How Australia’s super fund mergers can create deeper portfolios
The ongoing spate of superannuation fund mergers will end up creating a handful of huge funds that boast the resources to broaden out portfolios, cut costs and add expertise, say senior super executives.
QSuper and Sunsuper will be the latest to form a new super-entity. The Queensland government approved their consolidation on March 15, and if it goes ahead as planned in September it would create a A$200 billion ($154.6 billion) behemoth that overtakes Aware Super as Australia’s second-largest.
Aware Super itself was created from the merger of First State Super and VicSuper in July 2020 and then absorbing WA Super in December. The A$135 billion entity is now in talks to potentially consolidate the A$850 million Victorian Independent Schools Superannuation Fund (VISSF) too.
At the same time, smaller supers are moving to form mid-sized funds. MTAA Super and Tasplan, for example will combine to become a A$23 billion fund called Spirit Super on April 1. Then LGIA Super and Energy Super will form a A$20 billion fund in July, while Cbus and Media Super are set to consolidate into a A$60 billion fund.
“There will be quite a bit of consolidation over the next few years. The current 120 odd super funds will probably be rationalised in a couple of waves,” Michael Dundon, executive consultant of corporate development at Aware Super, told AsianInvestor.
“The first wave, which is happening now, is where you see maybe four or five very large funds merge. And then several of the small, very small funds will probably consolidate in to those large funds as destination funds,” added Dundon, who was chief executive of VicSuper before the merger.
“Then there'll be a second wave, which might be anywhere in the next five years, where we'll probably see consolidation of some of those medium sized funds in the range of A$15 to A$35, A$40 billion.”
David Knox, senior partner at consultancy firm Mercer, said that in a few years the super industry could have far fewer players.
“We might have four or five really big funds of A$200 billion but there will still be the space and opportunity for the more middle sized ones in the A$20 to A$50 billion range.
“These may be funds focused on industry or focused on particular features that people like – maybe technology or responsible investment."
BIG IS BEAUTIFUL
There are many reasons for superannuation funds to want to merge.
First, they offer economies of scale. Combined investment and administration costs can be reduced, such as the fees for investing into funds or hiring external managers. A larger asset base can also mean funds can add more specialist inhouse investing expertise.
Industry super fund Cbus, for instance, has started expanding its investment team, with three new hires for property, equities, and private equity, while in the process of its merger with Media Super, which is expected to be completed by the end of 2021. Cbus did not respond to requests for interview.
However, Mercer's Knox said there is a limit for inhouse portfolio management.
“There will be areas where it is more difficult to internalise and you may need expertise from outside the fund,” he said. “It might be private equity, it might be emerging markets. So I don’t think we will get to a stage where 100% is internalised, but certainly the bigger funds are moving in the direction.”
At Aware Super, scale has brought benefits to members “in the form of reduced investment and administration fees, and better concentration of segments, so that you can offer products that are relevant to particular segments, the most common one being the post retirement segment,” said Dundon.
Member fees for VicSuper members dropped 20% since the merger, he added.
Plus, some merged have been able to pursue direct investments they would have struggled to allocate a “meaningful sums of money” to before.
Aware Super, for example, has made large real estate investments such as a 25% stake worth A$460 million in the Lendlease Retirement Living business, and a A$300 million allocation into affordable housing development.
"Having size and scale certainly becomes a platform for these organisations to be able to act and behave in that manner which allows [benefits such as] internationalisation, internalisation and higher sophistication," Babloo Sarin, head of asset owners and official institutions in Asia Pacific at State Street, told AsianInvestor.
"If you have an asset size of $50 billion, this gives you access to talent, tools and markets that a $5 billion dollar fund would not have."
LGIA Super and Energy Super are using their combined resources to invest in larger assets near home, said Kate Farrar, chief executive of LGIA, who will take over the merged fund upon completion in July.
"We have large holdings in the North Queensland gas pipeline and in the airport, and we have other diversified assets, like the Gold Coast rail and the regional livestock exchange in Rockhampton. We see this merger as an opportunity to continue to invest in assets like that around Queensland, but with further scale and with more opportunities in the energy sector," she told AsianInvestor.
She added that the fund wants to expand further in areas such as Rockhampton, Townsville, Cairns and Toowoomba in Queensland.
Both Farrar and Aware's Dundon also said regulatory changes have also put pressure on superannuation funds to reduce costs. This has included the Australian Prudential Regulation Authority (Apra) leaning on funds that underperform and charge high fees to merge with peers and become more competitive.
The regulator is also discussing changes to the superannuation legislation known as Your Future, Your Super, which may ban super funds from accepting new members if they fail to reach industry benchmarks.
"I understand why it's important that funds perform well. And so I support the attempt to measure comparative performance with funds because it is very difficult when you have different risk allocations and different products effectively," Farrar said. "But it does put pressure on trustees to perform."
Look out for the second part of this story in the coming days, in which we explore the obstacles that mergers of superannuation funds can present to super investment divisions.