Super trustees face challenges in assessing merger partners

In a rapidly consolidating sector, trustees must consider many factors as they eye potential tie-ups.

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The landscape of the Australian superannuation industry is changing rapidly with fund consolidation a constant theme in recent years. The introduction of capital gains tax rollover relief and the release of several major governmental and regulatory reports over the past 12 months will surely serve to motivate further merger activity in the coming months and years, as funds look to increase scale and efficiencies and manage increasing regulatory obligations.

Regulatory authorities and political parties have been consistent in recommending that industry consolidation is the correct way forward in order to eliminate underperforming funds and reduce the total fees incurred on superannuation balances, ensuring that all Australians have the potential to maximise their retirement benefits.

Third party provider synergies

“One important consideration for funds considering suitable merger partners is the potential for cost savings and the smoothing of transition complexity,” says Peter Hele, Head of Business Development, Asset Servicing, at NAB. He says this can be realised by merging with another fund (or funds) who are already using common third-party service providers, such as custodians, asset consultants, health insurers and investment managers.

By seeking alignment in these servicing arrangements, the additional FUM scale which results from a successful merger can present an opportunity to renegotiate to more favourable contractual terms with those providers, while any fixed costs are spread across a larger pool of accounts, resulting in direct financial benefit to fund members.  Additional value is realised by ensuring that various service outputs, such as the depth and quality of data, consistency in reporting formats; and application of policy standards (including accounting and tax treatment) are already being consistently applied across the merging funds. This removes the need to account for rationalisation of divergences in those areas when undertaking planning for the merger transition project.

The merging of superannuation funds is generally a very complicated process, and it would obviously be desirable for all parties involved if complexity can be limited wherever possible. The presence of existing third-party provider synergies is undoubtedly beneficial, and is a key consideration for an RSE when conducting due diligence on potential merger partners.

What role can third party providers play in supporting merger activity?

Given the intimate knowledge of the structure and investment activities of superannuation funds, and the expertise gained from being a party to previous fund mergers, third-party service providers are well placed to offer insight and perspective to RSEs who are considering their future state.

“We believe there is a significant role to play in the consolidation activity of our superannuation clients in the coming years,” Mr Hele says.  At the very least, input will be crucial in contributing to transition planning and execution.

“In our view, the role of the custodian does not need to be limited to a late stage in the merger process,” he adds.

Custodians have significant expertise in superannuation structures, asset allocation strategies, and in addition have daily interaction with multiple member registry systems and providers. In some cases, the geographical location of two merging funds can be supported more broadly by a third-party provider who can extend their offering to provide facilities on the ground in various states around Australia to help reduce costs.

Merger assessment and risk mitigation

  • Indirect costs must be a key consideration. A merger partner may have competitive direct costs for funds management and custody fees, but significantly higher indirect costs for foreign exchange execution, tax efficiency and interest rate leakage. Fund members could be at a distinct disadvantage under a merged entity with a lack of operational efficiencies.
  • Contractual terms are usually the last consideration but should be the first. Liens on assets, indemnities and liabilities are not always more favourable in large funds. Your members may be exposed to higher risk, which may have been the trade-off for lower fees in previous negotiations.
  • A complicated registry transition could result in poor engagement, lost contributions and lost members. Effective planning, communication and a project staffed with industry experts is the only way to execute a successful registry transition.
  • How is your merger partner positioned for upcoming regulatory change? Is their traditional fund-of-funds structure able to cope with pension and accumulation phases? Will your members be disadvantaged by an unfavourable structure that may on the surface appear effective and low cost?
  • Advisor support may be critical, especially for high end balance members. How will your members be looked after in the combined entity — there may be an established relationship which is hard to break? Retention of key talent on the front line will play a big role in retaining members.

The choice of the right merger partner and effective execution of the transition in the best interests of members is probably the single biggest event a Trustee will be responsible for in their tenure. Making a decision taking into current and future events is challenging. It will be an interesting road ahead for the industry; on one hand the growing assets pools sends a strong signal of growth, while on the other hand we are seeing a significant decrease in supplier contracts due to consolidating opportunities.

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