Super fund mergers - from tribalism to agnosticism

A feature of recently announced superannuation fund mergers has been the sudden dissociation of potential partnerships from the industry sectors that host their memberships.

This reflects the circumstances in which the $3 trillion-plus sector finds itself, some due to external factors, others from a greater level of sophistication in governance and investment capability and perspective.

Recent industry-agnostic fund merger announcements (excluding corporate fund roll-ins) or projects in various stages of completion* include:

• Equipsuper - Catholic Super

• Sunsuper - QSuper

• HostPlus - Statewide - Intrust

• Cbus - Media Super

• Australian Super - LUCRF -Club Plus

Australian Super has been industry-agnostic for many years and has benefited immensely from being a first mover in developing a consumer brand.

It is notable that when the industry ultimately consolidates down to eight or so mega-funds, it will be those which have invested in their brand that will thrive and dominate - Australian Super, Cbus, HostPlus, Aware Super, Sunsuper, HESTA - and perhaps one or two more.^

Outside of these, a few with highly specialised offers, like Equipsuper with defined benefit, will survive to provide boutique solutions, perhaps more focused on meeting the bespoke needs of particular employers.

External pressures have contributed to this flurry of merger activity after more than a decade of lip service to much-needed industry consolidation.

The Federal Government’s Your Future Your Super legislation introduces one of the most potentially transformative ideas to hit super in 20 years - ‘stapling’ accounts to members rather than employers or industrial agreements so that, by default and unless they instruct otherwise, they carry their first fund with them throughout their working lives. The first fund for most is the one they join through their first employer.

It is a gift horse for those funds servicing industry sectors which predominantly provide young people with first entry points into the workforce. It is a potential nightmare, even death knell, for those servicing industries that are stagnant or in decline.

Funds that have spruiked the benefits of diversifying investments to manage risk are understanding that merger partnerships should also ensure diversity of membership. Amplifying the existing membership demographic can double down on risk rather than mitigate it.

Enter the next great merger consideration for funds - the capacity to design fit-for-purpose products to take members into and through retirement. This received scant attention with the introduction of mandatory superannuation contributions in 1993, born as they were out of a hybrid of visionary thinking and the realpolitik of striking an industrial accord between employers and the trade union movement.

If there is a pivot around which future fund marketing will be constructed, it will be retirement. It’s where the big balances and retention most important to scale of funds under management sit. In the emerging world of stapling, it will be an opportunity to unstaple members from accumulation accounts, because it’s a point at which more engaged members decide how to engineer a balance between drawing an income and making their money last.

The latter is about managing what the industry calls longevity risk, the risk of living too long, which for members translates to possibly running out of cash before they die.

Longevity risk management for funds will rely on either having, or having access to a large pool of members across which they can spread risk. Put bluntly, a large pool means having enough members to ensure enough die younger than normal life expectancy to help fund those fortunate enough to live longer. Savage - but it’s a numbers game and we’re all numbers.

So diversity of membership for merging funds must focus not only on the ‘acquisition’ of new members so they’re ‘stapled’, but also having a large base of older and wealthier members for when the staples fall out.

Whether the greater maturity and responsibility of super fund boards and trustee directors with respect to mergers has been forced or evolved naturally is a moot point. For years, the Australian Prudential Regulation Authority (APRA) has advocated industry consolidation. For more than a decade, trustee boards resisted merger - either due to ignorance, denial, self-interest or all three. Perhaps it was a sense of loyalty to the tribe - the lingering industrial connection to the sector from which they spawned?

Which leads us to the final piece of the jigsaw in the industry-agnostic merger trend - a much greater level of sophistication in fund governance. While the equal representation of employers and members on trustee boards still exists and has generally served members well, there is a much greater adherence and understanding of the principle that directors must leave external interests and affiliations at the boardroom door and focus solely on their responsibilities to the fund’s members.

While some continue to debate the benefits of scale to performance, market competitiveness and the interests of members, the argument based on ‘special connection’ with members increasingly rings hollow and impossible to support with evidence of net benefit. Member engagement for younger cohorts is for the most part proving a Quixotic dream and older members entering retirement are likely to shop around, maybe get professional advice and pick what’s best.

The truth is that scale and utility are the things that matter most when carving costs out of investments, administration, compliance and other back-end stuff. For members, it’s the leftover that counts in achieving retirement outcomes.

In future, the surviving superannuation funds will boast brands as ubiquitous as those of the banks. Within their structures, it is conceivable that they will cater to the needs of their multiple cohorts with bank-like packaging - ‘everyday’ retirement saver accounts, private super, direct investments, SMSF advisory services, Apple Pay and similar for untaxed pension accounts - the list only constrained by rules and imagination.

By 2050, it will be hard to find a member who remembers their fund’s industrial heritage. They won’t be part of the tribe. They’ll be agnostic and, if they think about it at all, deciding among the brands who’ll deliver them the best financial benefit. What is there not to like about that?

The author is a former employee and executive of Equipsuper and has previously contracted to Media Super on merger matters. This article provides no insights that are confidential to these funds or those with which they have partnered.

* An important omission from this list is the recent merger of First State and VicSuper, respectively the New South Wales and Victorian state public sector funds, which created Aware Super. This was a merger of like memberships.

^ Always dangerous to pick winners, but this is an educated hint as to what the list may look like.