There is a view in the superannuation industry that merging with a smaller or struggling fund is not attractive for larger players. Customer acquisition has historically been cheap for many big funds thanks to Australia’s default system while mergers are seen as time and cost-intensive.

Struggling funds have been viewed as unattractive merger partners because of their small size, being in net outflow,  poor culture, low-quality assets and generally historically poor member outcomes.

Some believe that forced mergers by the regulator is the only solution for struggling funds, while others advocate some form of government-run national consolidation fund.

But will the lens look different in a post-COVID-19 world?

The superannuation industry has faced an existential shock due to this crisis.  Members’ savings are no longer locked up until retirement. We cannot underestimate how fundamentally this may change attitudes towards super and probably for the worst. Australians are now more aware of their superannuation savings and they have a taste for accessing them to pay mortgages, rent and food.

Calls to halt or freeze SG contributions are no longer just from the far-right ideologues. High levels of unemployment will slow organic member growth and as the size of the gig economy grows, more superannuation decisions will happen outside the default system.

Dissatisfaction with super funds has increased through the crisis, and members are becoming more selective. The superannuation market will become more contested, even before the possible dismantling of the default system.  As if this is not bad enough, asset growth from investment returns will slow. The perpetual growth in the funds under management may be a thing of the past.

In this highly contested super market place of the future, organic growth will slow and mergers, even with smaller or struggling funds, will be a cost-efficient way to build economies of scale and improve outcomes for members.

Small fund mergers can broaden industry reach, expand distribution, and implement new technology capabilities. If a struggling fund has suffered from poor investment returns, net cash outflows and poor culture members will be better served

The costs of a merger can be high. But my experience is they are only high when you do a merger for the first time or when it’s a transaction with a similar-sized fund. When a smaller fund rolls into a larger one, costs can be extremely low. Implementation deeds and best interest documents can be dusted off from last time and internal project teams can do much of the heavy lifting.  Once a fund or administrator has experience in a merger, transitioning a group of members becomes straight forward.

It is also much less expensive to acquire a new member via a well-managed merger than via an advertising campaign, while legacy system and product issues are much easier to resolve with a smaller fund.

Also weighing on struggling funds is the successor fund transfer (or SFT). This is where a trustee can agree to discontinue certain products or investment strategies in line with a best-of-breed approach.

Another concern is a successor fund will inherit bad assets and investment returns. But if the fund is small enough, its assets can be cashed up before being transferred. For slightly larger funds, a due diligence exercise will make sure better assets are retained and the poorer assets sold. Portfolios can be rationalised at any stage of the SFT process so long as the valuations are corrected and aligned.

Even the smallest fund may have system or other IP assets that are extremely valuable to the larger fund. As with members, it can be much cheaper to acquire capability and systems through an SFT than through in-house development. Future returns will be driven by the merged fund’s combined asset portfolios and investment expertise.