VicSuper, First State Super merger to create $120bn fund

First State Super and VicSuper have started due diligence on a merger that would create a $120 billion fund.

Michael Dundon of VicSuper with Deanne Stewart of First State Super.

Australia’s second-biggest profits-for-members super fund is set to emerge next year after the Victorian and NSW public sector default funds struck a deal they claim will enhance returns, reduce fees and advice options for more than 1.1 million members.

Top-rated First State Super and VicSuper have started due diligence on a merger that would create a $120 billion fund — second only to the $155bn AustralianSuper — from July next year.

First State Super with $98bn under management is set to claim the chairman and CEO roles as well as a majority of the board after the two funds signed a binding heads of agreement to merge the two funds.

The merged fund would overtake QSuper — the Queensland public sector fund — as the second-largest fund in the nation and open options to trim costs and broaden investment portfolios.

Deanne Stewart, chief executive of First State Super, said the merged entity would be the pre-eminent fund for retirement and advice, with as much as 25 per cent of members in the drawdown phase.

“The merger business case has confirmed there is strong alignment between our funds and we’re confident we could generate significant benefits for our combined membership,” Ms Stewart said.

First State has been a serial ­acquirer, buying the advice business StatePlus in 2016 to add another $21bn in funds to its tally and expand its advice network to 200. It took over Victoria-based Health Super in 2011.

Ms Stewart would become chief executive of the merged fund, while First State chairman Neil Cochrane would preside over a board that would expand to 15 as the merger is implemented.

It would contract to 10 directors plus an independent chairman by 2022.

Ms Stewart said the decision around the merger had been based on principles to avoid conflicts and contests such as who got the top jobs in the merged fund that has scuttled other deals.

The merger is the latest in a wave sweeping the funds sector as the Australian Prudential Regulation Authority seeks to stamp out poorly performing funds and create an industry with largest, better managed funds that are able to pass scale benefits back to members.

VicSuper chief executive Michael Dundon would continue with the merged fund to help with integration, despite not getting the top job.

He said the merger would open up investment options that had not been previously available to the $22bn fund, including the potential to bring some investment management services in house, and larger direct investments such as First State’s purchase last year of the Victorian Land Titles office for $2.7bn.

But the increased scale would also help reduce return volatility, administration expenses and spread costs such as technology across a larger base.

Mr Dundon said VicSuper’s small size had also hampered its ability to pursue social impact investing such as the apartments developed and owned by First State Super at Epping in Sydney that it makes available to fund members. Both funds have comparable returns with First State’s My Super product delivering 8.2 per cent over five years and 9.17 per cent over 10 years, compared to 8.3 per cent and 8.77 per cent for VicSuper.

Mr Dundon said the merger would have to create an impact “greater than the sum of the parts” for members if it was to be approved by both trustee boards member best interest tests.

Both funds, which cover public servants teachers, healthcare workers and emergency services, skew heavily in favour of women at around two thirds of the combined funds’ members.

Ms Stewart said the proportion of members in pension phase highlighted the need for a strong advice channel within the fund to help them with the transition to retirement.