Australia’s superannuation system has been likened to the big four banks with an oligopoly likely to form within the industry.
Speaking at the Australian Institute of Superannuation Trustees (AIST) ASI 2021 LGIAsuper chief executive Kate Farrar noted the current environment lends itself to a similar situation we see with the big four banks which are for-profit and are too big to fail.
“There’s no question there might be four or five [major superannuation funds],” she said.
“The regulatory and government narrative is very clear. The narrative is around consolidation at scale. And that will end up in an oligopolistic structure like all our other markets in Australia have ended up.”
Liking it to the banking sector, with smaller providers offering innovative products for consumers, Ms Farrer pointed out the same could happen in the superannuation sector.
“I think innovation will continue to thrive in that mid market space. A lot of innovation and niche offerings can thrive in that space even though we would not have the protection of the regulators in the way those that are too big to fail might have,” Ms Farrar noted.
Ms Farrar said recent Your Future, Your Super (YFYS) reforms will only add to an increase in mergers, as super funds look to scale resources in order to pass key criteria.
“I do think that YFYS and the business criticality of the long-term relative performance history, which is not necessarily correlated with either outright return or volatility, does mean that performance relative to YFYS is likely to be a driver of merger partner selection going forwards,” she explained.
However, Spirit Super’s chief investment officer Ross Barry has pointed out that bigger doesn’t always mean better, with some mergers likely not to benefit members to the expected extent.
“The danger is that you go into a merger and sit back and think that all of a sudden scale benefits are going to fall out of the sky and you’re going to operate at a lower cost base,” Mr Barry said.
“That doesn’t happen unless you make it happen.”
Pointing out the difficulties funds that merge face, Mr Barry said if a fund is going to deliver scale benefits there has to be some rationalisation of internal resources or of the manager line-up.
“Those conversations are always really difficult and personally taxing. Those conversations need to be had with eyes wide open on that,” Mr Barry concluded.