The announcement of an intended merger between the $235 billion Aware Super and $8 billion Prime Super is interesting for what it signifies. First, it confirms that the long-term trend towards consolidation remains alive. This is consistent with our analysis in State of Super 2026 where we increased our assessment of the likelihood and potential scope of merger activity. 

Second, this particular transaction is a sign that the merger trend is gaining further impetus from heightened requirements around regulatory uplift, systems and retirement. Each of these pressure points increases the fixed-cost component and raises the minimum scale required to operate effectively as an institutional super fund.

Regulatory pressure designed to ensure reasonable member outcomes sets the scene. APRA has long held an implicit view that adequate scale is required to meet its expectations. While APRA does not explicitly rule out small funds, it continues to push trustees to demonstrate that their fund has the scale to deliver good member outcomes.

This pressure manifests through the regulatory requirement on funds to perform business performance reviews incorporating member outcomes assessments. These reviews are then scrutinised by APRA. There is a pathway for small funds to remain viable, but they must meet the requisite standards.

A more recent factor is pressure for “compliance uplift”. This has been an area of significant regulatory focus, predominantly via APRA’s CPS 230 Operational Risk Management. Delivering on compliance amounts to a significant fixed cost on systems, which better scales across a larger member base. Compliance also absorbs time and focus. Large funds can more readily afford extra internal resources to help address requirements. For smaller funds, compliance absorbs proportionately more cost and attention from boards and management, leaving fewer resources for other initiatives.

Enhancing systems and the technology stack is another pressure point. Addressing cyber risk, improving member services, building delivery channels and adopting AI create the need for leading-edge technology-supported systems. Capabilities and governance processes have to be developed. All amount to sizable fixed costs that can be more readily met by large funds.

The theme of higher fixed cost carries over to the greatest challenge facing the sector: developing a quality retirement offering. Addressing the retirement phase will prove far more complex than accumulation. Due to the need to deliver more personalised solutions and services, retirement involves greater member engagement and the ability to tailor to individual member needs.

Super funds are part-way through a journey of re-engineering their businesses to deliver on retirement. This will carry sizable fixed-cost in terms of investment and operating platforms, again making scale an advantage. In our view, the high standards being set by some leading funds must be confronting for those funds which are lagging.

In investment management, while the benefits of size are more debatable, two notable aspects are encouraging large scale. First is building out internal investment teams, which can reduce costs versus paying managers and enhance organisational investment capability. A second and emerging element is that large funds are starting to deploy their balance sheets (through so-called ‘collateralisation’ strategies) in order to generate additional return. Small funds face greater difficulty in venturing into these two areas.     

Being small requires excellence to offset the lack of scale benefits available to larger funds. Small size is much more acceptable if there is an evident growth path that will improve scale. However, many small funds are experiencing slow growth. Of 25 funds with assets less than $30 billion we identified in State of Super, nearly two-thirds are experiencing sub-industry rates of net flows. The conundrum is that pursuit of above-sector growth requires increased spend on brand, marketing and advertising – all of which amount to fixed costs that are more difficult for smaller funds to absorb.

Historically small funds have catered to market niches and provided a more relatable member experience. The well-entrenched move to funds becoming public offer along with dispersion in member needs around retirement leaves far fewer funds specialising in employees in single industries. Most funds now directly compete in a larger, more open market. The “we’re servicing a unique membership” rationale to continue despite being small is ebbing away.

Overall, we remain ambivalent on the merits of large size: the arguments on both sides as set out in our 2023 report Do Superannuation Fund Members Benefit from Large Fund Size? remain valid. Nevertheless, the “how small is too small?” threshold has clearly moved up significantly since our 2023 report reflecting heightened requirements and the fixed-cost nature around uplifting regulatory and compliance, enhancing systems and developing retirement offerings.

Boards of small funds that press on as standalone entities would effectively be backing themselves to deliver across these areas despite their scale disadvantages, all while trying to identify and execute a growth strategy to avoid slipping behind the rest of the sector. We are not saying that all small super funds should go. But rationally, only the truly excellent small funds should remain.

There are some hitches to the ongoing consolidation story, though. The requirement for members of both funds to benefit creates a hurdle. While the benefit of mergers to members of smaller funds may be becoming clearer, benefit may be trickier to demonstrate for large funds already operating at scale.

We also reflect on small-to-medium sized funds that are sub-scale and either present as an unattractive merger candidate or are not well-placed to pursue mergers that are watching the industry behemoths scoop up attractive smaller prospects as bolt-on acquisitions. We wonder about how these remaining funds can build scale and avoid being left behind.     

Nevertheless, with the super industry facing into headwinds that raise the floor on minimum scale and increase complexity, the pressure towards further consolidation should ultimately prove inexorable. We suspect a natural end-point may be something like ten mega-funds each over $200 billion in size managing more than 90 per cent of system assets. The path to this destination, however, could be bumpy.

The Conexus Institute is a not-for-profit think-tank philanthropically funeded by Conexus Financial, the publisher of Investment Magazine.