Rob Prugue. Photo: Simon Hoyle

A period of forced consolidation in the superannuation industry, led by regulators, will lead to a “too big to fail” culture, according to industry veteran and commentator Rob Prugue.

The last few years have seen a raft of super fund mergers amid expectations laid out by APRA that super funds should be at least $30 billion in size to gain the benefits and business efficiencies of scale.

The nation’s two biggest funds AustralianSuper and Australian Retirement Trust are forecast to collectively control $1 trillion by 2030.

In a candid Ted Talk at the Investment Magazine Fiduciary Investors Symposium, Callidum Investment Research principal consultant and former Lazard Asset Management Asia-Pacific CEO Rob Prugue said it was alarming how funds have embraced ‘the bigger, the better’ narrative from regulators.

“Sadly, I’m not sure we all are aware of the moral hazard that we’ve now embraced, and what the consequences are with this ‘too big to fail’ moral hazard,” he said.

“Will the government allow a [major super fund]… to go bust? I don’t think so. 

“If that’s the case, what we ultimately have is a PAYG-like fund, only chocolate covered as DC [defined contribution]. We’re not truly a DC structure anymore.” 

He outlined a scenario where the consequence of a systemic failure could lead to another attempt by the government to nationalise the superannuation system.  

“The consequence therein of that, if even half right, is that when there’s an implosion… and the government is forced to bail that fund out, ultimately the DC concept of the risk being held by individuals is a farce. 

“Why shouldn’t we expect our pension systems to be nationalised [then]? 

“I’m not advocating for that, let’s be perfectly clear. But if we don’t talk about these risks, then we’re beginning to believe our own marketing.” 

From owners to managers

Prugue said super funds are deviating from their original mission as “guardians of pension” and are starting to look and sound worryingly like asset managers.

He described himself as a fierce advocate for compulsory super but argued the sector has “changed culturally” since he started his investment career at the start of the super levy in the late 1980s.   

“We became a financial service provider, as opposed to a guardian of superannuation or pension,” he said.

“As a financial service provider, some of our focus has begun to change – some of it was forced, and some of those commercial.” 

For example, Prugue said funds now need to consider asset capture with increasing member choices, and some have introduced independent membership to the board aside from employee and employee-nominated seats.  

As we embark into this expansion into financial services industry? Does the board have sufficient gravitas to challenge its management in the direction that they wish to go?” 

He argued that as funds pursue strategies as global investment businesses, they need a greater diversity of professional skills on the board, so they can ask tough questions an interrogate the strategy set by management. Without it, management can easily go unchecked, he said.

“It’s not uncommon in the financial services. We begin to believe our own marketing… We become… hubristic.”