A new report into the superannuation industry from KPMG suggests that 2019 will be defined by mergers and consolidation between super funds as they seek to deliver improved member outcomes.
The 2019 Super Insights Report from KPMG said that, over the next twelve months, an increased number of funds would enter merger discussions seeking to deliver improved member outcomes on an increased scale.
The industry is already seeing this play out with VicSuper and First State Super having entered consolidation discussions and Sunsuper and AustSafe Super having completed its consolidation earlier this year.
The KPMG said that the past twelve months has seen a number of reports about the industry, including the high-profile royal commission, the final productivity commission report and the new ATO legislation.
The recent 2019 federal budget also provided tax relief for merging funds with an extension to the 2008 legislation which allows funds to move capital and revenue losses to new merged funds, while deferring taxation on gains and losses from other assets.
The report said that these events had created strong tailwinds in favour of consolidation in three areas: member outcome assessment, inactive accounts and changes to default arrangements.
From January 2020, super funds will be required to undertake an annual member outcomes assessment to focus on returns, fees, operating costs and more.
The assessment which considers what funds deliver to members will be a key driver for merger activity in the short-to-medium term, according to KPMG with many funds to have initiated discussion prior to this assessment.
“Prior to an initial assessment, many funds have initiated merger discussions with a view to improving their long-term sustainability,” it said.
Legislation passed by the government in February and coming into effect in July will require all funds to transfer inactive account balances to the ATO.
This will reduce membership in many funds, said KPMG, which in turn will provide a strong incentive to enter into a growth merger strategy.
“Member reductions and associated revenue reductions will provide a strong incentive for many funds to consider inorganic growth/merger strategies,” it said.
Finally the Productivity Commission and royal commission ignited debates around default arrangements with a best-in-show proposal in particular drawing industry criticism.
“While the best-in-show proposal is unlikely to be adopted, it is clear that significant changes to default arrangements – reducing the number of accounts and funds eligible to receive default contributions – will made be in the near future,” the report said.
The KPMG report said a default government fund, or an elevated MySuper licence reducing the number of funds able to accept default contributions or the adoption of an automatic rollover model were much more likely to be introduced.
“These are some of many proposals that have been put forward to reduce multiple accounts and/or increase the likelihood workers are defaulted into sustainable and well-performing funds,” it said.
Executive director of QMV Stephen Mahoney agreed with the KPMG report and said the industry had seen an increase in the rate of consolidation and it showed no signs of slowing.
“Mergers will be driven by a number of factors, including APRA focusing on poor performance, as well as the potential for members to push trustees to wind funds up.
“In addition, technology and the growth of digital offerings in superannuation is changing the industry landscape in multiple ways and will see smaller existing funds seeking new economies of scale,” Mr Mahoney said.
However, funds need to be careful, said Mr Mahoney, and continue to run a successful fund during merger processes.
“While a merger may well be the best outcome for members, continuing to run the fund successfully during the merger process needs to be priority.
“Before, during and after the actual merge it is crucial to have a strong, dedicated and empowered transition team, with this team being responsible for managing collaboration amongst all concerned parties,” he said.
The most important element according to Mr Mahoney was knowing what a merger was giving to members.
“Knowing who your members are, what they want, and what the merger will deliver to them, is key,” Mr Mahoney said.
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