Successful superannuation mergers of the future will depend on the ability of funds to be able to get their target operating models right, the chief executive of the Association of Superannuation Funds of Australia (ASFA), Martin Fahy warns.
In an interview with Investment Magazine, he says there would continue to be more super fund mergers which could lead to more economies of scale, but their success would depend on how well funds were able to bring their operating systems together.
He says funds which struggled to do so could have difficulty digesting more mergers.
“From an investments point of view, two funds together could be better at investing than they are separately,” he said.
“But a big part of making a merger work is getting the target operating model working.
“When you put the two funds together, how can you make sure that they are cohesive, and all of the activities from member engagement, right through to Insurance, investing retirement offerings work?”
“That’s going to be the main challenge to mergers going forward − do funds have a target operating model that will allow them to on board more small and a medium-sized funds as they search for scale?”
“We don’t want is a situation where funds essentially become multi-tenants operating under the one roof.”
Industry analysts are all expecting superannuation mergers to continue over the next few years, with a survey by JP Morgan last year predicting that the current number of around 150 funds could be down to less than 75 by 2025 with 20 or more mergers a year over the next few years.
A quarter of the super fund executives surveyed by JP Morgan believed that the total number could be down to less than 50 by 2025, which would mean the disappearance of two thirds of super funds.
But as mergers continue, with regulator APRA continuing to push smaller funds to seek larger partners, there is also concern that mergers can create operational challenges for funds as they put together two different systems from IT to member administration and other back office operations.
Fahy says the success in integrating super funds after mergers and the capacity of funds to handle more mergers would be one of the challenges for the sector over the next 18 months.
“It’s more complicated than just moving from two custodians to one custodian, two insurers to one, moving from two-member administration systems to one.”
“That’s where a lot of the hard work and the heavy lifting is going to be in the next year to 18 months.
“Those funds which can deploy really good target operating models, will be able to do more mergers, while those that struggle will be carrying the baggage of their earlier activity.”
“Crystallising the economies of scale in the back office is challenging because there can be different ways of working with different systems and processes.
“It’s hard work driving that transformation for any organization which is where the good funds will excel.”
Fahy expects more mergers between small retail super funds while more corporate super funds would seek to be managed by larger funds, such as last year’s move by the Australia Post super fund to come under the umbrella of the $230 billion Australian Retirement Trust.
But he says there already has been significant consolidation in the superannuation sector with the top 20 super funds now representing 90 per cent of the total funds under management in the system.
“We already have significant scale in some of those mega funds,” he said.
He expects the next few years would see mergers which would see those funds ranked below 120 in size disappear and become part of larger funds.
“That bottom tier is starting to disappear,” he said.
JP Morgan Australia’s head of platform sales, securities services Nick Paparo, says the total number of super funds had come down from 174 when the report was released early last year, to around 140 today.
He said the exact number of superfund mergers which would take place was “anyone’s guess but the directional view is that mergers will continue and at a rapid pace.”
“Mergers are being driven in the pursuit of scale to minimise the impact to members in relation to administration and investment-related costs as well as providing funds with additional investment opportunities including capabilities in areas such as data and digital,” he says.
“External pressures including new regulations such as Your Future, Your Super legislation have also undoubtedly added impetus to the merger trend, as well as the scale guide referenced by APRA as $30 billion.”
Rising costs pressures
KPMG’s superannuation partner Platon Chris says rising operation costs would continue to put pressure on more funds to consider merging over the next five years at least.
He is aware of a lot more merger discussions taking place between super funds which were in the process of being worked through and agreed.
“We are hearing about a lot of mid-sized funds in the $15 billion to $30 billion range which are looking for potential partners,” he says.
“It’s not just the small funds that are looking for a destination home, but the mid-sized funds that are looking for merger partners to create a merger of equals and enhance operational sustainability and member outcomes.”
Craig Cummins, superannuation leader at PwC Australia says most super fund trustees were now “continually evaluating the merits of mergers and who to merge with”.
“ Some are doing this to address historical performance and sustainability questions but most are exploring mergers more strategically as a way of achieving greater economies of scale and enhancing member outcomes through better performance and member services.”
The era of mega-mergers is likely to continue as trustees recognise the benefits to members in terms of scale and fees, he says.
“The challenge is that the benefits of mergers can vary considerably due to the size of the merging funds and complexities associated with differences in investment approach, operating model, insurance arrangements and people and culture considerations etc.
He said mergers in the system meant there was likely to be 5-10 very large funds as well as a number of mid-tier and niche funds “which will all need to deliver competitive returns and provide quality services to their members.”
He says there would always be a role of well performing mid-tier and niche funds who provide quality services to their members and deliver competitive returns but the scale benefits of a merger can create the capacity to invest in important capabilities and services which benefits members.
But warns super fund mergers cost money and could add significant complexity to running a fund.
“Finding the right merger partner and approaching it the right way is important to achieving the benefits,” he said.
Super fund merger deals underway:
Care Super and Spirit Super
Signed non binding memorandum of understanding to explore merger in November 2022
Would create combined fund of $45 billion and over 500,000 in members
Active Super and Vision Super
Sign memorandum of understanding in June 2022
Would create combined fund of $26 million with around 170,000 members
Cbus and EISS
Plan for EISS Super members to be transferred to Cbus Super in May 2023.
Hostplus and Maritime Super
Announced plans for merger in February 2022
Effective September 2023
ART and AvSuper
Announced merger talks in February 2023
ART has assets of $230 billion and 2.2 million members. AvSuper has assets of $2 billion and 5,300 members.
ART and Commonwealth Bank Group Super
Announced merger talks in February 2023
ART has assets of $230 billion and 2.2 million members. Commonwealth Bank Group Super has assets of $12.3 billion and 67,000 members.
TWUSUPER and Mine Super
Reached non binding memorandum of understanding on merger talks in December 2022.
Would create a combined fund of $20 billion with over 150,000 members.