Key industry figures said there should be a place in the future superannuation landscape for smaller, more nimble funds, speaking at an event held at the University of Technology, Sydney, where academics and fund leaders exchanged notes on the benefits of scale.
Mark Burgess, chairman at HESTA, praised the industry and regulators as doing “a very good job” and being thoughtful in how they were considering the issues, but said doubling and tripling the size of funds can create tipping points which can have long-term cultural impacts if done badly.
There are difficulties inherent in blending cultures, Burgess said, speaking at an event titled Australian Super Funds at a Crossroads: Consolidation, Performance and Regulation, held by the Finance Department of the UTS Business School – and this could result in poor performance if not managed well.
Reaching 150 staff is an approximate tipping point where culture needs to be re-thought, Burgess said. Another point comes when an organisation is large enough to have teams working offshore in different regions.
Building and retaining the teams required will itself require new skillsets, as “complexity can build…like barnacles on a boat [and] it starts to slow the speed of the operation,” Burgess said.
“If you double or triple the size of the business, it may well be you need to change the management of your fund to bring in people with expertise…running a larger sized pool of assets,” he said.
Funds need to be realistic and critical about the advantages they are hoping to achieve with added size, Burgess said, noting the largest Australian funds are still small compared to others overseas and will find a “hot environment out there” when competing for the best private equity or unlisted deals. Their investment committee will need to have the skillsets required.
He also noted the concentration of a small number of large funds potentially creates a systemic risk that a small number of peers controlling most of the money will behave in a unified way, and this strategy could come undone during moments of crisis.
The current pace of merger activity is unprecedented, said David Bardsley, partner, operations advisory at KPMG. There were 13 large mergers between 2011 and 2016, 17 large mergers between 2017 and 2019, and 16 in just the last 18 months with several more close to being announced.
In the next three or four years we are likely to see a concentration of 13 or 14 large funds with more than A$70 billion in assets under management, he said, and by 2040 there will likely be three megafunds with assets under management greater than A$500 billion, and another 10 or so with over A$250 billion.
The arguments for consolidation are well known in the industry, but there are also arguments against consolidation, said panel moderator Lorenzo Casavecchia, the associate head of external engagement at the UTS Finance Department, who cited findings that very large funds may find it difficult to deploy their huge amount of capital in an active way.
Casavecchia said UTS analysis of fund mergers had failed to find any statistically significant reduction in member fees, or any improvement in performance–in stark contrast to the widely held assumption that larger funds are in a stronger position to provide better member outcomes. He asked, could it be that funds just require more time to mature post-merger?
David Carruthers, head of member solutions at Frontier Advisors, said while being bigger had benefits, there were also disadvantages and “diseconomies of scale” such as the inability to invest in small-cap Australian shares because the fund is too big to take meaningful positions in these assets.
While merging does reduce costs such as administration fees – and this is easy to measure – it is harder to measure the ultimate outcomes for members, Carruthers said, making the case for the ongoing existence of some smaller funds.
“Bigger is not necessarily better in all circumstances,” Carruthers said. “We think there’s a place for small funds that can be nimble, can do things – implement things – quicker and in meaningful positions.”
Casavecchia noted the conventional wisdom driving consolidation relied on the assumption that competitive industry forces will translate lower per-member costs into lower fees. But this assumption was problematic when applied to the superannuation industry, with high barriers to entry from restrictive regulatory policy, a complex and diverse array of products and member services, and a low fee sensitivity from members despite greater transparency.
He asked if industry concentration could, in contrast to the regulator’s expectations, “become a hindrance to competition and the sector’s long tradition of both innovation and quality service to members.”
Jack Gray, former CIO at SunSuper, said he had “never agreed with anything [former Treasurer] Peter Costello has said with one exception, when he said there should be [only] one super fund.”
Assuming this isn’t going to happen, the connection between scale and performance in studies becomes a lot more complicated when it is applied to super funds, Gray said.
Evidence on corporate mergers and acquisitions showed “the large bulk fail to meet their objectives on costs and on everything else,” Gray said, with obvious reasons and also subtle ones like legacy systems not talking to each other.
Having said this, there are plenty of examples of enormous global organisations that are innovative and efficient, Gray said.