Standalone corporate super funds face significant challenges to remain viable, hit by dwindling in-flows due to falling membership.
Last month, Commonwealth Bank Group Super announced it would merge with the Australian Retirement Trust (ART), following Australia Post super fund.
APRA’s data shows that out of all the funds it regulates, corporate super funds shrunk the most between 2008 and 2018 – from 143 to 24 – and more consolidation is expected.
But how much further can this sector of the market shrink?
“We expect that there will only be a small handful of corporate funds remaining after the next couple of years, plus possibly a few corporate funds that are defined benefit or where the employer wants to retain control and not outsource to another fund,” says Ian Fryer, general manager at Chant West.
According to recent research from The Conexus Institute, corporate funds generally do not meet the $30 billion in assets under management (AUM) threshold APRA believes they need to compete against much larger funds. Most are also contracting because they are less active in seeking new members.
TelstraSuper, with $24 billion in AUM at the end of the 2022 financial year, is the closest to APRA’s $30 billion floor. The fund experienced -1.4 per cent growth rate of net-inflow. While the $12.4 billion Commonwealth Bank of Australia’s corporate fund experienced -8 per cent of inflow growth and the $8.5 billion Qantas Super suffered -5.7 per cent according to APRA data.
A question of scale
The size of CBA’s fund was certainly a consideration in its decision to merge with ART, the fund’s chair Rosemary Vilgan tells Investment Magazine. “We are still a relatively small fund and we know scale is important to deliver long-term outcomes for superannuation fund members.”
Other factors affecting the CBA decision included the investment needed to remain competitive and the impact of the required investment on members’ fees.
Tim Barber, CEO of the Mercer Super Trust, believes the Your Future Your Super regulatory changes add to the urge to merge because they have heightened the pressure to deliver good investment returns, charge competitive fees and remain sustainable.
“The need to keep up with the regulation and increasing pace of regulatory change can be a burden and we’ve even heard APRA making comments that in the Australian market as a standalone fund, you almost need to be the $50 billion in assets,” he says.
Mercer Super Trust, a new home for many corporate funds, is poised to merge with BT’s corporate and personal super funds next month [April], to create a fund with more than 850,000 members and AUM of around $63 billion.
Mergers are not for everyone
Anne MacNamara, a partner at lawyers Hall & Wilcox, observes that remaining corporate funds tend to be more complex in their benefit design, because they have defined benefit components or are pension funds, factors that can make the successor fund transfer onerous.
The process is also complicated because you have the employer, who may have to meet the costs of any transfer and has a relationship with employees, and the trustee which has fiduciary duties. “We are not just dealing with one party,” she says.
“For a successor fund transfer, you also have to provide equivalent rights to benefits going forward and that’s a more complex exercise. Plus, often the fees have been met (wholly or partially) by the employer and on transfer, that may not continue.”
MacNamara says there may also be risks around potentially offending section 249E of the Crimes Act 1900 (NSW) when changing trustee or giving effect to a successor fund transfer – as highlighted by some recent court judgements.
But overall, she says: “I think the transfer of corporate funds into public offer funds will continue. It will become more difficult for corporate funds to offer something demonstrably better and to rationalise to their members why a corporate fund is a better option.”
More than one way to crack an egg
Mercer Super Trust’s Barber does not believe that scale is necessarily the only measure of sustainability for corporate funds. Other important measures include making a really good value proposition focused on your particular member cohort and your ability to deliver a really good service and good retirement outcomes.
“For some funds without scale that can become hard and therefore a pressure point, potentially, for a merger. It’s really a decision by that super fund whether it’s in the members’ interests to move to a different super fund,” he says.
Given its $24 billion in AUM, TelstraSuper CEO Chris Davies believes his fund is strongly positioned financially to continue to deliver great retirement outcomes for its members.
“We’re big enough to offer great value to our membership,” he says. “This is evident in recent results from independent research agency SuperRatings that saw us again awarded the top Platinum rating, recognising us a Best Value for Money super fund for the 18th year in a row. We were also named Pension Fund of the Year for 2023 from both SuperRatings and Chant West.”
However, Davies adds: “While there are advantages in being a larger fund, there are also significant challenges, particularly when it comes to servicing members, particularly in the post-retirement space where members need dedicated and specialised advice.”
To build up scale and offer a broader range of products and services at competitive fee levels, Fryer says some corporate funds are looking to offer membership to those outside the company – for example, to ex-employees as well as members and their families.
TelstraSuper is one of these.
Davies says the fund decided last year to seek additional employer partners that were aligned with its current partners and its values and vision. TelstraSuper is also now open for anyone to join.
And, as Fryer notes, there is still a market for corporates having their own plan within a master trust or industry fund with tailored insurance, pricing and service model.
Room for everyone
Looking ahead, Davies believes that there’s still a valid place in the market for funds such as TelstraSuper that deeply understand their members and deliver tailored services in response.
“Tailoring is critical to address the challenges around engaging members and getting them involved in understanding and managing their financial futures,” he says. “Corporate funds with strong employer relationships and deep knowledge of their members are in a unique place to deliver this.”