As the superannuation industry continues to raise the bar in terms of performance for its members, mergers and fund consolidation are likely to stay in the coming year.
There were over 10 mergers and acquisitions in 2022 alone, such as Cbus Super and Media Super, Hostplus and Statewide Super, HESTA and Mercy Super, Care Super and Spirit Super, and QSuper and Sunsuper (now known as Australian Retirement Trust), to name a few.
The activity was spurred by increased scrutiny from the Australian Prudential Regulation Authority (APRA) through performance and stress tests, leaving the industry to introspect on its fees and investment performance.
Speaking at the Australian Institute of Superannuation Trustees (AIST) Australian Superannuation Investment conference last year, APRA’s head of investment risk, Geoff Stewart, predicted an upward trajectory in merger activity.
“The industry will change fairly rapidly over the next two years as the current trajectory continues then there will be a period of settling down for the few years after that where there’s more consolidation and peace of mind and the industry will become more familiar,” he observed.
This was echoed by Rita Da Silva, EY Oceania wealth and asset management leader, who said: “2023 will continue to see mergers and acquisitions activity in the asset management industry, including in the superannuation sector, where further consolidation will push asset managers into fewer relationships.”
Dr Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA), told Super Review that 2023 would be shaped by the wider context of legislating an objective for superannuation, the review of Your Future Your Super (YFYS) provisions and the ongoing political and economic headwinds.
“Fund mergers will remain part of the superannuation landscape this year as funds seek to achieve the scale needed to drive down administration and investment fees, access the best investment opportunities for members, and grow their exposure to international private markets,” he said.
Creation of mega funds
Per KPMG’s Super Insights 2022, over 40 merger announcements had been made in the last five years but activity had ramped up more recently with the advent of YFYS. The consultancy forecast there could be eight funds by 2025 that had more than $125 billion in assets under management, the so-called 'mega funds'.
Some of these major players were Australian Super and ART, which were likely to grow their assets under management from around $200 billion in 2021 to $1 trillion by 2040. Insignia could grow to $500 billion while Aware Super was likely to grow to $600 billion.
Fahy added: “With the aggregates of Australia’s super system (compulsion, universality, the move to 12% and preservation) now largely assured, a handful of large funds, those with $250bn under management, are set to take their place among the largest defined contribution pension funds around the world.”
For smaller funds, such rapid consolidation of funds could mean taking a good, hard look at their sustainability and whether they will be able to pass the YFYS performance test at their current size.
In a report on the Future of Superannuation from J.P. Morgan, which surveyed executives from 11 major super funds, including Bernard Reilly, CEO of Australian Retirement Trust (ART) and Kristian Fok, Cbus chief investment officer, two-thirds of today’s funds would disappear by 2025.
“Half of industry executives believe the pace of mergers, which is already at record levels, is set to accelerate over the next few years,” said Nick Paparo, head of platform sales-securities services at J.P. Morgan.
“Almost one-quarter believe there will be fewer than 50 funds by 2025.”
Would all this insinuate that mergers and consolidation were inevitable for successful performance? Not necessarily, said Mel Birks, AIST deputy CEO and general manager of advocacy.
Mergers could deliver scale benefits and other efficiencies, however there were high-performing funds of all sizes, she said.
“Profit-to-member (P2M) superannuation funds have delivered higher returns with lower fees than for-profit retail funds on average,” she told Super Review.
“While some of our member funds have participated in the industry consolidation, it has not distracted them from the sharp focus that P2M funds have had on improving the retirement savings of members since compulsory, universal super was introduced 30 years ago.”
She observed: “The ultimate goal of all funds is to deliver competitive returns to members. For some, but not all, funds this will mean merging with another fund.”
Rise of alternative assets
Market experts also noted funds’ expansion into new avenues such as affordable housing in 2023.
Announced in Treasurer Jim Chalmers’ Budget, the initiative would bring together Government, investors and industry to boost supply and deliver up to 20,000 new affordable homes. The Government would commit an initial $350 million in additional funding for another 10,000 new affordable homes, on top of its existing commitments.
A Super in the Economy report by Frontier Advisors, commissioned by Industry Super Australia (ISA) noted affordable housing investments could deliver stable long-term returns for super funds while addressing an economic and social need, with meaningful government backing.
In the last year, funds have acted on the Government initiative, with HESTA announcing a $240 million investment towards the launch of Super Housing Partnerships (SHP) and Cbus committing $500 million towards affordable housing through the Housing Australia Future Fund as part of the National Housing Accord.
Other explored areas have included infrastructure, private markets and private debt. Most recently, UniSuper made two appointments to its private markets team. HESTA, too, committed $290m to a sustainable private equity partnership with Stafford Capital Partners.
Da Silva said: “With interest rates rising around the world and investors continuing to look for high-yield opportunities, we’re likely to see superannuation funds continuing to expand their presence in areas such as private debt”.