Merger activity in the $2.8 trillion superannuation sector is reaching fever pitch, and behind the scenes are discussions suggesting a spate of further deals this year.
Cbus, which was formed in 1984 for construction workers and now manages about $50 billion, is said to be in talks with smaller funds about mergers.
One of those parties in the past was BUSSQ, which has focused on similar industries and manages $5bn in funds.
While those talks may not have progressed, smaller funds are certainly weighing their options in a more challenging regulatory and investment environment.
LGIAsuper, which emanated from looking after the retirement savings of Queensland’s local government employees, is another fund that is understood to be assessing partnering options. It manages more than $12bn.
Industry participants pointed to Sunsuper as a potential fit as it has $66bn under management and is also looking to participate in the consolidation wave.
Industry fund gorilla AustralianSuper, which manages $165bn, has also been fielding approaches from a string of smaller funds.
The scale benefits are a big driver of the tie-ups, both to ensure that investment returns remain attractive and that operationally costs aren’t too high.
One industry participant said funds with less than $20bn under management would struggle in the present climate, while another said the threshold was closer to $40bn.
“That’s because the game has changed,” one source explains, noting that small funds would not be able to compete with the emerging giants, many of which are making large direct investments.
Even the larger funds are exercising caution.
AustralianSuper chief investment officer Mark Delaney said yesterday its investment performance was underpinned by resilience in infrastructure and property markets, while falling interest rates helped fixed interest do well in the 2019 fiscal year.
But he also knows the good times don’t just keep rolling on.
The underlying global political and economic uncertainty has created a complex investment environment.
“We know that at some point in the future the fund will experience very low or even negative returns,” Delaney said.
“As we start to get closer to the end of the current economic growth cycle, members need to prepare themselves for that and not react to short-term fluctuations in returns in the future.”
AustralianSuper members saw a return of 8.67 per cent for its balanced option over the 2019 fiscal year.
The Productivity Commission last year estimated that mergers between the 50 highest-cost funds and the 10 lowest-cost funds could save at least $1.8bn.
Funds also face a more aggressive prudential regulator that has shouted from the rooftops that underperforming or sub-scale funds are on notice. And now it has an array of stronger powers to take action against the trustees of underperforming superannuation funds.
The opposing view — against too much rationalisation — is that superannuation members don’t want to end up with an oligopoly-like situation akin to the banking sector. That’s a long way off.
It’s no easy feat merging industry funds, as many of the deal candidates are finding.
Anecdotal evidence suggests that once parties are on the same page with an agreement, the success rate for deal completion still remains at just 50 per cent.
There are issues such as culture clash, who will run the merged group and populate its board, and the demographics of the membership base.
Some funds are grappling with a large proportion of their members moving from the accumulation phase to the retirement phase, which puts pressure on them to attract new members as greater outflows are managed.
Those factors can be exacerbated by merger partners using different fund administrators and having differing asset allocation and risk appetite for investments.
Overlaying all of that is that mergers must be in members’ best interest.
Still, this year has seen a range of parties moving forward on potential marriages.
As recently as this week, Hostplus revealed merger talks with smaller Queensland-based hospitality industry fund Club Super.
MTAA Super and Tasplan also last week outlined a binding memorandum of understanding to investigate a tie-up of the two funds that manage $13bn and $9.5bn, respectively.
That MOU was signed after a proposed three-way marriage between Statewide Super, WA Super and Tasplan collapsed.
In April, VicSuper and First State announced they were in discussions on a merger that, if executed, would create one of Australia’s largest super funds managing more than $110bn.
Equipsuper and Catholic Super, with a combined membership of 150,000, are working on a merger of their operations in a $26bn deal to be completed by next year.
And Sunsuper has completed a merger with rural fund AustSafe Super.
While the deal landscape is gaining traction, directors canvassed by this column said sorting out combined board seats and leadership teams was still a key stumbling block.
A merger last year between Catholic Super and Australian Catholic Superannuation Retirement Fund fell over on concerns about who would lead the combined group.
By Joyce Moullakis - Joyce Moullakis is a senior banking reporter. Prior to joining The Australian, she worked as a senior banking and deals reporter at The Australian Financial Review.
The Australian Financial Review
5 July 2019