SUPER SIZE ME
Mega superannuation funds are on the horizon
In the big picture, the sector could end up like the banking regime SUPERRATINGS FOUNDER JEFF BRESNAHAN
BIGGER, fatter and fewer superannuation funds are coming, like it or not, with the number of funds tipped to more than halve as mergers and takeovers create a new breed of mega-fund.
The superannuation sector is also bracing for the next round of royal commission hearings with several problems expected to be flushed out, including the lack of mergers by underperforming funds and the strong focus on selling insurance products instead of concentrating on retirement savings.
Overall, there are 224 managed super funds in Australia with analysts expecting the total to shrink to about 100, as underperforming and smaller funds amalgamate in search of higher investment returns and lower fees.
According to independent research company SuperRatings, the sector could eventually see the dominance of a “big four or a big six” mega funds, following in the footsteps of the banking industry. However, the merger forecast is not a death knell for all small funds. Those that remain are set to thrive in other aspects.
Smaller funds have already realised the trend and are starting to refine their offer by providing an extra high level of service and to cater to specific workplaces and industries.
But, to date, big appears to be best for super funds, with the statistics showing the biggest funds also have the highest investment returns.
Analysis by research company ChantWest found the average return from large funds — those managing more than $20 billion — was higher than small funds (under $5 billion) by almost 1 per cent a year in every investment time period during the past 10 years.
“Small funds are overrepresented in underperforming funds, compared with large funds,” Chant West head of research Ian Fryer said.
“Scale is quite important, especially for funds under $1 billion, it’s hard to see how they can compete against bigger funds. When you look at the performance of larger funds versus smaller funds, the larger funds are definitely well ahead.”
Mr Fryer said larger funds often got a better deal on investment fees and could access a wider range of investments.
“They can even make direct investments themselves such as buying a big shopping centre or toll road or airport,” he said.
“Scale gives you access to more opportunities.”
Large funds also typically have more in-house expertise such as a team of investment experts, compared with smaller funds which may rely on just one or two people or pay an outside asset consultant for the advice.
However, SuperRatings founder Jeff Bresnahan said larger funds are not without their issues and can be slow to change and adapt.
Some larger funds would also benefit from merging but have so far failed to do so despite it being in their members’ best interests, he said. “I expect the pace of mergers to increase,” Mr Bresnahan said.
“In the big picture, the sector could end up like the banking regime, pretty much between a big four or a big six major funds and then you would have a series of others that have a geographical or industry-based advantage, catering for specific demographics or geographies, also a bit like credit unions compared with the big banks.”
Mr Bresnahan said an argument could be made that funds will get so big they will find it difficult to outperform average returns.
“They will have to buy investments in such huge amounts that they will struggle to make them meaningful,” he said.
“A $100 million investment to a small fund is massive but $100 million to a large fund won’t really move the needle. They would need to find 10 of those investments to nudge their performance.”
Several funds have already had tentative merger talks but have failed to go ahead after eyeing each other off as potential joint board members.
“Some funds should have merged and haven’t and I think the royal commission will flush some of that out,” Mr Bresnahan said.
“The reason in a few isolated cases, just anecdotal, is perhaps directors or trustees have put their self interest ahead of their members. After all, when you have two trustee boards there will be a lot of director positions lost, which board retains their chairman or who gets the chief executive gig?
“With pressure from the Productivity Commission for mergers and, although we’re yet to see the outcome from the royal commission, we can pretty much guess there will also be pressure there for funds to improve governance and or to merge.”
The Association of Superannuation Funds of Australia (ASFA) said mergers must be based on the best interest of members.
“There are many factors fund trustees might consider — are there synergies between the member bases; will costs be reduced; will members receive a higher level of service; and will insurance arrangements be suitable,” ASFA chief executive Martin Fahy said.
The cost of due diligence, financial, taxation, legal and commercial transactions, asset transfers, integration costs, the merger of databases, communications to members and the change to insurance and services all involve time and cost before and after a merger.
“Scale alone does not necessarily deliver,” Dr Fahy said.
“Smaller funds can be nimble, responsive to member needs and tailor arrangements to be suitable for their particular members — factors such as occupation and geography. Additionally, there is a point at which any benefit from economies of scale [becomes] negligible.”
Superannuation mergers must be based on the best interests of the members.