Conglomerates have gained a bad name over the past decade because of the failings in the financial system under bank ownership, which were exposed by the Hayne royal commission, and the governance failings at collapsed conglomerates such as General Electric.
Super funds have unique risk management challenges because as well as being the largest owners of illiquid infrastructure assets, they must manage entities with increasingly large cash outflows caused by ageing Baby Boomers.
Nevertheless, the same compelling commercial logic behind the Sunsuper/QSuper merger should result in Australia’s super mega funds striving for total assets under management of $1 trillion each by 2050.
Bigger is better
The mega funds will almost certainly include the $290 billion Colonial First State, which is owned by KKR, the $260 billion AustralianSuper, the $150 billion Aware Super, and Insignia’s $88 billion super platform.
One or two other mega funds ought to emerge from combinations involving the $105 billion Unisuper, the $68 billion Hostplus, the $65 billion Rest and the $47 billion Cbus.
In many ways the Sunsuper/QSuper merger is a blueprint for the mega-mergers that will be a feature of the superannuation industry over the next decade.
The carefully planned and controlled merger process brought together two large funds that were under no pressure to do anything.
Their performance numbers had been in the top quartile and, therefore, they were not being pressured by the prudential regulator to find a partner.
Also, they were already delivering members the benefits of scale through competitive investment fees and administration fees near the lowest paid in the industry.
The trustees of both funds understood the compelling logic in bringing together QSuper’s membership, which is skewed to an older generation in the retirement phase, with Sunsuper’s younger membership, which must necessarily lean towards a more aggressive investment profile.
Sunsuper chairman and former Queensland treasurer Andrew Fraser tells Chanticleer the thinking behind the merger.
“Ultimately, this was a decision taken about what is the best way to face into the next 20 years and 50 years of how the industry is going to operate,” he says.
Fraser says having two funds in Queensland helped with the social issues that are raised through a merger.
“But the really important strategic benefit is that the funds are complementary – Sunsuper has a younger profile and more generic profile, and very private sector-exposed membership.
Combining the two together means we think we’ve created something uniquely strong and resilient. — Andrew Fraser
“QSuper obviously has a deep position in a public sector market with secure and stable employment and high contribution rates.
“So, when you think about the ideal scenario for QSuper, it was being able to grow and collect more members at the front end to balance out its profile.
“The ideal scenario for Sunsuper is to have a strong and stable membership base that sits on the other side of the ledger of a growing and younger base.
“Combining the two together means we think we’ve created something uniquely strong and resilient.”
Don Luke, who is chairman of QSuper and was the first CEO of Sunsuper in 1997, says QSuper came to the merger with a unique advantage – the strength of its relationship with Queensland public servants.
“We had our annual meeting recently and the average balance of the people attending was about $650,000 – that’s a very different membership base to Sunsuper,” he says.
Luke says a cut of the membership by age shows the striking demographic gap – 29 per cent of Sunsuper members are over the age of 45, while at QSuper that figure is 56 per cent.
The average balance in QSuper is $170,000, and the average in Sunsuper is a third of that, about $60,000.
Fraser and Luke were determined to deliver the 2 million members of the newly formed Australian Retirement Trust an immediate benefit from the merger.
All the QSuper account holders will benefit from a cut in their administration fee from 0.16 per cent to 0.15 per cent per annum. That fee currently caps at $900 a year, and will fall to $875.
The former Sunsuper members will get a weekly administration fee drop from $1.50 to $1.20. Some members who are part of corporate plans acquired by Sunsuper already pay $1.20 or less, so are unaffected.
Pressure on smaller funds
The fee cuts delivered by mega funds, which will be a feature of industry consolidation over the next decade, will increase the pressure on smaller super funds.
The mega super funds will have all the characteristics of conglomerates with the need for complex co-ordination of different operating tasks, as well as management of cash flows and diverse asset portfolios.
They will have to compete for new members with marketing campaigns, co-ordinate the administration of millions of members, manage a diverse array of assets and potentially get involved in the management of private businesses.
Fraser says marketing expenditure will be essential for super funds in a world where the flow of money is determined by the choices made by members rather than industry awards.
Increased exposure to unlisted assets
“If you believe choice and competition are inherent drivers of good outcomes, then marketing of super funds is the natural consequence, and for anyone to promote both of those as mutually exclusive I think is reasonably incoherent,” he says.
Also, mega funds will have to build the sort of reserves that are found at Australian Retirement Trust. It has total reserves of $1.2 billion, although this amount is segmented into a general reserve, an insurance reserve, an unallocated contribution reserve, and operational risk reserve.
As funds strive for economies of scale to deliver their members lower investment fees and cheaper administration costs, they will have increasingly large exposures to unlisted assets, which do not have the same ease of price discovery as listed shares.
This will present unique challenges for trustees and chief investment officers, particularly when a major unlisted asset they own suddenly makes a call for, say, $500 million in capital.
Unlisted assets do not have constant price discovery and there is often no transparency about the valuation of unlisted assets except at the point of purchase. Funding the capital growth of private companies will require strict adherence to current valuations, and not book value.
Source: Financial Review