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Funds in need of merger partner left with fewer opportunities due to APRA test, experts says

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KPMG has examined the annual performance test and its impact on consolidation in the superannuation industry.

With the results of APRA’s second MySuper performance test due for release soon, KPMG has highlighted key challenges that have arisen since the test was introduced last year.

KPMG Australia partner, actuarial & financial risk, Platon Chris said that while the test pushed 10 of the 13 funds that failed to reconsider their future and either merge or exit the industry, it is now likely to present new challenges for small to medium funds needing a merger partner. 

According to Mr Chris, funds that have already undertaken significant mergers or reached ‘mega fund’ status may not be looking to be involved in additional mergers.


“Recent large fund mergers are likely to focus on getting the strategy, integration and operating models in place before they can be in a position to enter additional agreements with new funds. Equally, the more stable mega funds can become more selective about how they grow their funds and the opportunities they pursue,” he said.

“This could leave the small to medium funds in need of a merger partner with fewer and fewer opportunities, and ultimately at the detriment to those members still within these funds,” Mr Chris cautioned. 

He explained that APRA’s push for consolidation in the super industry has seen the emergence of $30 billion as the threshold or “ticket to play” for the scale that is required longer term.

However, at the end of the 2022 financial year, there were 59 super funds with less than $30 billion in assets under management and 42 of these funds had less than $10 billion.

“The annual performance test as a driver of industry consolidation represents a challenge for both the regulator and trustees, in seeking to achieve the desired outcome for members of long-term sustainable and well-performing funds,” Mr Chris added.

Moreover, Mr Chris pointed to a shift in how funds approach consolidation. He explained that while historically, funds have chosen merger partners based on strong synergies and aligned investment philosophies, the drivers of selection and ability to attract a merger partner are shifting, making the process of determining that a merger will be in the best financial interests of all members increasingly challenging. 

“Funds who fail the performance test and don’t have resources to work through the underperformance issues, may not be able to find a timely alternative solution before members start to ‘vote with their feet’ and leave the fund, opening up potential liquidity issues for the remaining members, and thereby reducing the appeal of the fund even more to any potential suitors,” Mr Chris said.

“Evidence suggests that members do take action against underperforming funds, with some of those who failed in 2021 experiencing higher than average net member outflows. The result of which may impact those mergers that are currently in train and in some instances cause them to fail as the potential merger partners will need to reassess the impact of taking on the underperforming fund to its members via the merger business case and members best financial interest, and determine if the merger still makes sense,” he explained. 

“The unintended consequences of such an event would create additional strain and pressure on a trustee that is in the process of merging and transferring members to a more sustainable future arrangement in an orderly and measured fashion.”

Earlier this month, APRA chair Margaret Cole indicated that the super industry was “a fair distance” away from reaching its optimal size.

“With the industry still at 145 APRA-regulated funds, of which 105 collectively manage less than 9 per cent of assets, I can say that it is our view that the optimal size of the industry remains a fair distance from where we are now,” she said.

On whether APRA had a specific figure in mind for the ideal number of funds, Ms Cole indicated that this was not the case.

However, she pointed to comments from outgoing APRA chair Wayne Byres, who recently stated: “It’s fair to say, that if you were designing the superannuation industry from scratch, you wouldn’t give it the shape we have today”.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.