In many cases when industry super funds are looking to merge to create scale and cost efficiencies, members may be better served through mutually beneficial partnerships with other funds, according to a Russell Investments paper.
While some mergers can deliver economies of scale, over a certain point complexity can be added because larger asset pools provide extra challenges, according to Russell's managing director of industry and government funds Michael Clarke in his paper Future Proofing for Industry Funds.
These challenges include the increase in technical governance skills required by trustees as investment complexity grows; accessing increased numbers of managers with growing monitoring and implementation costs; the costs of growing internal investment teams; and the challenges associated with accessing and managing global asset portfolios. These mean investment economies of scale are quickly exhausted for small, medium and large funds, according to the paper.
Funds are most efficient at around one million members and $20 billion in assets, beyond which dis-economies of scale are introduced due to constraints on factor availability, reduction in incentives and growth in bureaucracy in large organisations, and a lack of specialised resources in once small markets, Clarke said.
Mergers may also result in significant one-off costs around transitioning assets, merging fund structures and management teams, and associated legal, accounting and advisory fees, he said. More complexity is added if the average member balances vary widely between funds or if they share differing levels of exposure to illiquid assets that need to be valued, he added.
One alternative is for funds to look at is creating mutually beneficial partnerships, given the emergence of vendors able to expertly provide outsourced super services means a broader depth of resources, he said.
By selectively combining the individual strengths of the fund and the outsource provider, member interests are maximised and access to resources is strengthened, and Russell is encouraging funds to consider tailored outsourcing partnerships as an alternative, he said.
"These relationships can relieve governance pressures, reduce risk and increase access to markets and research," Clarke said.
"We're not saying mergers are never appropriate, but rather funds should be aware alternatives exist that have the potential to deliver better member outcomes," he said.
Clarke also said it is puzzling that the merger process for industry funds does not follow the same rigorous principles of transparency, disclosure and stakeholder engagement as those found in public company mergers.
"Members are not given a detailed analysis of expected costs so don't have the means to hold trustees accountable for managing costs and achieving the forecast benefits over the medium term," he said.
