In recent months there has been a lot of commentary – and regulatory exhortation – in the superannuation sector suggesting that a wave of fund mergers is imminent.
KPMG believes this is well-founded, and now assesses that our prediction last year that the number of funds would halve in the next decade needs to be updated. It will happen sooner.
In a report, Superannuation merger insights, published today, we make the case that increasing regulatory pressures will now lead to an acceleration in this activity.
Numerous tailwinds supporting industry consolidation have developed, or increased in likely impact, and we expect these to intensify. 2018 will almost certainly go down as the year that sowed the seeds for the most significant transformation of the super industry in a generation.
The Royal Commission into Financial Services; the Productivity Commission’s review of the efficiency and competitiveness of the super system; and the key changes in the 2018 Federal Budget will all influence the sector for years.
All this activity will give a rocket boost to the already growing regulatory oversight of the sector. Trustees and shareholders in super entities will increasingly question whether their members would be better served in a larger entity with the scale, processes and functions more able to effectively manage greater regulatory obligations.
KPMG identifies the key pressures driving fund merger acceleration as:
- APRA’s Member Outcomes package – funds will, from January 2020, have to undertake an annual assessment of member outcomes, which the regulator will then review and use as a remedy for action. It will be a holistic assessment of how funds are performing for their members. We are already seeing these proposals driving merger discussions as funds seek long-term sustainability.
- Fees – both the Royal Commission and Productivity Commission reports focused significant attention on the level of fees and costs within superannuation, as well as the gaps and inconsistencies in how funds report on these. ASIC’s additional guidance on disclosure requirements, RG97, and APRA’s member outcomes assessment will further increase the scrutiny in this area.
- The 2018 Budget included three key proposals which will provide further motivation for fund consolidation – all super accounts with balances below $6,000 and have not received a contribution in the last year will be classified as inactive and must be transferred to the Tax Office; all super fund exit fees will be banned; and there will be a cap on admin and investment fees at 3% for accounts less than $6,000. These proposals have now been legislated and will result in a significant reduction in membership numbers for many funds.
- Default arrangements – while KPMG believes the Productivity Commission’s proposals for a “Best in Show” shortlist of 10 funds to use for new workforce entrants who don’t make their own selection are unlikely to be taken up, nonetheless there will still be significant changes in this area, which will reduce the number of accounts in the system.
These issues collectively represent a very significant ‘push factor’ for funds considering mergers.
But it should be remembered there are also considerable ‘pull’ factors – there are positive reasons to merge, such as reduction in costs and improved investment outcomes, products and services, and exposure to new member groups.
Balanced against this are the risk factors. There are many reasons why mergers sometimes do not succeed – such as lack of cultural alignment, materially different demographics, varying investment philosophies and underlying shareholder interests.
Trustees and managers in most funds in Australia should be considering their options. They must be careful not to panic over the increased regulatory pressures and rush into a poorly-conceived or under-resourced merger, as this can have serious detrimental reputational consequences. There are extremely complex considerations in mergers – in choosing the right merger partner and the optimal structure to adopt – so great care must be taken.