Australia’s pension fund rises to take on global financial giants

Australia’s handful of big pension funds are set to become global financial giants as Australian regulators push for consolidation of the 3.3-tonne ($2.4-tonne) pension industry.

After a record 15 mergers in the 12 months to October 2021, recent reforms are pushing the industry toward a three-to-five mega-fund structure, analysts said.

This shift is underpinned by the large pool of assets created by Australia’s mandatory superannuation savings system.

Pressure from financial services regulator the Australian Prudential Regulation Authority to require distressed funds to merge or exit the sector is also behind the wave of consolidation, said Abhishek Chhikara, principal at Melbourne-based consultancy Right Lane.

“The changes brought about by the reforms are exacerbating pressures, especially among small and mid-sized funds, and leading us towards a more consolidated system,” Chikara said. “As smaller companies struggle to compete, they are likely to consolidate into larger funds.”

In addition to the “Your Future, Your Super” reforms — which include annual performance tests for funds, allowing members to keep the same account when changing jobs, and an online fund comparison tool — which went into effect last year, trends are focusing the industry on Some of the world’s largest pension funds.

Right Lane’s analysis found that three to five large generalist funds, each with 1 million to 3 million members, and seven to ten specialist funds with at least 500,000 members would keep the market competitive and specialized.

The four “super funds” with more than $100 billion in assets under management are AustralianSuper, Aware Super, UniSuper and QSuper.

AustralianSuper has 2.5 million members and $244 billion in funds under management, a figure it expects to double in five has 14 mergers were made, most recently using Club Plus last month.

QSuper, a $133 billion fund with about 600,000 members, will serve 2 million members and manage more than $200 billion when combined 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 believed that the number of funds and investment options within the superannuation sector is too numerous to the detriment of members. The regulator even called for some funds to be consolidated after the first pension performance test last year, which sought to rein in funds to compensate for poor performance by increasing transparency and penalties.

The test evaluates funds with at least five years of performance history against the benchmark; 13 funds failed to meet.

APRA is so concerned about Christian Super’s “continued underperformance of investments” that last month it ordered a “merger with a larger, better-performing fund by 31 July 2022”.

The regulator’s test could also provide further stimulus, said David Bardsley, a partner at KPMG superannuation advisers Industry consolidation. He added that the past few years have introduced broader and more comprehensive regulatory and compliance expectations.

“In many cases, small companies have been struggling. There’s also an appreciation that if you have scale, you can pass on efficiencies to members by reducing fees and improving investment performance,” he said.

However, there is also the risk that large funds will grow too large. “We’ve seen this in other markets with large companies of $600 billion to $800 billion,” Bardsley said. “It’s getting harder and harder to be able to deploy that much money in a positive way. You tend to move to index-like performance, so you pay index-like fees for that.”

Bardsley expects the landscape to include some A$15 billion to A$30 billion funds within five years, but rarely between A$30 billion and A$75 billion. “And there will be a handful – maybe 10 or 12 that I would describe as mega funds – those that are close to or over $100 billion.”

AustralianSuper executive Rose Kerlin said any collaboration had to be in the best interests of members. “We evaluate mergers based on criteria such as the payback period of merger costs, which includes all costs and investment performance, and the effect of the merger on membership, assets and future contributions,” she said.

Mergers aren’t the only way to grow, Kerlin added. “Ultimately, it only makes sense if the fund continues to follow its standard path and its returns outperform expectations.”

Despite the growing pressure to merge funds, Chikara stressed the importance of finding the right partner. “There [are] There are countless examples across industries of hasty mergers without proper integration, which only lead to sub-optimal outcomes,” he said.

“But more important is the issue of execution risk. Trustees need to think about what kind of fund they need to create to survive and thrive in the future.”

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