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APRA in crackdown on subscale funds

By Cameron Micallef
3 minute read

The prudential regulator has signalled it will continue to push more subscale super funds to merge, revealing the magic number below which it does not believe funds can deliver good member outcomes.

In her exit speech, deputy chair of APRA Helen Rowell said Australia currently has too many superannuation funds, with smaller funds needing to merge with larger firms.

Funds with less than $30 billion under management, Ms Rowell noted, cannot remain competitive, often charging members more for underperformance.

“The emerging industry view seems to be that any fund with less than around $30 billion in assets under management is increasingly going to be uncompetitive against the so-called ‘mega-funds’,” she said.

“While there will inevitably be debate about the threshold level of assets needed, we agree with the sentiment. Smaller, underperforming funds would ideally consider merging with a larger, better-performing partner rather than another small fund – especially one that is also underperforming.”

According to APRA data, almost 90 per cent or 124, of the 142 funds in APRA’s fund-level superannuation data have less than $30 billion in assets.

Ms Rowell said APRA has been “pushing hard” for several years for more fund mergers, and it is not simply “weeding out underperformers or making the sector easier for members”.

“All things being equal, the evidence suggests that larger funds are better placed to deliver stronger investment performance and lower fees,” she continued.

“As the operational capability needed to run a successful superannuation fund generally increases with technological and regulatory developments, scale is becoming a more important determinant of member outcomes.”

While praising APRA’s work in reducing the number of funds in the market, Ms Rowell was quick to point out that smaller funds should not be together with other inefficient small funds.

“Over the past eight years, about 70 APRA-regulated funds have finalised mergers, and there are currently around a dozen potential mergers under consideration that we know of,” Ms Rowell said.

“While this is welcome, we’re not convinced all of these mergers are producing a new entity that has either the governance capability or the scale to be sustainable over the long term.”

She noted that APRA did not expect trustees to consider whether a small fund-to-small fund (or bus-stop) merger is going to tackle underlying issues or just be a temporary stop on the way to the ultimate destination of sustainability.

“With an obligation to consider members’ best interests, not just better their interests, trustees should be considering the express bus route that will take them more directly to where they need to be,” Ms Rowell concluded.