Is consolidation the cure-all for underperforming super funds?
Calls for consolidation of the number of funds in the superannuation sector have intensified. APRA and industry commentators have put under performing funds and those with net outflows on notice. In the interest of members things need to change.
This follows the recent release of data showing more than half of Australia’s super funds have more money going out the door than coming in, which in some cases is an indicator of poor performance. But the extent of consolidation remaining stubbornly low.
There are a few key reasons cited for this low level of consolidation. The sector is littered with failed merger attempts, often after many months and, in some cases, years of negotiation and planning. All at significant costs to funds and their members.
Funds point to deal breakers which in essence are due to inward focus: misaligned investment philosophies, differently constituted boards or difficulty merging administration and insurance arrangements.
If funds truly put members’ interests first, in almost every case it is in their interests to be part of a consolidation that improves fund scale, decreases administration cost and improves fund, and administrator capability.
I’ve seen how a complicated and lengthy merger process – preoccupied with selecting potential merger partners, negotiating terms, agreeing new governance arrangements and conducting due diligence – can be derailed.
But, importantly, I’ve also seen it can be done successfully.
Governance, investment and operational considerations can all be managed where funds take an objective, well-structured and disciplined approach to generating benefits for members in their pursuit of mergers.
Success demands an approach that respects but appropriately puts to one side political and personal interest and instead focuses on the attainment of scale that will have a substantive impact for members.
Funds must assess cultural alignment beyond who sits on each board, and seek synergies in core fund operations including product design, investments and member administration.
Such an approach can make for, in many cases, unexpected results. But there is a need to break historical barriers and to look beyond the traditional considerations of industry alignment and the politics of board composition to deliver a result that is genuinely in the best interests of members.
There is also work required of medium and large funds seeking to benefit from an anticipated increase in consolidation of sub-scale funds. Platform integrity, maturity of governance and risk systems, and a robust long-term strategy are all criteria that sub-scale funds should rightfully consider in seeking a potential merger partner. These are areas in which many funds – large and small – have work to do.
With the maturation of the sector and pressure from the regulator, there are a number of productive conversations taking place between funds and positive indications that a wave of consolidation may soon be under way.
APRA is right to encourage the sector to move in this direction, but the approach must be rigorous to ensure a result that can be objectively declared in the best interests of members.
Consolidation is not always the answer to improving outcomes for members, but in many cases it is just not being seriously considered.