Super fund mergers: why bigger is not always better

Australian superannuation veterans are questioning the wisdom of the continued and accelerating consolidation of super funds.

As AsianInvestor reported recently, the combination of increased regulation and geopolitical risk is weighing heavily on smaller Australian superannuation funds, with pressure to perform accelerating the pace of fund mergers.

A major contributor to this increased pressure is the new performance testing regime designed by the Australian Prudential Regulation Authority (Apra) to highlight underperforming super funds.

TUNNEL VISION

Graeme Russell, a former CEO of MediaSuper now working as a consultant from his base in Melbourne, contends that super fund consolidation, taken to its logical conclusion, would not be a good thing.

His contention is there is too much focus on the funds providing the best net financial returns — and this ignores the benefits that come from a more actively engaged membership that you typically see with some of the smaller industry funds with $5 billion to $10 billion in assets under management.

“The mega-funds will not send field staff to workplaces with less than 400 workers. But the smaller funds are regularly on-site, or regularly engaged in industry events and activities that provide direct contact with members,” Russell said. 

And because of that, members are likely to be more engaged and access financial advice. “[Even if] their fund performance might be second quartile over the journey, they have a very good chance of achieving higher income in retirement than a disengaged member in a mega-fund,” he said. 

“Looking at more recent Apra pronouncements and action, you’d be excused for thinking that superannuation had only one objective: best net financial returns. But that is not the case,” Russell continued.  

Apra has pushed for the merging of funds that fail its performance test.

“Size is not everything,” said Russell. “Yes, there are unquestionably significant economies of scale to be extracted in most mergers, but there are equally risks of dis-economies of engagement.”

“The primary objective of super is still to provide workers and members with dignity in retirement. That is, to deliver to them the best possible income in retirement. And that is not necessarily achieved by simply delivering first quartile returns.”

Smaller funds, like the funds that Russell managed (Media Super and First Super) have much higher levels of direct engagement with members, he said.

An engaged member might salary-sacrifice, switch to higher growth options earlier in their working life, make personal contributions, access the government co-contribution, and make other decisions that will produce a better outcome. Meanwhile, a disengaged member of a mega fund would not be as proactive in this regard.

Gordon Noble, research director at the Institute of Sustainable Futures at UTS and a policy adviser to the super industry, shares the concern that consolidation of super funds could have consequences that are not being factored in.

“Ultimately, we want a financial ecosystem that consists of a diversity of participants as well as a diversity of thought. The super industry has a responsibility not just to ensure that individual investments are in the best interests of their members, but to ensure that the ecosystem in which they invest is fit for purpose,” Noble told AsianInvestor.

HOMOGENOUS STRATEGIES

As the big funds are increasingly measured only on net investment performance, they’ll be increasingly peer-conscious, leading to more homogenous investment strategies, said Russell.

And the challenge of an investment environment populated only by mega funds is that they can easily end up as dominant shareholders in small companies, said Noble.

"In this sense, it is better to have 50 funds rather than 10. Mega funds will naturally focus on large-scale investments. This is an advantage to the Australian economy. To ensure that Australia benefits from the scale of investment there is a need for collaboration, particularly around infrastructure,” Noble explained. 

"There is a danger that in the search for large-scale investments, that mega funds do not prioritise investment in smaller opportunities. This is particularly important with the transition to net zero emissions that is going to require investment in many new innovative technologies.

Russell agreed, saying, "They are rapidly outgrowing the investable markets in Australia and they are too big to benefit from often superior relative returns from small-cap Australian equities, smaller private equity deals, and smaller commercial property investments.”

Asia Pacific fund industry veteran Anthony Fasso told AsianInvestor he sees the merger trend continuing and that the regulators would be keen to have fewer funds to monitor.

"These big funds are probably where mutual life insurers were in the mid-1970s and 80s," Fasso said. “The next step is demutualisation. I see no reason why this shouldn't happen. After all, mutual insurers were for the benefit of members. I reckon it will happen."

A spokesman for Apra declined to comment, except to say that the performance test benchmarks were designed by the Australian Government and not the regulator.