Small super funds should explore easier way to merge

A new kind of merger has come to town and smaller superannuation funds should take note.

Traditional fund mergers can take more than a year. But last Friday, the board of leading super fund Hostplus voted on a deal that would bring two industry funds together at unprecedented speed.

Hostplus chief executive David Elia led a deal take over $6 billion in retirement savings from Maritime Super, as undersized funds come under pressure to consolidate.
Hostplus chief executive David Elia led a deal take over $6 billion in retirement savings from Maritime Super, as undersized funds come under pressure to consolidate.Credit:Jesse Marlow

Hostplus chief executive David Elia said the fund’s structure provided a “clear and distinctly viable alternative” to traditional mergers that can be costly for smaller funds to execute.

One person close to the talks said it was a “no brainer” that everyone would vote in favour. “Who says no to $6 billion?” And that they did, turning Hostplus into a $61 billion fund and relieving Maritime Super of the stress in struggling to remain competitive.

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On the same day the deal was sealed, Australian Prudential Regulation Authority deputy chair Helen Rowell delivered a scathing speech at Association of Superannuation Funds of Australia conference.

It was the latest in her crusade against under-performing funds, a rhetoric that escalated last year as COVID-19 exposed cracks in the system.

“I reiterate the message for those in the industry still lagging behind that, if you’re not up to scratch, you need to get better or get out,” she said.

APRA has started tapping smaller funds on the shoulder to find new dance partners or face regulatory action.

The reason is two-fold. One is the regulator’s self interest. The industry is dominated by smaller funds, with 62 per cent of APRA-regulated funds covering 5 per cent of all its assets, according to Rainmaker research.

Senior researcher Alex Dunnin says these funds represent a disproportionate share of the regulator’s efforts. “This alone should motivate APRA to force some of these funds out of the market,” he says.

Secondly – and more importantly – is investment performance.

Scale opens the door to investment opportunities unimaginable to smaller funds – and the data proves that scale pays.

Rainmaker reseach found that while the overall superannuation market grew by 6 per cent last financial year, funds with less than $5 billion in assets went backwards by an average of 10 per cent.

However, Dunnin says you cannot lump all small funds into the same basket.

“Some of these sub-$5 billion funds are among Australia’s best. For example, Future Super and Australian Ethical are in the top-five Mysuper and balanced funds.”

Coming regulatory reforms will “name and shame” the country’s worst performing super funds from July, meaning the poor-performing smaller funds will no longer be able to hide.

But therein lies a problem. While it is the smaller funds that are facing the most pressure to merge, these funds also find traditional mergers a big challenge.

Fund members do not have to consent to a merger, so regulation is exhaustive to ensure trustees make decisions that are in the best interest of their members.

Trustees must undergo a detailed assessment of the impact a potential merger would have on fees, returns and products for each individual member. The process can be costly and does not guarantee the merger will go ahead.

That is why the deal between Maritime and Hostplus should turn heads. Hostplus is a pooled superannuation trust – one of 25 such entities in Australia.

It means that Hostplus, a hospitality sector fund, can manage money on behalf of other super funds, without the hassle of having to jump through the hoops of a traditional merger.

The deal was described as an industry first, an innovative solution to a complex problem.

Maritime Super described it as a “win-win” for members, who can still benefit from workplace-tailored insurance and union advocacy for workers’ rights, while gaining access Hostplus’ investment managers, who oversee global deals in infrastructure and venture capital.

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Source: Thanks smh.com