Catholic super merger not a marriage made in heaven
After tortuous negotiations, a perfunctory exchange of emails sounded the death-knell for a $16bn-plus, faith-based merger.
After tortuous negotiations that lasted for the best part of 2017, a perfunctory exchange of emails late last year sounded the death-knell for a $16 billion-plus, faith-based merger between Catholic Super Fund and its Sydney-based rival Australian Catholic Superannuation Retirement Fund.
“Thank you for the response,” CSF chairman Peter Bugden wrote to his ACSRF counterpart Richard Haddock on October 27.
“We are disappointed that you were not able to accept our offer and I wish you well for the future.”
Haddock responded in kind, adding that they should keep in touch. Despite the resumption of merger discussions earlier this year under new CSF chairman Danny Casey, unreported evidence in the financial services royal commission shows that ACSRF held strong reservations about its rival’s business model.
Much of the concern was centred on a small, loss-making bank, MyLife MyFinance, and its ability to withstand an objective review after CFS had propped it up with almost $13 million in tier-one capital since 2016.
The only precedent for bank ownership in the $600bn industry fund network is ME Bank, which reported an underlying profit of $85m in the 2017 financial year and is held by 26 super funds.
ME Bank is yet to pay a dividend, choosing instead to reinvest profits to expand the business.
CSF chief executive Frank Pegan, who did not return calls or an email, said in an interview last year that MyLife MyFinance was treated as a private equity asset and was expected to generate a return in two to five years.
Pegan said the bank was a means of attracting and retaining members.
“For most members, super is not a conversational topic,” he said. “We identified that we had to connect with youth members more than through super.”
CSF, which looks after the retirement savings of staff in Catholic schools, has spent years scouring the industry fund network for merger partners.
The urge to merge has been fuelled by a number of powerful forces, notably the prudential regulator’s stricter oversight of the “best interests” rule that recognises the benefits of scale as an offset to escalating industry costs and the heavy downward pressure on fees charged to members.
There’s a general acceptance that sub-scale funds with less than $5bn in assets will struggle to survive in the next five years, and even those weighing in below $10bn will find the environment increasingly challenging.
Not surprisingly, the royal commission has taken an interest in merger failures, including the CSF/ACSRF deal, that were likely to have benefited members if they had proceeded.
In 2011-15, CSF identified six funds as potential merger partners, with a further 13 targeted in 2015-17.
Last May, well after the ACSRF talks dissolved, the board retained industry consultant and former Labor senator Nick Sherry to write to 40 funds in an attempt to initiate merger discussions.
Unfortunately, appeals to higher authorities appear to have gone unanswered.
The May board meeting, for example, kicked off with a prayer composed by Bugden in 2017.
“During this meeting as we discuss important issues in superannuation, may we be open to the influence of our Spirit so that we may be visionary in planning, wise in discernment, prudent in judgment and firm in decision making,” it said.
The directors mouthed: “Amen.”
Part of CSF’s challenge is its apparent determination to be the dominant merger partner so that — in its own words — the fund’s strong investment performance and unique structure can be preserved.
Royal commissioner Kenneth Hayne was unimpressed when CSF deputy chairman Peter Haysey appeared as a witness and espoused a similar, all-encompassing belief.
“What does it matter a hill of beans which fund merges into which?” Hayne spluttered.
Haysey protested: “We felt, to protect our members’ interests, and given our structural arrangements as I described earlier, that it wouldn’t be in our members’ best interests for their retirement savings to be put at risk, given that the policies and procedures that were in place to achieve those outstanding returns might, in fact, not be able to be guaranteed going forward.”
“Well, those policies and procedures are set by the board, aren’t they?” Hayne asked.
“They are,” Haysey conceded.
In the group structure, CSF is the master trust with two divisions: Catholic Super and My life MySuper.
There’s also a financial planning service and MyLife MyFinance, which was a credit union before CSF bought it and obtained a banking licence in July 2016.
The CSF group is No 33 on the ladder of super funds ranked by assets, and is the 12th largest industry fund.
Its 5.2 per cent average return on all assets over 10 years is the equal fourth highest of all funds.
When CSF looks in the mirror, it sees strength and a long history of top-quartile returns, but others, including ACSRF, see complexity and can’t figure out why there’s a bank in the mix.
As of last June, CSF had ploughed almost $13m of tier-one capital into MyLife MyFinance, which has about $54m in home loans.
Retained earnings, which were $4.7m in 2016, have turned negative to the tune of $1.7m.
The last set of detailed accounts, for the 2017 financial year, revealed a $1.2m operating loss, with salaries almost $500,000 higher than budget.
Directors said the recruitment of chief executive Mark Ellis in December 2016 was the first step in the development of a “sustainable banking business”, featuring a substantial upgrade in the banking platform and a new strategic relationship with the super fund.
MyLife MyFinance was a thorn in the merger discussions when the two funds met in Melbourne in July last year.
ACSRF director David Hartley swore in a witness statement for the royal commission that Pegan said words to the effect that “our bank could be sold tomorrow for $50m”, with one of the other CSF directors saying it was important for CSF to “retain sufficient control of the merged board to make sure that the bank would continue to be supported”.
Hartley was unimpressed.
“This raised questions for our board regarding the valuation of this asset and, by extension, other CSF assets, and also raised questions as to whether the strategy that led to CSF owning and continuing to inject capital into this bank would be able to withstand an objective review,” he said.
In a further barb, Hartley said his board became concerned about CSF’s approach to compliance.
The trigger was a letter to CSF members in which the fund projected 10 years of past investment performance 30 years into the future, giving a misleading impression that past performance would continue unchanged far into the future.
“Those governance concerns were the primary reasons for our board as to why the merger discussions did not move to the broader and formal due diligence phase of the process, and stalled in October,” Hartley said.
Haysey from CSF saw it differently.
Asked by Albert Dinelli, counsel assisting the royal commission, why the deal had fallen over, he said the best interests of both funds’ members would have been served by Catholic Super being the successor fund.
It also emerged that ACSF declined to accept Danny Casey as CSF’s proposed independent chairman of the merged entity.
As it turned out, Casey was not so independent — he was employed as a CSF consultant at the time of the merger discussions.
Haysey told the royal commission he was “not certain” when ACSRF became aware of this, although it was “fairly late in the process”.
The upshot was that a merger recommended by CSF’s adviser RiceWarner collapsed in a heap, despite RiceWarner advising that the scale benefits to the enlarged entity could be as high as $4.6m a year.
On February 16 this year, Casey wrote to Haddock, his opposite number at ACSRF, and proposed a resumption of merger discussions.
Haddock agreed. A deal is now in the lap of the gods.