TelstraSuper members could be forgiven for receiving the news on Thursday that their fund was exploring a merger with the $200 billion Aware Super with some scepticism: a plan to merge with Equip Super about a year ago was unexpectedly and unceremoniously scuppered by TelstraSuper when its directors suddenly figured out the merger benefits they thought would flow to members were in fact unachievable.
So the pressure is on to make this one work. But Aware is feeling plenty of pressure at its own end, too.
The fund is still on the hunt for scale. Of the three megafunds, alongside AustralianSuper and Australian Retirement Trust, it’s the smallest; it wants to make inroads into the corporate super space, and thinks that bringing in TelstraSuper – which has expertise in managing both super and differentiated insurance offerings on behalf of larger employers – is one way of putting up the flag for the consultants that manage corporate super tenders.
That would go some way to levelling the playing field between itself and the rest of the big three. Aware would also pick up a strong financial planning capability, which will complement its own, and a handful of new offices. They have differing retirement philosophies; TelstraSuper turned to Challenger to design it a fund-branded longevity solution, while Aware is hoping to keep theirs in-house.
All about the money
But other industry sources say that, while TelstraSuper’s insurance bona fides are compelling, it’s really all about the money. TelstraSuper would add assets of around $26 billion to its $200 billion; a 15 per cent-plus bump in AUM in one (albeit complex) transaction is nothing to be sneezed at, and there’s not many funds that could provide that still floating around. TelstraSuper isn’t a tasty morsel; it’s one of the largest fish still in the pond, and even base ego would be a good enough reason to try and hook it – especially if it meant beating out ART for once.
While ART has been the merger partner of choice for many a small fund, with Qantas Super being the most recent minnow gobbled up, it certainly doesn’t need the FUM and technological uplift (which carries with it significant risk – see HESTA) mean it’s not currently as well-placed to bring another fund onboard as it has been in the past.
But the merger also comes at a time when funds are under regulatory and public pressure to move away from a FUM-gathering mindset and towards one centred on member services and retirement. The member demographics are largely similar; Aware would not suddenly be adding 85,000 younger members that would diversify its much older base (20 per cent of its FUM is in the retirement phase and it pays out $4 billion in benefits every year). In fact, TelstraSuper’s member base probably skews older.
Either way, ART and AustralianSuper are pulling ahead in the FUM game, and Aware wants to keep playing.
Choose your exit
For its part, TelstraSuper gets to choose its exit in a tough environment for smaller super funds – or even see parts of its organisation continue in the new one – and its members would enjoy the benefits of massive scale and an improved digital offering.
Aware Super has done significant work on uplifting its administration through Project Catalyst and is currently enjoying a technological advantage that it believes will hold for a few more years as other funds play catch up. Sources point to the fact that it wasn’t caught up in the co-ordinated scam attack in April and that it’s moved to a digital process for binding death benefit nominations as evidence that it’s ahead of the pack.
But it’s unlikely that TelstraSuper would have taken this on lightly.
Even prior to the attempted merger with Equip, TelstraSuper was clearly experiencing existential anxiety about its future in the competitive landscape, despite enjoying net member growth, consistently winning awards for the quality and innovation of its products and services, and building a high-quality full-service financial advice division.
But it’s now fresh from what was a very involved merger process – one where board and investment committee composition was more or less decided – run from a significantly smaller cost base than its larger brethren enjoy.
In the process it also transitioned its custody to Northern Trust, the provider to its erstwhile merger partner, in preparation. It’s not too hard to move it again, but it’s also not particularly cheap, and members have already paid that price once.
Depending on how it structured its contract with Northern, TelstraSuper – and therefore its members – could also be on the hook for a chunky break fee. Northern, which took a big loss down under with the loss of QSuper to ART and which did not benefit as strongly as some of its peers from the NAB Asset Servicing exit, will likely be having some very robust conversations with TelstraSuper, or at least considering charging on the outgoing transition.
Cost in ‘merger of equals’
In a true “merger of equals” there’s a cost to both funds in bringing them together – not to mention what’s lost to resources and staff being distracted from BAU. Time will be a factor, and staff on TelstraSuper’s side are no doubt nervous: this is the second time in a year where they will have significant employment uncertainty hanging over their heads. But keeping them by guaranteeing no job losses for a period is also expensive.
There’s plenty of risk ahead. A merger in super can only fly if the benefits to all members are clear and can be clearly articulated. An inability to do that is why the TelstraSuper board said it walked away from the Equip deal.
But things have changed. To have one merger fall at the last hurdle is bad; a second would be catastrophic.
A spokesperson for TelstraSuper said that the fund is “unable to share anything further at this stage in the due diligence process”. An Aware Super spokesperson declined to comment.
