Superannuation ‘merger zone’ sucks in tiddlers; Industry and government funds face pressure to merge as reforms squeeze smaller funds

Superannuation ‘merger zone’ sucks in tiddlers

March 17, 2014

Georgia Wilkins

Australia’s industry and government superannuation funds are facing growing pressure to merge, as greater competition and government reforms put pressure on smaller funds.

Industry experts say about a quarter of the sector, worth $143 billion, is up for grabs, with funds worth less than $5 billion being forced to improve their offerings or be gobbled up by the dominant players.

Alex Dunnin, executive director of research at super research group Rainmaker Group, said 56 funds with under $5 billion fell into the ”merger zone”.

”There are a large number of funds in this ‘merger zone’ and every one of them is under significant pressure to get its story straight and define shrewdly how it intends to compete,” he said.

”If they don’t, they won’t be around for too many more years.”

Of the 56 funds, 45 are worth less than $2 billion and 34 are worth less than $1 billion, Mr Dunnin said. He estimated the sector targeted for acquisition represented a quarter of government and industry funds, or $143 billion in Australian superannuation.

Australia’s super funds were valued at $1.8 trillion at the end of December, with self-managed super funds (SMSF) accounting for $543 billion. The sector is under pressure as baby boomers retire and cash in their savings.

So far this year several state funds have advanced plans to merge, with Queensland’s AUST(Q) folding into AustralianSuper and Tasmania’s Tasplan considering a merger with Quadrant Super.

Financial Services Council chief executive John Brogden said the recent introduction of the government’s MySuper and SuperStream administrative reforms was helping spur competition in the sector by raising compliance costs out of the reach of smaller funds.

”Most of the pressure is coming from government changes, whether they be the cost of changing internal processes or adopting new IT systems,” he said. ”The smaller funds will have a lot of pressure on them to prove that they’re viable beyond the next two or three years. The smaller you are, the more pressure is going to be on you.”

The federal government is looking into the possibility of removing default superannuation settings in workplace awards.

A 2012 report by the Productivity Commission estimated that between $6 billion and $9 billion in super contributions were made to default funds.

Industry Super Australia chief executive David Whitely said the trustees of smaller funds were increasingly looking at merger opportunities to survive.

”Many trustees are considering whether their fund is delivering the benefits they’re supposed to to their members,” he said.

”If the answer is ‘no’, then they are often looking to merge with a much larger entity or merge with an entity of a similar size.”