Tue. Jan 18th, 2022

A handful of giant pension funds in Australia are emerging as titans of global finance, as the country’s regulator promotes mergers in the A $ 3.3tn (US $ 2.4tn) pension sector.

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

The move was supported by the large pool of assets created by Australia’s mandatory pension savings system.

Pressure from the Australian Prudential Regulatory Authority, the financial services regulator, for non-performing funds to merge or leave the sector was also behind the wave of consolidation, said Abhishek Chhikara, principal of Melbourne-based consulting firm Right Lane.

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

In addition to the Your Future, Your Super reforms – which include an annual performance test for funds, which allow members to keep the same account when they change jobs, and an online fund comparison tool – which went into effect last year, the trend concentrates on sector in some global-scale pension funds.

Analysis by Right Lane found that three to five general mega-funds, each with 1 million to 3 million members, and seven to 10 specialist funds with at least 500,000 members, will retain competition and specialization in the market.

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

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 14 mergers carried out, most recently with Club Plus last month.

QSuper, a $ 133 billion fund with about 600,000 members, will 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 combined 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 is detrimental to members because it is too large. The regulator has even demanded that some funds merge following its first pension performance test last year, which sought to hold funds accountable for underperformance by increasing transparency and fines.

The test rated funds with at least five years of performance history against a benchmark; 13 funds failed.

APRA became so concerned about the “persistent investment underperformance” at Christian Super that last month it ordered “a strategy to merge with a larger, better-performing fund by 31 July 2022”.

David Bardsley, an advisory partner on pension funds at KPMG, said the regulator’s tests are likely to spur further as well. industry consolidation. He added that the past few years have introduced a much broader, more comprehensive set of regulatory and compliance expectations.

“In many cases, smaller businesses struggled. There is also an appreciation that if you have scale, that there is efficiency that can be passed on to members through reduced fees and improved investment performance, ”he said.

However, there is also the risk that mega-funds become too large. “We’ve seen it in other markets where there are very large businesses from $ 600 billion to $ 800 billion,” Bardsley said. “Being able to deploy that amount of capital in an active way is becoming increasingly difficult. You tend to move towards an index-like performance and will therefore have to pay index-like fees for it. ”

In five years, Bardsley expects the landscape to include a range of funds from A $ 15 billion to A $ 30 billion, but little in the range of A $ 30 billion to A $ 75 billion. “And there will be a handful – maybe 10 or 12 that I would characterize as mega-funds – that is, those that are close to or more than A $ 100 billion.”

Rose Kerlin, an executive officer at AustralianSuper, said any ties should be in the best interests of members. “We assess mergers on criteria such as the payback period for the cost of merger, which includes all costs and investment performance and the impact that the merger will have in terms of number of members, assets and future contributions,” she said.

Mergers are not the only way to grow, Kerlin added. “Ultimately, it only matters to be greater if it results in a level of outperformance in return than would be achieved if the fund continued on a standard path.”

Despite the increasing pressure on funds to merge, Chhikara stressed the importance of finding the right partner. “There [are] “There are countless examples across industries where mergers are done in a hurry and are not properly integrated, and this only leads to sub-optimal outcomes,” he said.

“But even more than that is the issue of execution risk. Trustees need to consider what kind of fund they need to create in order to survive and thrive in the future. ”

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