Vast differences between the capabilities of superannuation trustee board members across the industry is creating barriers to mergers, said Australian Prudential Regulation Authority (APRA) executive board member Margaret Cole.

While many boards had high-quality members focused on the best financial interests of fund members, others were “blissfully untroubled” by their skills gaps and inaction which was likely to adversely impact on members’ retirements.

Speaking to Investment Magazine’s Chair Forum, Cole said a healthy turnover of board members was essential for the sector’s sustainability and every chair needed to question their board’s skills and capabilities for their fund’s future.

APRA would work with industry to overcome legitimate barriers for smaller funds to merge such as due diligence costs and finding suitable partners, she said.

Regrettable barriers

“Rather less legitimate are other regrettably common barriers to merging such as protecting jobs on the board, preserving payments to sponsor organisations or petty feuds and rivalries,’’ Cole said.

“Trustee boards are no-one’s personal fiefdom… serving as a trustee is a privilege, not a right conferred by extraneous circumstances.’’

After record-breaking merger activity with super funds in 2021, with 15 mergers or alliances announced in the year, Cole said APRA directed several trustees of underperforming funds to pursue mergers and this “muscular approach” would continue.

Cole is encouraging smaller, less sustainable funds to consider merging with larger, better performing funds and is aware of 10 mergers under formal discussion.

“The problem isn’t just the number of funds and products on the market, it’s the shape of the industry which is awkwardly skewed with regard to membership and funds under management,’’ Cole said.

“It is no secret that the superannuation industry has a very long and concerning tail.’’

Some funds going backward

Ms Cole said 96 of the 136 APRA-regulated funds had less than $10 billion in assets under management with two thirds of those less than $2 billion and, while AustralianSuper was growing at $20 billion in assets a year, these smaller funds which are standing were going backwards.

Members in funds above $50 billion were typically receiving benefits from lower fees but also likely to have better long-term retirement outcomes, charging administration fees 0.33 per cent of net assets compared with 0.57 per cent of net assets for sub-$10 billion funds.

APRA’s paper showed hard evidence that lack of scale was hindering performance and undermining future outcomes for members, she said.

Sustainability challenges

“More concerning, we have found that half of small funds (with assets under $10 billion) face sustainability challenges with declining net cash flows and member accounts.’’

As cash flow ratios slide for most smaller funds, they will likely underperform with higher fees and poor investment returns for members, she said.

Cole recommended smaller funds merge with well-performing larger funds rather than create “bus stop” mergers with other small funds, which was not a final destination for members.

A few small funds bucking the underperformance trend were specialised providers of Environmental, Social and Governance (ESG) products or delivering a point of difference in the market, Cole said.

APRA’s analysis of sustainability in the super sector demonstrates larger funds are better equipped to deliver higher returns and lower fees over the long term for members with the gap between small and large funds getting wider.

“Encouragingly for small funds facing sustainability challenges, our analysis also shows that a merger with a suitable partner can deliver almost instant and ongoing benefits to members and the bigger the receiving fund, the greater the benefits,’’ she said.

To read the full text of Margaret Cole’s speech click HERE

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