‘Rapidly changing’ super landscape driving mid-sized mergers in Australia
Merger mania in Australia’s superannuation industry has continued to rage on, with even well performing funds under pressure to jump on the bandwagon.
Last week, Vision Super and Active Super were among the latest two funds to announce their intention to explore a merger that would form a A$26 billion ($18 billion) fund.
Super mergers have been going on for years, resulting in behemoths such as the A$155 billion Aware Super, the A$245 billion AustralianSuper and the recently formed Australian Retirement Trust, which manages more than A$200 billion.
Funds have been under pressure by the Australian Prudential Regulation Authority (Apra), which has released annual performance tests that name and shame underperforming funds.
Active Super and Vision Super, however, have performed well in general. In August 2021, Active Super was named the top superannuation fund by net return for the average 30-year-old with a A$50,000 balance, and in December, Vision Super's all shares asset allocation was revealed to be among the top performing funds over seven years.
“A rapidly changing superannuation landscape in Australia, competitive pressures and regulatory reforms have meant super funds are increasingly looking to partner with like-minded funds to unlock additional benefits for members through economies of scale,” Active Super chair Kyle Loades told AsianInvestor.
The fund believes that the merger will allow them to compete more effectively and attract new members by providing more services and low fees, he said.
Larger funds have also been known to be able to internalise asset management capabilities at scale and have access to deals unavailable to smaller funds, such as offshore deals, David Carruthers, principal consultant at Frontier Advisors in Australia, told AsianInvestor.
Most of Active Super’s portfolio is externally managed, with the exception being Australian property, but it is too early to say if the merger will affect this, Loades said.
BIGGER NOT BETTER
While scale can help lower fees, there are benefits to being a mid-sized fund, which could in some ways offer access to different types of assets.
“We’re talking about a mid-sized fund, these are not small funds; they are in the 10s of billions of dollars,” Carruthers said. “They can invest in lots of different things, and the fees are important but most of their returns come from the assets they are invested in so reducing fees shouldn’t just be the concentration you look at.”
The smaller funds also have closer engagement with their members, and provide more tailored service, he said.
Large funds have also been observed to have their own investment restrictions. “The mega funds struggle nowadays to invest in smaller companies in Australia because they can't take meaningful positions in those companies because they're too large,” Carruthers said.
“There might not be the same economy means of scale, but they can make up for it in other ways by being more nimble and being able to invest in opportunities that some of the big funds can't,” he said.
According to Loades, it is too early to tell how the merger will affect Active Super’s investment strategy, whether it is about asset allocation, how much is externally managed or how much will be actively managed. But one area that will not change is the fund’s environmental, social and governance integration.
“Unlike some super funds, our responsible investment principles are applied to our entire portfolio. The companies we invest in are assessed for their ability to deliver strong financial performance, as well as their ESG impact on the world,” he said.
“Active Super is recognised for its strength in responsible investment and we remain committed to it.”
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ESG is an area that merging funds should ensure alignment in their approach, especially since every super fund might have different priorities.
“Each fund has their own interpretation of how ESG works… Some funds are taking the ‘E’ of ESG more seriously while other funds are focusing on the social side of things. Obviously, governance is a key one. So, within a merger they must have discussions on what their shared belief of the fund is going forward,” Carruthers advised.
Regardless of challenges, Active Super and Vision Super are not the first mid-sized funds to merge, and they are not likely to be the last, analysts said.
“Part of it is driven by those who failed the Apra tests but there’s more to it than that,” David Knox, senior partner at Mercer Australia said. “It’s all about longer term sustainability.”
“A couple of years ago [Apra deputy chair] Helen Rowell mentioned the A$30 billion figure in a speech. While she didn’t exactly express it as the minimum size, the implication was that A$10 or A$15 billion was going to be sustainable going forward,” he said.
“So I think it goes beyond the tests and Apra’s focus on member outcomes and sustainability. The number of possible partners is also reducing quickly,” he added.