The much-anticipated consolidation of master trusts is not happening. Despite the hype behind the so-called trend, industry observers cannot point to a single instance that could demonstrate a shake-out.
Plan For Life managing director Simon Solomon talks about consolidation as a “myth to grab headlines”. Instead, he notices “plenty of fragmentation as financial institutions clamber to get into master trusts, or at least a share in the money involved”.
Chant West Financial Services consultant Warren Chant finds “a little bit of rat and mice nibbles but no example I can think of points to the consolidation of master trusts”.
For his part, SuperRatings managing director Jeff Bresnahan says “there may have been a few minor deals but no major deal — so long as master trusts are a licence to print money, why would any owner want to get rid of the revenue stream?”
Talk about master trust consolidation is largely premised around choice-of-funds and competitive pressures generated as the larger industry funds move further into corporate super.
But will consolidation happen?
Certainly, new entrants are most unlikely and the smaller funds will be the first to go either by mergers or by entering into agreements to re-brand the products of larger players.
Bresnahan believes talk about consolidation of master trusts is based on memories of the shake out in the life insurance industry. “Because of scale, they could not compete in the middle-market. But with master trusts, the fee basis is still highly profitable. Until the commercial funds are forced to bring their fees down to a more acceptable level, then consolidation will not occur.”
But not everyone believes achieving the right scale is critical in the master trust game.
Snowball managing director Tony McDonald says: “Everyone lumps platforms into one pot at the moment and that is not necessarily right. You don’t necessarily need scale if you deliver at the front end and target a niche market. The market is moving away from almost an obsession with platforms, which are what master trusts are, to a realisation that the adviser component is probably most important going forward.”
Chant feels it is “hard to imagine financial institutions giving up their master trusts, they are focusing more on internal rationalisation and synergies”.
He does find early evidence of corporate super divisions of master trusts “becoming dormant, or at least not actively pursued”.
McDonald notes the debate “got hijacked around the public offer advisor platform which probably will see some consolidation but is only half the story”.
Dexx&r managing director Mark Kachor finds that mergers and acquisitions have reduced the number of master trust products offered by the life offices and banks.
The evidenced trend towards outsourcing corporate funds to master trusts or industry funds shows little sign of abating.
Figures from the Australian Prudential Regulatory Authority show that 1759 corporate funds existed at the end of September 2003 — less than half the 4211 that were around at the end of June 1995 and almost 9 per cent less than the 1922 at the end of March 2003.
The size of the funds outsourcing is also getting bigger with the $340 million Woodside Superannuation Fund and the $220 million St George Bank staff fund among the latest to take the plunge.
Chant expects a small number of in-house corporate funds to be left in a few years time from large organisations like Telstra, Australia Post and the banks.
Behind the drive to outsource is the Financial Services Reform Act (FSRA) and the growing compliance burden faced by super funds — those who do not want a licence must outsource as it’s virtually impossible for a superannuation fund to operate without an FSRA licence.
At the same time, corporate funds want to stick to their core business and are weary of the costs of management time and of running a fund.
In a competitive environment, master trusts of some funds are winning funds from other master trusts and picking up interest from those already in other master trusts looking to change. Competition is focused on price and service, with most players concentrating on boosting their efficiencies.
But this is a long way to mergers and acquisitions on a scale that would demonstrate an industry consolidation.
