Five to 10 mega super funds on the horizon

BY LIAM CORMICAN

Australia will end up with about five to 10 superannuation mega funds in the future as smaller funds merge with larger players who will be jostling for dominance, according to PwC.

Speaking on a webinar, Naresh Subramaniam, director – investment advisory at PwC Australia, said he had been involved in the due diligence phase of about 20 mergers in the past two to three years and that mid-tier funds would trend toward amalgamating into a mega fund.

“We’re going to see these mid-tier funds starting to get together to aim at becoming sustainable and aim at becoming a mega fund,” he said.

He said he had witnessed mid-tier funds starting to discuss mergers, pointing to Australian Prudential Regulation Authority (APRA) pressures and rising costs as what was driving the trend.

Subramaniam said it would be complicated to conduct due diligence for the mid-tier mergers as it was likely there would be two to four entities attempting to mix into one.

He said unit pricing and equivalency, the APRA term to make sure members were not worse off from a merger, were the critical elements in PwC’s due diligence process analysis.

Conducting equivalency analysis meant looking at the super fund’s products and investment options, Subramaniam said, and analysing them from an asset allocation exposure or a growth asset exposure to see where there was commonality so they could be brought together.

Mergers that were confirmed this year so far were Equip and BOC Super, Hostplus and Statewide Super, Australian Super and LUCRF Super, QSuper and Sunsuper, LGIAsuper and Energy Super, Hostplus and InTrust Super, Toyota Super and Equipsuper, and Tasplan and MTAA.

There had also been discussions between Sunsuper and Australian Post Super, Aware Super and VISSF, and Hostplus and Maritime Super.

‘Middle ground’ super funds will struggle with value proposition

BY CHRIS DASTOOR

Funds that are in the middle ground between being a behemoth and a niche fund will struggle in the future post-merger environment, according to Aware Super.

Michael Dundon, Aware Super executive consultant – corporate development, was previously chief executive of Vic Super for the decade leading up to the merger with First State Super, which was now Aware Super.

After the merger was completed, he took on his current role with the fund which involved looking after the merger team and activity.

Looking at the broader marketplace, Dundon said it was the funds that made up the middle ground between the dominant super funds and the smaller niche funds that could struggle.

“Those funds in the middle ground where they are not niche but they’re not big enough to get the scale benefits, it’s going to be hard for them to have a really strong, compelling value proposition in my view,” Dundon said.

“We will probably see those funds consolidate and a number of those funds will end up in ‘destination’ funds, so they’ll do a merger into a large fund and be part of a very large fund in the future.”

Dundon said the industry was evolving quickly and the structure was being driven by the level of competitiveness that we’re seeing across the industry.

“There’s some big funds that are extremely competitive on investment performance and fees, and our view is that there will be a dozen or slightly less large funds of above $100 million [funds under management] and a small number of $250 billion plus,” Dundon said.

“Then there will be funds that are very specific and very niche to some segments so they’ll be quite small but their offering will very tailored to that market segment and they will achieve some scale benefits to outsourcing, collaboration and those sort of things.”

It echoed a similar view of Aware Super’s CEO, Deanne Stewart, who told Super Review in September she expected to see a dozen or so large funds along with room for niche funds.

Dundon said he expected more funds to similarly have dedicated merger teams set up, if they did not already.

“In our case, we have a dedicated team set up, we’ve got a really current playbook of experience that we can leverage each time we do a merger,” Dundon said.

“You’re probably going to see a lot more funds thinking about that aspect because mergers are complex, they’re very time consuming [and] there are different ways to structure these things.

“You want to be working on a merger with someone who’s done it before because there are significant learnings that can be leveraged to really enhance experience.”

APRA places new license conditions on EISS Super

BY JASSMYN GOH

The prudential regulator has placed three license conditions on trustees of EISS Super to protect the best financial interests of its members, including the need for the fund to merge.

The Australian Prudential Regulation Authority (APRA) said in an announcement the conditions were to address concerns regarding its investigation into expenditure and governance matters and because it failed the Your Future, Your Super performance test.

The terms of the new licence conditions, which take effect immediately, require EISS to: • Implement better expenditure processes and greater board oversight of fund expenditure; • Review its expenditure and cease sponsorship arrangements and other expenditure that are not in the members’ best interests; and • Implement a strategy to merge with a larger, better-performing fund by 30 June, 2022, and report to APRA if the merger has not been executed by that date.

APRA member, Margaret Cole, said: “Being a trustee of an APRA-regulated super fund, and managing – and spending – billions of dollars of members’ money, is a privilege, not a right.

“Although our investigation into EISS’s expenditure is ongoing, we have sufficient concerns about the trustee’s ability to demonstrate that some decisions are in members’ best financial interests that we believe it’s necessary to intervene now. Further action may follow, depending on what the rest of the investigation uncovers.

“Ultimately, the best way for EISS to optimise outcomes for members of its struggling MySuper product is to transfer them to a more sustainable and better performing product as soon as possible. The new licence conditions ensure the trustee obtains independent advice and reports to APRA on progress before making a go-ahead decision for these members.”

Vanguard Super delayed until 2022

BY LAURA DEW

Vanguard has delayed the launch of its Vanguard Super until 2022 in order to work through regulatory requirements.

The firm announced a board of directors back in April and said at the time, that it expected to launch a superannuation product in 2021.

At the time, Vanguard Australia head of superannuation, Michael Lovett, said: “The current climate has only strengthened our resolve to support Australians in managing their retirement savings in a way that will enable financial peace of mind, and to contribute meaningfully to Australia’s superannuation system”.

However, eight months on and there had been no further announcements from the business. A page on the website invited visitors to sign up for information but offered no further details.

A spokesperson for Vanguard said: “We’re making good progress towards a launch in 2022 but no specific launch date has been set yet.

“We’re continuing to work through the relevant licencing and regulatory requirements, and are focused on ensuring that all elements of our offer, from investment strategy to member experience, benefit from the input of our local and international expertise in delivering retirement solutions.”

Super funds increasing offshore investments

BY CHRIS DASTOOR

Superannuation funds have increased their allocations to offshore investments to an average of 46.8%, up from 41% over the past two financial years, according to a survey from NAB.

The NAB 2021 Superannuation FX Survey found that 61% of funds reported plans to further increase the amount invested in foreign assets.

Drew Bradford, NAB markets executive general manager, said findings revealed some funds had already crossed the 50% threshold for the first time.

“This survey shows the move to increase offshore investments is continuing and funds are taking on more foreign currency exposure,” Bradford said.

“Notably, many public sector funds have crossed the 50% threshold for the first time within the past two financial years.

“Currency is now the biggest investment risk in the portfolio after equity market risk and super funds are increasingly treating foreign exchange as an asset allocation, just as they would for any other asset class.

“What’s really interesting is that funds have started hedging more of that risk – reversing earlier declines – but continue to move away from traditional hedge ratios that used to dominate their offshore investments.”

Despite the challenging economic period, the survey also found the top 20 balanced funds closed out the 2020/21 financial year with an average return of 18% and funds that fully hedged their AUD/USD exposure during the 2020/21 financial year would have added approximately 6% to member returns.