$23bn super merger just the start, says Brumby

The chairman of the $13bn MTAA Super fund is predicting a wave of super­annuation fund mergers.

Pink Piggy bank money concept on dark blue background, stuffed with Australian cash.

The chairman of the $13bn MTAA Super fund is predicting more super­annuation fund ­mergers as smaller funds move to seek economies of scale ahead of political and legislative pressure.

“We will be seeing more mergers over the next few years,” John Brumby told The Australian, speaking on the announcement of the merger of the MTAA fund and the $10bn Tasplan.

The merger, which is set to go ahead on October 1 next year, will result in a combined super fund of $23bn made up of about 335,000 members.

Mr Brumby said superannuation funds were under increasing pressure to ensure they had sufficient scale to provide competitive products.

“The current political and legislative landscape will likely mean an increase in mergers,” he said.

“By merging now, MTAA and Tasplan have chosen to be on the front foot and stay in control of our destiny and member outcomes.”

Mr Brumby said the merger of the two funds would provide efficiencies that could be passed on to members through improvements to products and services, low fees and strong returns.

“The merger will enable us to negotiate top-quartile investment management fees and take ­advantage of fee scale discounts,” he said.

The MTAA-Tasplan merger comes as the Australian Prudential Regulation Authority is given more power to force super funds to merge, particularly in cases where funds have lower investment returns.

The number of APRA-regulated superannuation funds with four or more members has fallen from 193 in September 2018 to 187 in September this year.

This comes at a time when the total assets of this sector have risen from $1.8 trillion to $1.97 trillion.

The number of retail funds has come back from 116 to 114, the number of corporate funds has fallen from 21 to 18 and the number of industry funds has dropped from 38 to 37 funds.

APRA is planning to produce “heat maps” of super funds highlighting those that have high fees and poor returns.

APRA deputy chairwoman Helen Rowell said last month the super fund regulatory body would be releasing the heat maps of funds to help direct APRA’s ­enforcement activity.

“Trustees can expect APRA’s supervision intensity to reflect the intensity of the colour shading on the heat map,” she told the ­annual conference of the Association of Superannuation Funds of Australia. “If trustees don’t fix these ­issues within a time frame that is acceptable to APRA, we will be ­requiring them to consider other options, including a merger or exit from the industry in some cases.”

Heat maps of more than 100 MySuper funds are set to be ­released by the middle of this month, with colours ranging from yellow to dark red, highlighting underperformance in investment returns, fees and costs and sustainability of member outcomes.

APRA has been keen to push for more mergers of super funds for several years.

While the number of corporate super funds has fallen, with many employers now getting out of ­offering their own super funds, consolidation in the industry and retail super fund sector has been a lot slower than APRA would have liked.

Questions over the future roles of the combined executives and boards have complicated some mergers, while many high-performing funds have been reluctant to merge with lower-performing funds, despite potential economies of scale.

While it has been given stronger powers to enforce mergers, APRA still faces challenges in making them happen.

But the MTAA-Tasplan merger is a sign that the industry is at last starting to be more proactive about merging ahead of more ­aggressive action by APRA.

Under the proposed merger of MTAA and Tasplan, Mr Brumby will step down as MTAA chairman next October.

Tasplan’s Naomi Edwards will stay on as chairwoman of the combined fund and MTAA chief executive Leeanne Turner will ­become chief executive.

Mr Brumby, the former premier of Victoria who has been chairman of MTAA for nine years, said the merger followed a comprehensive due diligence process.

“The amount of work involved is huge,” he said. “There are so many issues to handle.”

Mr Brumby said these included the demographic profile of each fund’s members and their respective investment returns.

He said a fund with a predominantly young member demographic would be reluctant to merge with a fund with much older aged members who would soon be facing retirement.

He said there was also the issue of the “cultural fit” of the two funds, which was an issue in deciding the future of board members, executives and the location of ­administrative offices.

“You don’t want a fund with younger members merging with a fund with much older members which is going to move into a cash outflow position,” he said.

He said there were also capital gains tax issues to be faced in any fund mergers if the assets of one fund had to be transferred into the assets of the other.

MTAA has investments in property and unlisted assets including stakes in Brisbane airport, Flinders Ports in South Australia and office buildings in Sydney, Melbourne and Canberra.

Mr Brumby said MTAA had looked at several potential mergers with other super funds over the past few years but none of these had gone ahead for various reasons.

Mr Brumby said the estimated “payback” on the merger from the transaction costs and stamp duty would come about in less than two years, “which is good for our members and will result in lower fees”.

He said it would be a “good thing” if there were more mergers in the industry.

“There’s nothing wrong with a fund of $13bn. We were a top quartile fund performance-wise.

“But over the long time, there will be more efficiencies which come through more scale and we will be able to drive better investment returns.”

Mr Brumby said the merger could also result in the combined fund taking a larger share in ­investment assets.