Superannuation funds need $30bn to be competitive and ‘bus stop’ mergers won’t cut it, says APRA’s Helen Rowell

One of Australia’s most senior financial regulators has warned small super funds they need to take the ‘express’ route to upsize fast.

Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell. Picture: AAP

APRA deputy chair Helen Rowell has fired a warning shot to super funds embarking on “bus-stop” mergers, saying small funds should take the “express” route and merge with larger players to be competitive with the sector’s mega-funds.

Appearing at the AIST’s major super funds conference on Wednesday, Ms Rowell put funds with less than $30bn in assets under management on notice and raised concerns that some of the mergers that had taken place in recent years lacked the governance capability or scale to be sustainable over the long-term.

“The emerging industry view seems to be that any fund with less than around $30bn in assets under management is increasingly going to be uncompetitive against the so-called ‘mega-funds’. While there will inevitably be debate about the threshold level of assets needed, we agree with the sentiment,” she said.

Smaller, underperforming funds should be merging with larger, better performing partners rather than other small players, Ms Rowell added.

“APRA doesn’t intend to let perfection be the enemy of the good. But we 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.

Source: Chant West

“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.

In what she said would likely be her last speech before she moves on to take responsibility for overseeing insurance in July, Ms Rowell also warned that APRA would take action against any funds found to be spending money that was not in members’ best interests.

“We have asked more than 20 trustees and industry associations to provide information and supporting analysis on different types of expenditure, including advertising campaigns, television program sponsorship, sponsorships of sporting teams and payments to external organisations.

“We expect to conclude this thematic work in the next few months and, if we form the view that some expenditure is contrary to the best interests of members or the sole purpose test, enforcement action will follow,” she flagged.

Next on APRA’s list will be to strengthen investment decision-making and governance practices, Ms Rowell said.

APRA will, in the coming months, release a consultation package which will include updating the relevant prudential standard on investment governance.

“The updated material incorporates learnings from our supervisory experiences through the pandemic, our unlisted assets thematic review, as well as the recommendations of our post-implementation review of the prudential framework.

“In particular, the package seeks to clarify our expectations and strengthen requirements around asset valuation practices, liquidity management practices, investment stress-testing, and the consideration of agency risks in internal investment management arrangements.”