The big wave of superannuation mergers is slowing down, as funds are better able to navigate the Your Future Your Super (YFYS) performance tests, but the pressure for more consolidation in the sector is continuing, say industry experts.
At the moment, there are only five super fund mergers in train for 2024.
Two of them involve smaller corporate funds coming in under the umbrella of the country’s second-largest super fund – the $260 billion Australian Retirement Trust, which is acquiring the $2.3 billion AvSuper fund and the $2 billion Alcoa fund this year.
This follows ART’s takeover of the $4.3 billion Woolworths and Endeavour Group fund in August, and the $12.9 billion Commonwealth Bank group super fund in November 2023.
Three others are between mid-sized funds, the largest being the merger between the $28.5 billion Spirit Super and the $22 billion CareSuper, which is expected to be completed by the end of the year, producing a fund with more than $50 billion of assets.
The mergers between Vision Super and Active Super (formerly Local Government Super) — which will combine to make a $32 billion fund — and the merger between Mine Super and TWUSuper, which will have combined assets of over $20 billion, are expected to be completed by the middle of the year.
Key merger drivers
The mergers follow continued pressure from prudential regulator APRA for smaller funds to consolidate, with hints to the market that $30 billion is a good minimum base for funds to provide good service for members and cope with the growing range of regulatory requirements.
Industry observers say that the big pressure for mergers which accompanied the introduction of APRA’s Your Future, Your Super performance test – which applied to MySuper products from July 2021 and which several smaller funds failed, forcing them to seek merger partners – has eased.
They say many of the easier or more obvious mergers, including mega-mergers such as the one in March 2022 between QSuper and Sunsuper which created ART, have now been done.
But they say increasing regulatory costs, the need for more economies of scale to reduce costs and the potential to become bigger players in investment markets will continue to drive more mergers.
Other factors at play include the move by corporations to get out of the business of running their own funds, handing the keys over to bigger players like ART to manage.
The total number of corporate funds in Australia has come down from around 50 in June 2013 to only nine as of September 2023.
The total number of APRA-regulated super funds in the private sector has more than halved over the past decade, from 259 in June 2013 to the latest figures of 103 in September 2023.
The number of industry funds has shrunk from 46 in June 2013 to 22 in September last year while the number of retail funds has more than halved from 163 to 72.
“Mergers have slowed down, especially over the last 12 months,” KPMG’s partner in charge of super fund mergers, Platon Chris, tells Investment Magazine.
He says the introduction of APRA’s YFYS performance test, which saw 13 funds fail the first round, was a big driver of mergers in the past.
“The majority of the funds which failed went through a merger process,” he says.
“But the performance benchmark test as the driver for mergers has started to slow down because superannuation funds have had time to understand the performance test and ensure that they are able to manage the benchmark if they’re close to passing or are thereabouts,” he says.
“That has pretty much played out right, but what we’re seeing in the market is that funds are now challenged with sustainability, particularly around financial sustainability.”
“So how competitive are they? Are they able to act in members’ best financial interest? Do they have enough in reserves or in capital to enable them to meet the ever-increasing regulatory, compliance and governance requirements?”
He says larger funds are better placed to meet the cost of regulation compared to smaller and mid-sized funds.
“Financial sustainability is going to be the real driver of the next wave of mergers.”
He says the growth of the superannuation sector and the emergence of several very large funds had seen an increase in expectations by regulators and members.
“The benchmark is being lifted by governments, regulators and the community in relation to what they expect from their super fund.”
Thinking ahead
Chant West’s senior investment research manager, Mano Mohankumar, says he is expecting more mergers in the super fund sector but not at the same pace as in recent years.
“There was a steady stream of mergers before 2021, and the introduction of the Your Future Your Super performance test fast-tracked that merger activity, with a number of funds forced to merge after they failed the test,” he says.
“Now that performance test in its current form has been in place for three years, we expect very few other funds will fail the test as those that are close to failing are managing their investments to ensure they don’t fail the test.”
While some funds have sought merger partners because they are under pressure, he says others, such as the recent mergers between Sunsuper and QSuper and First State Super and VicSuper, were mergers done because both funds believed it would be better for their members.
He says the mergers between Active Super and Vision Super, and CareSuper and Spirit Super are two current examples of this.
“Super funds are thinking about where they need to be in a few years’ time,” he says.
“They recognise that increased scale is an important enabler for many of their objectives – it broadens the investment opportunity set in private markets and provides more efficient access to these assets, it provides better access to high quality staff, it means they can invest more in responsible investment initiatives, it can facilitate greater investment in systems to manage investments and better engage with members to help them grow their super, and it can bring costs down for members.”
“While funds can grow organically to get scale, this is generally quite slow – a merger can fast-track a fund to the multiple benefits of scale.”
But he says despite the benefits it still can still take time for them to be fully realised.
The interim chief executive of the Association of Superannuation Funds of Australia (ASFA), Leeanne Turner, says consolidation had been a long-running feature of the superannuation industry.
But she says the pace of merger activity has picked up significantly over the last three years “as funds have sought to enhance economies of scale and improve member outcomes.”
She points out that the number of APRA-regulated funds stood at around 1,500 two decades ago.
Over recent years, there has been only a small number of new super fund entrants to the market.
Turner argues that there are only around 70 effective super funds in the market today, taking into account the number of funds operating under the one corporate trustee umbrella.
“The scope for ongoing merger activity between APRA-regulated super funds – and any associated efficiency gains – would be expected to diminish as the market becomes more concentrated,” she says.
‘Not scale for scale’s sake’
The chair of TWUSuper, former federal government minister Nick Sherry, says his fund’s proposed merger with Mine Super has been driven by the need to look to the future of the fund including upgrading its digital capability.
He says the merger was “a good opportunity to reassess our service offering and have a good look at what we have been doing in the past and how we can improve it going forward.”
“Today’s world is a fundamentally different world to the world of the 1980s and 1990s (when industry super developed),” he says.
“There is a lot more focus on how you service your members with products, communication and the digital (capacity).”
“That has been one of the factors driving a lot of the mergers.
“It’s not just scale for scale’s sake, but the need to adapt to new technology and service provision which a fund needs to be offering in today’s world.”
The combined fund will be renamed Team Super to reflect its representation in the mining, energy, and transport sector.
Sherry says the new fund could look at more mergers but it wants to make sure that any deals would still reflect its industry base.
“We remain focussed and committed on our two industry sectors because they have similar workforce characteristics.”
“We are not aiming to be a mega fund.”
The executive director of The Conexus Institute*, David Bell, says there is still “ongoing pressure” for small and mid-sized super funds to reach the $30 to $50 billion scale which APRA officials have mentioned.
He says liquidity is one factor encouraging more mergers.
“Many of these smaller funds are experiencing negative flows and need to merge to give them the scale to establish a brand and marketing presence and get some more sustainability,” he says.
“It’s not just about present size, which is important, but also the inflow position of funds. There are many funds struggling from an inflow perspective.”
He says liquidity pressures are coming about as a result of stapling, which ties members to existing funds even when they move employers, demographic factors with more members moving into retirement and the cost of advertising and brand promotion which is needed to compete for new members against industry giants such as AustralianSuper.
He says ongoing policy and regulatory pressures on funds are also adding to merger pressures.
These include the increasing demands around the retirement income covenant and the pressure for funds to do more to help members as they move into their retirement phase, data requirements from APRA and other regulatory changes.
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
