Choice-of-funds and the competitive pressures generated as the larger industry funds move further into corporate super will combine to hasten a consolidation of master trusts in Australia over the next three to five years.
Nobody is prepared to predict which master trusts will fall by the wayside first, but there is general consensus that those with less than $1 billion under management will be among the first to go.
There’s talk that a number of smaller master trusts are already up for sale. And some experts are predicting that the competitive pressures now affecting master trusts makes it highly unlikely that there will be any successful new entrants any time soon.
Watson Wyatt managing director Andrew Dillon is one of those who believes that the sector is not only facing a consolidation, but that the environment is not conducive to the entry of new players.
“In my view, anyone looking to set up a master trust now has got buckley’s of making it successful,” he says. “They’re doomed to failure because they’re just not going to get sufficient critical mass.
“I see a consolidation coming, although the timing is anyone’s guess — perhaps over the next five years. But really, only a handful of the biggest master trusts in the corporate area will survive.”
Dillon says the introduction of choice-of-funds and portability will have an impact because it will boost administration costs for master trusts without, at the same time, resulting in an increase in the pool of funds.
However, Dillon says the timing of consolidation is difficult to pick because of the deep pockets of the organisations running master trusts. “You’ve got to remember that the people and organisations controlling master trusts have exceedingly deep pockets and they’re very, very patient people,” he says.
The likelihood of a consolidation is supported by AMP’s head of corporate superannuation, Ken Lockery, who says there is already signs of movement among smaller players, making size a crucial issue.
“What corporates have to consider as part of their outsourcing decision is how long a player will be around, and that makes size and critical mass key issues,” he says. “They have to ask themselves whether they want to outsource their corporate superannuation to a particular master trust if that trust is unlikely to be around in three or four years time.”
Lockery believes consolidation will manifest itself in the form of mergers and that it’s also possible that some smaller players might seek to stave off difficulty by entering into agreements to re-brand the products of larger players.
He finds it hard to time when the trickle of smaller players leaving the sector will become a flood, but he believes it will start to happen within the next three to five years.
Lockery says: “There are a lot of subscale players out there. A few will run on. But if they see no chance of reaching scale in the market, there will be consolidation.”
For those not already in the market, Lockery believes that it’s too hard to develop the scale required. He says: “It’s a process of putting a whole lot together… administration systems, investment options… It’s not easy to put these together and to remain credible as well.”
Wayne Walker, managing director of Rice Walker Actuaries, says some consolidation is inevitable “because the profitability of some of the master trusts isn’t as flash as they’ve been cracking it up to be”.
“This is attributable in part to the high cost of winning business,” he says.
Walker believes industry funds are placing real pressure on the master trusts and this is a trend that is likely to continue.
Asgard head of product Mike Fielding notes that, to some degree, the shake-out has probably already begun in circumstances where corporate superannuation is not all that profitable and where most organisations see it as a means to an end.
