Australia's financial regulators are cracking down hard on governance issues in the country's superannuaction industry. But industry service providers believe they should do more to encourage mergers between underperforming or sub-scale superannuation funds. 

In addition, they argue that the country's political parties should put individuals' retirement needs rather than their goals first, if they are to regain the trust of the country's super members. 

Several industry participants or advisers said the country's financial regulators can do more to facilitate mergers between underperforming or sub-scale funds. The super sector is regulated by the Australian Prudential Regulation Authority (Apra), and is characterised by a small number of very large funds and a large number of smaller funds. 

More than half of funds (112 of varying type) had assets of less than $1 billion, they collectively accounted for 2% of total assets and 8% of member accounts. 165 funds with assets of under $5 billion represent 25% of member accounts and 12% of total assets and covers all types of funds.

A damning report by the Productivity Commission in May on the poor service offered by superannuation industry players to their members noted that stronger governance rules are needed, especially for board appointments and mergers. It recommended recommends a set of amendments to governance rules to lift the performance of boards and make trustees more accountable to their members.

More genuinely independent directors on boards may help in this regard, but getting the right mix of knowledge, skills and experience is at least as important and arguably matters most. The key impediment to mergers lies in large part with the trustees of super funds, who make the ultimate decision over mergers.

M&A RETICENCE

The super funds have been reluctant to consolidate so far. This is partly down to experience; there  several attempted fund mergers have failed in recent years, including the proposed A$10 billion Vision Super and Equipsuper deal that collapsed amid disagreement over the preferred investment model for the merged funds. Maritime Super and Auscoal Super failed to agree terms for an A$8 billion merger.

The PC recommended the Australian Government should establish a superannuation data working group. This is comprised of Apra, the Australian Securities and Investments Commission (Asic), the Australian Tax Office, the Australian Burea of Statistics and the Commonwealth Treasury (with Treasury taking the lead).

It sugggested that this group should identify ways to improve the consistency and scope of data collection and release across the system, with a focus on member outcomes. It should also evaluate the costs and benefits of reporting changes, including strategies for implementation

There has been some consolidation but it needs to continue apace said the PC and APRA, which noted that “Some trustees and funds appear insufficiently prepared to manage current and future industry challenges. These include a more competitive environment; changing fund demographics as more members move into retirement; and low investment returns.”

As a result of the PC report and the criticism levelled at regulators such as Apra and Asic, super fund trustees will now come under increased pressure to make fundamental changes to the way they operate their business – if necessary by merging with, or transferring their members to, another fund. The proposed directions power before the Parliament would allow Apra to enforce this.

However, this round of blame and suggested change has come at a cost. Several Australian super fund executives spoken to by AsianInvestor said they couldn’t blame members for not trusting that the money will be there when they retire.

Chris Trevillyan, director of investment strategy at Melbourne-based asset consultant Frontier Advisers, said, “The regulatory pressure in Australia has increased. As well as the Royal Commission into banking, we’ve now had the productivity commission review of the superannuation industry and then we have the regulator, APRA, introducing a number of different regulations and increased oversight. It seems for a long time there’s been too much tinkering by successive governments.”

This is the second part of a feature on the criticisms of the superannuation industry in Australia, which originally featured in AsianInvestor's June/July 2018 edition. Please click here to read part one, and here for a related story