First State Super chief executive Deanne Stewart

Two leading superannuation funds are set to merge and become one of the nation’s largest profit-to-member super funds managing more than $110 billion in retirement savings for over 1.1 million members.

First State Super and VicSuper announced on Thursday they have signed a non-binding memorandum of understanding to explore the benefits of a potential merger.

A recommendation to the respective boards is anticipated around the middle of 2019.

First State Super is one of Australia’s largest industry funds with $91 billion in assets. VicSuper is a $22 billion-strong profit-to-member superannuation fund with over 249,000 members and over 24,000 employers.

The merger talks come just as Queensland-based industry super fund Sunsuper completed its merger with rural fund AustSafe Super, creating Queensland’s second-largest non-profit fund with 1.4 million members and $64 billion under management.

Also, Statewide Super says it is in advanced merger talks with WA Super and Tasplan.

A wave of consolidation is sweeping the superannuation industry which is expected to see the number of funds in the market halved in under a decade.

This is spurred on by the prudential regulator which is ramping up the pressure on trustees to merge funds. The Productivity Commission has further added to this pressure by quantifying the benefits of consolidation to the sector.

According to First State Super chief executive Deanne Stewart, there are a number of merger conversations taking place in the industry between smaller, medium-sized and large-sized funds.

“There is a sense there are strong dynamics at force and real opportunities and benefits from achieving scale,” she says.

Unsurprisingly, given the focus of both commissions on mergers and members’ interests, VicSuper chief executive Michael Dundon pointed to the benefits of scale to growing member returns as a key reason to join forces.

“Merging with First State Super would enable us to achieve greater benefits of scale, including access to a broader range of investment opportunities,” he argues.

“There are certainly diversification benefits with scale that would provide opportunities that a smaller fund wouldn’t have.”

For Stewart, the ability to have “meaningful investment” in the direct space is a huge plus.

“A lot of global infrastructure opportunities involve $1 billion deals so the ability to combine forces is another way to provide benefits for members,” she adds.

In her view, initial discussions with VicSuper indicate a strong cultural alignment between the two funds which makes merger discussions far more fruitful.

“We share a lot in common with VicSuper. We both have a member-first culture and a heritage in the public sector. Many of our members work in education, community services and health and we’re both seeing strong private sector growth. Importantly, we believe quality financial advice can help our members make the most of their retirement savings.”

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