A handful of giant pension funds in Australia are set to emerge as titans of global finance as the country’s regulator promotes mergers in the A$3.3tn (US$2.4tn) superannuation sector.
Analysts said that recent reforms were driving the sector towards a structure of three to five megafunds, following a record 15 mergers in the 12 months to October 2021.
The shift has been underpinned by the vast pools of assets created by Australia’s system of compulsory pension saving.
Pressure from the Australian Prudential Regulation Authority, the financial services regulator, for non-performing funds to merge or exit the sector was also behind the wave of consolidation, said Abhishek Chhikara, principal with Melbourne-based consultancy Right Lane.
“The changes the reforms introduced are intensifying pressure, particularly in small and medium-sized funds, and leading us down a path to a system that is much more consolidated,” Chhikara said. “As smaller firms struggle to compete, they’re likely to consolidate into much larger funds.”
Alongside the Your Future, Your Super reforms — which include an annual performance test for funds, allowing members to keep the same account when they change jobs and an online fund comparison tool — that came into effect last year, the trend is concentrating the sector into a few superannuation funds of global scale.
Analysis by Right Lane found that three to five generalist megafunds, each holding 1m to 3m members, and seven to 10 specialist funds with at least 500,000 members, would preserve competition and specialisation in the market.
The four “super funds” with more than A$100bn in assets under management are AustralianSuper, Aware Super, UniSuper and QSuper.
AustralianSuper has 2.5m members and A$244bn funds under management, an amount it expects to double within five years. It has carried out 14 mergers, most recently with Club Plus last month.
QSuper, a A$133bn fund with about 600,000 members, is set to serve 2m members and manage more than A$200bn following its merger with SunSuper, which will be completed by the end of February. The combined fund will operate under the new name Australian Retirement Trust.
APRA has long argued that the number of funds and investment options within the superannuation sector was detrimental to members because it was too large. The regulator even demanded that some funds merge following its inaugural superannuation performance test last year, which sought to hold funds to account for underperformance by increasing transparency and penalties.
The test assessed funds with at least five years of performance history against a benchmark; 13 funds failed to meet it.
APRA became so concerned by the “persistent investment underperformance” at Christian Super that last month it ordered “a strategy to merge with a larger, better-performing fund by July 31, 2022”.
David Bardsley, a superannuation advisory partner at KPMG, said the regulator’s tests were also likely to spur further industry consolidation. He added that the past few years had introduced a much broader, more comprehensive set of regulatory and compliance expectations.
“In many cases, smaller firms have struggled. There’s also an appreciation that if you have scale, that there are efficiencies that can be passed through to members by way of reduced fees and improved investment performance,” he said.
However, there is also the risk that megafunds grow too big. “We’ve seen that manifest in other markets where there are very large, $600bn to $800bn firms,” Bardsley said. “Being able to deploy that amount of capital in an active way becomes increasingly difficult. You tend to move to an index-like performance and will therefore need to pay index-like fees for that.”
In five years, Bardsley expects the landscape to include a number of A$15bn to A$30bn funds but few in the A$30bn to A$75bn range. “And there will be a handful — maybe 10 or 12 that I would characterise as megafunds — that is, those close to or exceeding A$100bn.”
Rose Kerlin, an executive at AustralianSuper, said any tie-ups needed to be in the best interests of members. “We assess mergers on criteria such as 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,” she said.
Mergers are not the only way to grow, Kerlin added. “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.”
Despite the increasing pressure on funds to merge, Chhikara emphasised the importance of finding the right partner. “There [are] countless examples across industries where mergers are done in haste and not properly integrated, and that only leads to suboptimal outcomes,” he said.
“But even more than this is the issue of execution risk. Trustees need to consider what kind of fund they need to create to survive and thrive in the future.”