Australian pension funds rise to take on global finance giants

A handful of giant pension funds in Australia are set to become titans of global finance as the country’s regulator encourages mergers in the A$3.3 billion ($2.4 billion) pensions sector. Americans).

Analysts said recent reforms are driving the sector towards a three to five megafund structure, after a record 15 mergers in the 12 months to October 2021.

This change was underpinned by the vast pools of assets created by Australia’s mandatory retirement savings system.

Pressure from the Australian Prudential Regulation Authority, the financial services regulator, for underperforming funds to merge or exit the industry was also behind the wave of consolidation, said Abhishek Chhikara, director of the Melbourne-based consultancy Right Lane.

“The changes introduced by the reforms are intensifying the pressure, especially on small and medium-sized funds, and leading us down the path to a much more consolidated system,” Chhikara said. “As smaller companies struggle to compete, they are likely to consolidate into much larger funds.”

Alongside the Your Future, Your Super reforms – which include an annual fund performance test, allowing members to keep the same account when they change jobs and an online fund comparator – which came into effect last year, the trend is towards the concentration of the sector in a few world-class pension funds.

Right Lane’s analysis found that three to five generalist mega funds, each with 1 to 3 million members, and seven to 10 specialty funds with at least 500,000 members, would preserve competition and specialization in the market.

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

AustralianSuper has 2.5 million members and A$244 billion under management, an amount it plans to double within five years. It has completed 14 mergers, the most recent with Club Plus last month.

QSuper, an A$133 billion fund with around 600,000 members, is expected to serve 2 million members and manage more than A$200 billion following its merger 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 argued that the number of funds and investment options in the pension industry was detrimental to members because it was too large. The regulator even required some funds to merge following its inaugural superannuation performance test last year, which sought to hold funds accountable for underperformance by increasing transparency and penalties.

The test assessed funds with at least five years of performance history against a benchmark; 13 funds did not reach it.

APRA has become so concerned about “continued investment underperformance” at Christian Super that it last month ordered “a merger strategy with a larger, better performing fund by July 31, 2022.”

David Bardsley, pension advisory partner at KPMG, said the regulator’s tests were also likely to spur further industry consolidation. He added that recent years have introduced a much broader and more comprehensive set of regulatory and compliance expectations.

“In many cases, small businesses have struggled. There is also an appreciation that if you have scale there are efficiencies that can be passed on to members through lower fees and better return on investment,” he said.

However, there is also the risk of megafunds becoming too big. “We’ve seen this play out in other markets where there are very large companies, $600 billion to $800 billion,” Bardsley said. “Being able to actively deploy this amount of capital is becoming increasingly difficult. You tend to switch to an index performance and therefore you will have to pay an index fee for this.

Five years from now, Bardsley expects the landscape to include a number of A$15-30 billion funds, but few in the A$30-75 billion range. “And there will be a handful – maybe 10 or 12 which I would classify as mega funds – meaning those near or above A$100 billion.”

Rose Kerlin, an executive at AustralianSuper, said any tie-up had to be in the best interest of the members. “We evaluate mergers on criteria such as the payback period for the cost of the merger, which includes all the costs and performance of the investments and the impact the merger will have in terms of number of members, assets and future contributions,” she said.

Mergers aren’t the only way to grow, Kerlin added. “At the end of the day, being bigger only matters if it translates to a higher level of return than would be achieved if the fund continued on a standard path.”

Despite growing pressure on funds to merge, Chhikara stressed the importance of finding the right partner. “The [are] countless examples across industries where mergers are done in haste and not properly integrated, and that only leads to suboptimal results,” he said.

“But more than that, there is the issue of execution risk. Trustees need to think about what type of fund they need to create to survive and thrive in the future.