Australia’s pension funds rise to take on global finance giants

A handful of Australia’s giant pension funds are set to emerge as global finance giants as the country’s regulator encourages mergers in the A$3.3 trillion (US$2.4 trillion) pension sector.

Analysts said recent reforms have pushed the sector toward a structure of three to five mega funds, after a record 15 mergers in the 12 months to October 2021.

This shift has been underpinned by the huge pools of assets created by the Australian Compulsory Pension Scheme.

Abhishek Chekara, president of Melbourne-based consultancy Rightline, said pressure from Australia’s prudential regulator, the financial services regulator, for distressed funds to merge or exit the sector was behind the merger wave.

“The changes introduced by the reforms are increasing pressure, especially in small and medium-sized funds, and are leading us down the path of a more coherent system,” Chikara said. “As smaller companies struggle to compete, they are more likely to merge into much larger funds.”

Along with your future, your super fixes — which include an annual fund performance test, allowing members to keep the same account when changing jobs and an online money comparison tool — that went into effect last year, the trend is focused on the sector in a handful of high-quality pension funds. global scope.

Analysis by Right Lane found that three to five public giant funds, each with 1 million to 3 million members, and seven to 10 niche funds with at least 500,000 members, would maintain competition and specialization in the market.

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

The AustralianSuper has 2.5 million members and A$244 billion in funds under management, an amount it expects to double within five years. It has carried out 14 mergers, most recently with Club Plus last month.

QSuper, a A$133 billion fund with about 600,000 members, is set to serve 2 million members and manage more than A$200 billion after its merger with SunSuper, which will be completed by the end of February. The mutual fund will operate under the new name Australian Retirement Trust.

APRA has long argued that the number of funds and investment options within the pension sector was detrimental to members because it was too large. The regulator even called for some funds to be merged after an inaugural pension performance test last year, which sought to hold funds accountable for poor performance through increased transparency and penalties.

The test evaluated funds with at least five years of performance history against a benchmark; 13 boxes did not meet.

APRA has become so concerned about the “continued underperformance of investment” in Christian Super that it last month ordered a “strategy to merge with a larger and better performing fund by July 31, 2022”.

David Bardsley, a consulting partner at KPMG, said the regulator’s tests are also likely to spur further integration into the industry. He added that the past few years had introduced a much broader and more comprehensive set of regulatory and compliance expectations.

“In many cases, small businesses have suffered. There is also an appreciation that if you have scale, there are efficiencies that can be passed on to members by lowering fees and improving investment performance.

However, there is also a risk that mega funds will grow too large. “We’ve seen that in other markets where there are very large companies that are worth between $600 billion and $800 billion,” Bardsley said. “Being able to actively use that amount of capital is becoming increasingly difficult. You tend to go for index-like performance, and so you’ll need to pay an index-like fee for that.”

Within five years, Bardsley expects the landscape to include between A$15 billion and A$30 billion, but as few as A$30 billion to A$75 billion. “And there will be a handful – maybe 10 or 12 I would classify as mega funds – that is, those near or above A$100 billion.”

Rose Kerlin, chief executive of AustralianSuper, said any links should be in the best interest of members. “We evaluate mergers based on criteria such as the payback period for the cost of the merger, which includes all costs, investment performance and the impact the merger will have in terms of number of members, assets and future contributions,” she said.

Kerlin added that mergers are not the only way to grow. “Ultimately, being bigger only matters if it leads to a level of outperformance in returns than would be achieved if the fund continued on the standard path.”

Despite the increasing pressure on funds to merge, Chhikara stressed the importance of finding the right partner. “over there [are] Countless examples across industries where mergers are hastily done and not integrated properly, and this only leads to sub-optimal results.”

“But more than that is the issue of implementation risks. Trustees need to think about what kind of funding they need to survive and thrive in the future.”

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