of the industry given the pressure from the Australian Prudential Regulation Authority (APRA) and the pressures on funds to reduce fees, she believes it will still have players with a range of different sizes.
“I don’t envisage that it [the super industry sector] is going to be like the four big banks. I think there will be more than 10 big funds, but whether there will be 30 funds left, I have no idea.”
Wright said NGS was increasing its capacity to handle more investments in-house as a result of its growing size.
“We started bringing the management of cash in-house and we have been building up some internal capacity around investment, particularly around the way we have been investing in private equity.”
“We have been building up internal capacity where we think we can make a difference… where we can be more streamlined and reduce costs. But we haven’t got a plan to bring everything in-house.”
The investment returns for NGS’ My Super option were 17.34 per cent over the financial year to June 2021.
Wright said mergers could create opportunities to boost the investment options of the fund.
She said the merger with QIEC Super had given NGS members the opportunity to access an infrastructure investment option which NGS didn’t have.
Avalanche of regulations
Wright maintained the super industry was having to cope with a raft of new regulations and laws including Your Future, Your Super stapling and performance tests, the amendments to Section 56 of the Financial Sector Reform (Hayne Royal Commission) legislation, which will make super fund trustees and directors financially liable for a wider range of penalties incurred by the fund which comes into effect on January 1, 2022 and the requirement for funds to have a Retirement Income Covenant which comes into force in July next year.
She said the increased regulation of the super fund sector was needed but the problem for the industry was the amount of changes being introduced over a short time.
“Industry funds came out of the Royal Commission extremely well, but the industry is playing catch up in the overall regulation space. A lot of it is good,” she said.
“My problem is the pace of change and the amount of work involved with a number of changes. Quite often we have got very tight timeframes for implementation. Sometimes you can get quite late guidance from the regulators.”
Wright said each individual fund was being affected differently by the Section 56 changes to the Superannuation Industry (Supervision) Act depending on the nature of its trust deed and its trustee structure.
She said NGS Super already had the capacity to charge its members an additional fee which could be used to build up reserves for any new fines incurred by directors and trustees.
But she said it was still getting “judicial advice” to clarify these powers.
“In our case we have a fee charging power, but it could be ambiguous, so we are just seeking clarification that we do have the power under our trust deed to charge a fee. We just really need to get that official sign off that we are not doing anything wrong.”