17 minute read
When two become one
BY CHRIS DASTOOR
With dozens of mergers having already taken place, the industry is starting to find it has a refined, formulaic process for consolidation.
WWhile it seems the superannuation industry is going through merger-mania, it has long been the call by the prudential regulator that there are too many funds. Even recently in a speech delivered to the Financial Services Council (FSC) in
October, Australian Prudential Regulation
Authority (APRA) executive board member, Margaret Cole, said the number of funds and investment options remained so large that it was “detrimental” to members. APRA stated that it expects anything less than $30 billion in funds under management (FUM) would be too small to compete. However, it also warned against trustees rushing into poorly-planned or sub-optimal mergers. There were many factors to consider when finding a merger partner, including member needs, workplace cultural fits, investment philosophy and demographics.
Because of this complexity, it was now common for super funds to employ teams solely to organise and assess potential mergers.
Identifying merger partners
It takes two to tango and without identifying an appropriate partner for a merger, the process is doomed to fail.
In the case of Aware Super, AustralianSuper and Spirit Super, all three funds were the result of multiple mergers.
In 2012, First State Super (established in 1992 for NSW Government employees) merged with Health Super, a health and community services-focused fund. In July 2020, First State Super merged with VicSuper and officially become known as Aware Super.
In December 2020, Aware Super completed its merger with WA Super. In July 2021, Aware announced it had agreed to merge with the Victorian Independent Schools Superannuation Fund (VISSF).
Michael Dundon, Aware Super executive consultant – corporate development, was formerly chief executive of VicSuper and now looked after the merger team at Aware Super. He was also acting chief operating officer (COO) as current COO, Jo Brennan, had taken more responsibility over the platform transformation project.
As CEO of VicSuper, Dundon said the fund had been exploring merger opportunities due to the belief that a $25 billion fund with 250,000 members was not going to be large enough for the future industry environment.
“Organic growth was not going to give us scale benefits that we wanted and we were looking at larger funds – the $100 billion plus who were delivering a broader range of services and better investment performance all at a lower cost to members,” Dundon said.
“Our view from a strategic perspective was we really needed to find a merger partner that would allow us to access those scale benefits quickly.
“Looking through the industry at the time, our focus was on a fund that was like-minded culturally, strategically, and in a [similar] demographic.”
Dundon said First State Super was the logical fit and it was a nice compliment to match a large Victorian and New South Wales fund together.
“In a cultural sense, we were both very aligned, similar sort of backgrounds from hiring staff, commitments to things strategically like responsible investing, very strong alignment around the views on the future of advice and the importance of advice and education in retirement outcomes,” Dundon said.
“Then we went through a process where we approached them and held discussions. I led the Vic Super discussion and negotiations, we established a joint board steering committee, which oversaw the conversations, discussion and planning and made recommendations to their respective boards.”
Dundon said there was a large universe of funds still in the industry so the fund had a process where it looked at individual funds and judged them both with quantitative and qualitative criteria.
“Some of the quantitative criteria include things like are they still growing strongly, what’s their investment performance like, what’s their cost structure like, what’s their market share in particular segments – do they have a presence in areas we’re not in that we would like to be?” Dundon said.
“The VISSF merger is a good example: Victorian independent schools is a small fund but it has a presence in the independent school segment in Victoria.
“That’s an area where neither First State Super or Vic Super have a very strong presence so it’s an opportunity for us to grow our presence in a new market segment.
“There’s qualitative measures as well that come down to things like the alignment of strategies, culture, governance experience and models – those sort of things that all inform you as to whether a fund will make a good merger partner.”
AustralianSuper may take the record for most fund mergers to date, having completed 14, with two more mergers on the horizon.
Rose Kerlin, AustralianSuper group executive – membership, said the fund wanted to continue to derive scale benefits from mergers as well as organic growth.
“We are currently working through due diligence with Club Plus [representing club hospitality workers] and LUCRF – which combined have over $10 billion in members’ retirement assets and over 180,000 members,” Kerlin said.
“AustralianSuper’s focus when it comes to mergers is about being members first; we want to achieve the best possible outcomes for members, that is the priority.
“AustralianSuper assess potential mergers on key criteria including the payback period for the cost of merging, which includes all costs and investment performance and the impact the merger will have in terms of number of members, assets and future contributions.
“We also look at cultural fit by assessing
– Kathleen Crawford, Spirit Super
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culture, values, business partners and portfolio construction. There is also an assessment of the strategic value and importance of any merger, which relates to assets such as what markets are involved.”
Kerlin said the success of AustralianSuper’s mergers had been because it had found partners who had a shared vision and aligned culture and strategic intent – without those attributes there was a low chance of success from the outset.
“There must be a shared vision to work together on a members first basis to create a better future for members,” Kerlin said.
“Ultimately being bigger only matters if it results in a level of outperformance in returns from what would be achieved if the fund continued along a standard path.
“Mergers are expensive, disruptive and time consuming so analysing and understanding the opportunity cost is essential.
“There also needs to be very strong focus on simplicity – ‘simple, targeted, excellence’ is our mantra. Don’t add products and services for the sake of it. Find out what do members actually care about because complexity drives costs and inefficiencies up.”
In the case of Spirit Super, it was a consolidation for four Tasmanian super funds that now had scale to become fullyfledged national player.
It started in 2015, when Tasplan merged with Quadrant Super (established in 1944 for the local government sector in Tasmania). Tasplan became the successor fund, resulting in a combined 100,000 members with $3 billion FUM.
In 2017, Tasplan merged with the Retirement Benefits Fund (RBF) which was established in 1904 to support State Government employees, with Tasplan once again becoming the successor fund. It was now 165,000 members strong with $7.6 billion FUM.
In April 2021, Motor Trades Association of Australia (MTAA) Super merged with Tasplan. MTAA would be the successor fund of the new 326,000 member entity with $23 billion FUM and a re-brand to Spirit Super.
Speaking at the Superannuation CX Forum, Kathleen Crawford, Spirit Super COO, said the merger was scheduled to be completed in October 2020 but it was delayed due to the COVID-19 pandemic.
“Managing a merger through that time going to be impossible, we had market volatility in March and all the COVID implications,” Crawford said.
“Given that heightened risk, our board of directors decided we would push that date out six months and the merger finally came to get in April [2021].”
Aligning cultures
In the case of Vic Super and Aware Super, Dundon said it was a good example of putting the people first through the merger process.
“We made sure that we had all our communication to our staff before any external stakeholder discussions,” Dundon said.
“We have brought the best elements of both organisations from a cultural perspective and brought those into the merged entity. Our leadership, values, beliefs and training are all very aligned, and all of those things are reinforced as we go through merger integration.”
For example, Dundon said there was a very significant onboarding process for the Vic Super people that moved into the merger fund.
“This allowed them to have a better understanding of the values of Aware Super, the processes and tools that we all have,” Dundon said.
“All that was done with a very significant effort… before the merger date, all of the newly-appointed or existing group executives were all interviewed in front of staff.”
When it came to appointing the CEO and board, Dundon said it was a straightforward process where both organisations agreed on what was appropriate.
“Vic Super board wanted some [board] representation but basically were comfortable that it should reflect the membership of the merged fund,” Dundon said.
“Given we were 250,000 members going into a fund with over 800,000
Table 1: Major super fund mergers
Completed
First State Super + Vicsuper + WA Super (rebranded as Aware Super)
Tasplan + MTAA + RBF + Quadrant (rebranded as Spirit Super)
Equip + Catholic Super In Progress
Aware Super + VISSF
Sunsuper + QSuper
Cbus + Media Super
LGIAsuper + Energy Super LGIAsuper + Suncorp Portfolio Services
SOURCE: SUPERGUIDE Under discussion
AustralianSuper + LUCRF + Club Plus
HostPlus + Statewide + Intrust
members, it was easy to work out the proportions for the board positions.
When it came to deciding on the CEO, Dundon said he had made it clear he was not interested.
“I was looking to slow down a little bit and explore other things in the industry and stay involved but not at a CEO level,” Dundon said.
“But I was keen to be part of the merged entity for a period of time to make sure the integration of Vic Super went well and that I might have an opportunity to participate in other merger activity which is something I enjoy and is beneficial for the industry.
“Then we had a process for all the senior leadership and broader staff positions where essentially we had a process where people could be considered for all roles and we used an independent consultant on a panel to assist with appointing the appropriate people into those roles.”
Assessing member needs
Ultimately, a super fund was nothing without its members and all funds agreed that member needs were forefront of any merger discussion.
Kerlin said any merger should be considered through the lens of whether or not it would present an improvement for members.
“Scale can lead to improved net investment performance and cost reductions for members, other benefits include improved ability to attract and retain talent and an improved advocacy impact,” Kerlin said.
“Trustees should be scrutinising the member outcomes a merger will deliver before going ahead and apply rigor to the business case while also tracking benefits to members.”
Kerlin said it was also important to also realise that mergers were not the only way to grow a membership base.
“At AustralianSuper, 47% of members directly choose the fund (versus 53% default) last year and this is only likely to continue to increase over the coming years; over 1,000 members join every day,” Kerlin said.
Like all matters that come up in merger negotiations, Dundon said it was important to have a strong lens around what was the members’ best interest.
“If you focus on that, decisions around resourcing [and other] big strategic decisions become a lot easier because you have a clear objective around getting the best people, the most experienced and capable people into the right role,” Dundon said.
Dundon said it started with a sideby-side comparison that looked at fees, investment performance, investment options, insurance coverage and cost.
“Even things like the provision of additional services like estate planning or advice, all those elements are put side by side and cumulatively you look at the impact of a merger and say ‘is this in members’ best interest’?” Dundon said.
“It’s often the case in some funds, you might get cheaper insurance premiums in the merger target fund than in Aware but overall, the administration fees and all the other savings that come, the member is better off in the merged fund.”
Not absolutely everything would be better, Dundon said, but the overall position needed to be considered better for the member.
“The big drivers for retirement outcomes – sustained strong investment performance and low fees – that’s a very big focus for us in our merger discussion and preparations,” Dundon said. “That’s what we’re aiming to achieve: getting the diversification and scale benefits of having much greater FUM it can give significant retirement outcome improvements.”
Crawford said each one of the legacy funds that Spirit Super was now comprised of had their own clear connection to its membership.
“All the evidence suggests that by adopting a customer-centric operating model, we can improve customer satisfaction, generate top line growth and reduce costs,” Crawford said.
“Managing through mergers is challenging; it’s challenging to engage and meet the needs of a broad membership.”
WHERE IS INSURANCE IN SUPER AT?
BY JOHN BERRILL
Insurance in superannuation has been through a tough period with multiple legislation changes affecting the product but the full impact remains to be seen.
TTo say that insurance held inside superannuation funds has had a few challenging years is a bit of an understatement. After the closure of inactive accounts, switching off insurance in accounts under $6,000, excluding insurance for members under 25 and for new members until their accounts reach $6,000, and now the stapling and performance testing of super funds, the question is how is insurance in super holding up? The answer appears to be it is still surviving and continuing to offer relevant products that offer value for money, at least that is what the latest Australian Prudential Regulation Authority (APRA) data shows.
Up to now
APRA life insurance statistics published for the 2020/21 year, highlight that the success rates for total and permanent disability (TPD), income protection, and death cover claims in group insurance in super (89%, 95% and 98% respectively) are higher than any of the other life insurance vehicles, namely individual advised and direct sale, and other group cover.
In addition, the claims paid ratios are very high, indicative of well targeted products that are value for money. At 97% and 72% respectively, TPD and death cover claims paid ratios compare very favourably with other insurance products. For example general insurance for compulsory third party (CTP), public and product liability, and home and contents policies (from APRA general insurance statistics published in July 2021).
The claims paid ratio for income protection insurance in super is even more generous, currently sitting at 111%. However, APRA has rightly flagged that this is unsustainable in the longer term and has required that super funds and insurers take steps to ensure that insurance offerings are “sustainably designed and priced”.
Individual income protection products have had even more direct measures imposed by APRA to maintain their viability, particularly regarding long term income protection.
In a broader sense, insurance in super has experienced market volatility in the last decade, mainly a consequence of the push for market share that occurred after the introduction of choice of fund legislation in 2005.
That together with increased consumer awareness and external pressure from regulators, various enquiries and media scrutiny, led to significant insurance losses in the 2010’s. This in turn led to significant increases in premiums, narrower terms and conditions and problematic claims handling, the latter of which was highlighted in the Royal Commission into banking and financial services.
Whilst these issues have stabilised somewhat in the last few years, some recent legislative changes pose new pressure points.
PYS and PMIF
It has been nearly two years since the introduction of the Protecting Your Super (PYS) and Putting Members Interests First (PMIF) legislation. Designed to prevent the unnecessary erosion of retirement accounts by poorly targeted insurance, the legislation has led to a significant drop in the number of superannuation accounts with insurance.
Some of this is welcome. The consolidation of duplicate accounts with income protection insurance that cannot be claimed twice and the scrapping of death cover for young workers under 25 has removed poorly targeted insurance cover.
However, many Australians have lost the only life insurance and disability insurance cover they had, as existing accounts with under $6,000 had their cover switched off.
Under the PMIF legislation, members were to be notified of the option to continue their insurance cover by 1 December, 2019. Approximately 16% did so but we have seen many examples of fund members who either did not receive the written notices or did not fully understand or pay attention in the lead up or subsequent to Christmas 2019.
A case in point is Bernadette (not her real name) who set up a super account in 2009 as a vehicle for long term death and TPD cover. She paid initial contributions into the account sufficient to maintain the insurance cover and assumed it would continue in the long-term.
However, the cover lapsed in July 2019 because the account was inactive for 16 months. She only became aware of this after she was diagnosed with stage four cancer in 2020 and unsuccessfully claimed a terminal illness benefit. She is now dependent on Centrelink benefits.
It is also noteworthy that the Australian Financial Complaints Authority’s (AFCA’s) 2020/21 Annual Review reported receipts of complaints about the cancellation of insurance consequent on PYS and PMIF.
How they will unravel administrative errors or compensate successful complainants remains to be seen.
Such scenarios were entirely predictable, but the Federal Government included the small account transition measures, despite the warnings of some of us in the consumer movement.
Stapling
The other major issue is the potential impact of stapling. Introduced in July 2021, stapling will lead to super fund membership becoming more diverse and less occupationally aligned as members are stapled to their first (or existing) super fund as they move from job to job.
The median age and account balance of members will likely rise but the pool may include a wider range of casual workers, those with broken work patterns and those in high-risk occupations.
This could lead to cross subsidisation, more basic levels of default cover and the greater use of blunt general underwriting tools such as occupational, pre-existing condition and mental health exclusions.
The Financial Services Council (FSC) has announced it will introduce a standard for its members to prohibit the use of exclusions and narrow disability definitions for high-risk occupations, including in default group insurance in super. This is welcome.
However, a more broad ranging introduction of universal terms and conditions, as recommended by the Hayne Royal Commission, was side-stepped by the Federal Government. The recommendation was for Treasury to consult with industry with a view to legislating key definitions, terms and conditions for default MySuper group life policies.
Treasury conducted a limited consultation in May 2019 but disappointingly, no legislation followed, despite the Government’s assertion that it had implemented the recommendation.
Other measures “Insurance in super has experience market volatility in the last decade, mainly a consequence of the push for market share after the introduction of choice of fund legislation.” Summary
Insurance in super has come through a tough period in reasonable shape. However, the full impact of the changes from the last few years and the industry response is still a close watch for consumers. The protection of the basic tenet of insurance in super to provide affordable insurance for the millions of Australians who otherwise have no insurance cover is vital to support the retirement incomes of those whose working lives may be cut short from disability or death and to reduce dependence on the welfare system.
Other measures which could impact the availability and affordability of insurance in super include: 1. Superannuation members shifting from funds that fail the Your Future, Your Super performance test and lose existing insurance – although in the first iteration, only a modest 7% have moved funds; 2. The COVID-19 early release of two tranches of super up to $10,000 each, which has reportedly drained upwards of 500,000 accounts. Many of these accounts will have included insurance – although some will have insurance reinstated (perhaps with some underwriting restrictions) as accounts are replenished; and 3. COVID-19 support measures such as JobSeeker and JobKeeper payments and working from home which have kept many workers in employment and reduced the number and size of disability claims. However, the potential impact of long-COVID claims is yet to be felt.
John Berrill is a director at Berrill and Watson Lawyers.
