APRA has warned super funds must be able to demonstrate their “right to remain” – and if they can’t, they could be forced to merge.
The impacts from COVID-19 are likely to accelerate sustainability challenges – including declining returns, reduced portfolios and membership bases, and cost pressures – for many super funds, and some could be forced to merge.
“What APRA has observed over the past few months is that not all funds are equally well equipped to handle shifts in the landscape,” APRA said in a statement.
“It has been a timely reminder that trustees must continually reassess and be able to demonstrate their “right to remain”, and that for some the only way forward to secure the future of their members for the long-term may be to exit the industry and pass on the trusteeship of their funds to others who are better equipped for the task.”
While many super funds are well resourced and governed, APRA believes Australia’s superannuation industry is not operating at peak efficiency despite the number of APRA-regulated funds decreasing by a third since 2013.
“In APRA’s view, even 185 funds (which offer more than 40,000 investment options) is still a large number and means the industry is probably not operating with maximum efficiency,” APRA said. “APRA continues to pressure the trustees of poor-performing funds to merge or exit the industry unless they are able to materially lift their game.”
The regulator also warned that super mergers often stalled because of narrow or restrictive interpretations of legislation, as well as concerns about due diligence costs on the part of super funds looking at acquiring other funds, and said that trustees should develop an “exit plan” to facilitate smooth consolidation by periodically scanning the landscape for merger partners.
“APRA acknowledges that it can be difficult to reach the decision to exit, and there may be challenges associated with finding a suitable merger partner,” APRA said. “That doesn’t mean that these important decisions should be avoided or deferred, or that (sometimes questionable) reasons are found to avoid a merger that otherwise appears to be in members’ best interests.”
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