Cbus chair and former Labor treasurer Wayne Swan has described heightened merger activity between super funds in recent years as “crazy”, questioning whether endlessly chasing consolidation has been a good thing for the sector.
Since the introduction of APRA’s Your Future, Your Super performance test in 2021, and amid much encouragement from the previous Coalition government, the industry saw a flurry of merger announcements as smaller funds sought to scale up fast and meet regulatory expectations.
Swan told the Investment Magazine Chair Forum in Sorrento, Victoria last week that the $85 billion construction fund he oversees certainly no longer feel pressured to be active in mergers, although it wouldn’t turn down more opportunities that check the right boxes.
“It’s crazy. I think the merger mania, if you like, that was thrown onto the industry and meekly accepted by us all – myself included – may not have been a wise thing to do,” Swan told the crowd.
“There’s been an underestimation in terms of the regulators and everybody else about the stress that mergers can put on the key infrastructure on which we are all dependent.”
This includes areas like fund administration and insurance, he said, where key players like Link Group are already under commercial and operational pressure without the additional test of fund mergers.
“There needs to be a much more mature discussion about the infrastructure for the industry in the context of its size, and then what it means individually across the funds.”
The $1 trillion ambition
AustralianSuper chair Don Russell, who as chief-of-staff to Prime Minister Paul Keating in the 1990s helped set up the compulsory super system, agreed that scale in and of itself is not a solution to all problems.
The mega-fund is on a trajectory to reach $1 trillion in assets in the foreseeable future, according to forecasts from KPMG and others. “Being big gives us opportunities, but we’ve got to make them happen,” he said.
For example, Russell said, the cost of evaluating and managing a $50 million and a $5 billion deal is likely to be the same for AustralianSuper. The fund has to let go of smaller opportunities, because it simply doesn’t make sense financially to invest the time. But it’s a different story for more sizable deals.
“We can be the 70 per cent owner of the Kings Cross precinct in London, and while it’s a huge investment, it’s not one in terms of the fund’s overall portfolio. It means that we can participate, we can co-underwrite, and we can co-invest with other big managers who appreciate the fact that we can write big checks, and do it quickly.”
“We are wrestling with the consequences of success and growth at the moment … [the $1 trillion forecast] was not a gloating notion that one day we will be even bigger, it was more about what we have to be prepared for.”
Small fund roles
Regardless, Russell added that scale plays a key role in the industry’s competitive landscape.
“I’ve always said that there is a place for small funds, but to be small and successful – because of the economies of scale – you’ve got to be exceptional. I think that’s a good competitive tension.”
However, Legalsuper chair Kirsten Mander highlighted some unique operational advantages that smaller funds may have in delivering better customer service. While big funds can tout their fee benefits enabled by automated processes, Mander said smaller funds’ focus lies in personalisation and knowing their members better.
“There’s a lot of pros about being a niche fund focused on a single customer group that, like Legalsuper, doesn’t need to spend money on mass advertising and can get to know its customers,” she said.
“While some of the [service] initiatives set up segments, that is still treating people as numbers or be it baskets of numbers, and it is not treating them as people with real needs and services.
“We need to not delude ourselves that when we talk about economies of scale, an important basket that companies are being pressured to achieve is reducing the people available in customer service and reducing the quality of those people by offshoring instead of hiring financial advisers.”
The comments follow research by Conexus Financial, publisher of Investment Magazine, and CoreData, which found small funds outperformed large funds on the key metrics of member experience and retirement preparedness.
No thuggish behaviour
Swan said there has been “too much hype” around discussing a fund’s size, and not enough attention on the quality of their performance.
“I don’t think the strongly performing and growing funds have just got there through some sort of thuggish behaviour,” said Swan, who also serves as national president of the Australian Labor Party.
“They’ve got there because they’ve understood, by and large, their customers and they’ve worked hard.”
When asked whether there’s risk of hubris and complacency in the ever-growing super sector, in which member assets of all APRA-regulated funds are now worth a collective $2.17 trillion, Swan said that’s not what he’s been seeing.
Speaking as a former federal treasurer, Swan said he doesn’t want to see the super sector to look the same as the banking sector. The diversity in fund sizes, products, demographics and occupational groups will be “absolutely critical” to the system’s success, he said.
“Setting up SMC [Super Members Council of Australia] reflects the fact that a large part of the industry values diversity in terms of size, and what people do.
“And the fact that we got that done in a year in pretty difficult circumstances and got a new CEO on board tells me that all of our [industry] funds – big, medium, and small – are up for the challenge of dealing with the customer service things they need to deal with, and certainly aren’t displaying hubris.”
Analysts anticipate M&A activity will slow this year with just five deals in train.