Increasing regulatory pressures will lead to an acceleration in super fund mergers taking place as companies decide whether they need the capacity of a larger entity to meet compliance standards, according to KPMG.
In its new report Super Merger Insights, KPMG has identified key pressures driving mergers, including APRA’s members outcomes package, and fees and costs and proposals from last year’s budget encouraging fund consolidation now being legislated.
The firm also believes that the Productivity Commission’s recommendation of ten Best in Show funds as a default list for new workforce entrants will not be adopted.
Adam Gee, superannuation advisory partner at KPMG, said his firm’s earlier prediction that the number of funds in Australia would halve over the next decade now seems more likely to occur sooner, with multiple factors supporting industry consolidation.
“We are seeing increased merger discussions in the market, and we expect this to intensify,” Mr Gee said.
“There had already been greater regulatory oversight in the super sector and the royal commission will give this a rocket boost.
“Trustees and shareholders in super entities will increasingly question whether their members would be better served in a larger entity with the scale, processes and functions more able to effectively manage greater regulatory obligations.”
APRA’s Member Outcomes package mandates that funds will, from January 2020, have to undertake an annual assessment of member outcomes, which the regulator will then review and use as a remedy for action.
KPMG said the evaluation of how funds are performing for members is already driving merger discussions as funds seek long-term sustainability.
Fees and costs within superannuation were also pointed out to be under further scrutiny, as a result of both the royal commission and productivity commission, as well as the gaps and inconsistencies in how funds report on the expenses.
Three proposals from the 2018 budget affecting fund consolidation are now legislated, which KPMG said will cause a significant reduction in membership numbers for many funds.
The budget proposals had two changes for all super accounts with balances below $6,000, including a 3 per cent cap on admin and investment fees; if they had not received a contribution in the last year, a classification as inactive and transfer to the Tax Office.
The third change was a ban on all super fund exit fees.
Although KPMG noted reasons why mergers can have benefits, including reduction in costs and improved investment outcomes, products and services, and exposure to new member groups, it said mergers sometimes do not succeed.
The firm said clashes can arise due to lack of cultural alignment, materially different demographics, and varying investment philosophies and underlying shareholder interests.
“While there are currently many push factors for funds considering mergers, they should also be mindful of the pull factors,” Mr Gee said.
“Funds must be careful not to panic over the increased regulatory pressures and rush into a poorly-conceived or under-resourced merger as this can have serious detrimental reputational consequences.
“There are extremely complex considerations in mergers and great care must be taken.”
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