Superannuation funds are experiencing another round of mergers and consolidation, but whose interests are really being served? And will the funds become too big to fail?
Less than a decade ago, this magazine published a feature titled 'Top 300 Superannuation Funds'. Super Review stopped publishing the feature when the number of funds that fulfilled the criteria of 'top' declined below 100.
To be included in the original Top 300, a superannuation fund needed to boast a given level of membership and a given level of funds under management (FUM). In the early days, only the top 20 or so of the Top 300 funds could be expected to have more than $1 billion in FUM.
Times have changed. These days few mainstream funds have less than $1 billion in FUM, and the non-corporate funds that do are inevitably earmarked for amalgamation.
But it is not natural market forces that have been responsible for the decline and fall of Super Review's Top 300 series.
It has been Government policy and regulatory initiatives - the most recent of which is giving rise to a further round of negotiations between superannuation funds, and has been prompted by the looming expiry of tax relief measures which have made such mergers more attractive.
Prior to the tax relief measures, the major driving force behind superannuation fund consolidation in Australia was the Australian Prudential Regulation Authority's (APRA's) imposition of a new superannuation fund licensing regime - something which, according to APRA chairman John Laker, saw a dramatic drop in the number of superannuation trustees.
In 2007, Laker told a meeting of the then Investment and Financial Services Association that "at 30 June, 2004, the day before licensing began, there were around 1300 trustees. At 30 June 2006, there were just over 300 licensed trustees".
And he made clear that APRA itself was a major beneficiary of the reduction, saying: "This consolidation will impact on the way in which APRA allocates its resources.
In the past few years we have allocated a greater proportion of our resources to superannuation to handle the licensing transition. I expect that from the next financial year we will see a redeployment of some resources back to the other regulated industries."
More recently, the chairman of the Cooper Review into superannuation, Jeremy Cooper, has pointed to the desirability of fewer but larger funds, citing the experience in Canada and the ability of large funds to directly invest in major infrastructure.
The evidence is clear to see: the consolidation that has occurred in the Australian superannuation industry has occurred as a result of Government policy initiatives rather than by market forces.
What is more, the nature of the rules about superannuation fund mergers and amalgamations means that individual members do not really have a say.
It may be members' money in the superannuation funds, but it is the trustee board members who decide who will manage it.
Where the most significant recently proposed fund merger is concerned - Westscheme and AustralianSuper - the views of the members of Westscheme will not be canvassed.
Notwithstanding the notoriously independent views of West Australians, they will be asked to take on trust the benefits that will flow from being taken under the umbrella of mega-fund AustralianSuper.
There exists a lingering question about whether 'bigger' actually equals 'better', and over the past decade there has been plenty of evidence to suggest that while some very small funds may struggle, many mid-size funds manage to do perfectly well in terms of investment performance and delivery of services to members.
There is no doubting that AustralianSuper has an admirable track record, but it is worth noting that it has not been regularly topping the charts maintained by the major ratings houses. Indeed, the top performers have inevitably been larger mid-size funds.
Perhaps the most disturbing fact to emerge from an examination of the consolidation that has occurred within the Australian superannuation fund industry over the past decade is that beyond Government policy, the major consideration for superannuation fund trustees has been the rising costs associated with regulatory compliance.
Almost without fail, trustees of funds that have chosen to merge with larger funds have cited rising regulatory compliance costs and the consequent need for better resourcing.
Fewer but larger superannuation funds will certainly make life easier for Australia's regulators and would certainly seem to fit with the views of people such as Jeremy Cooper, but it is uncertain whether the best interests of members will ultimately be served.
The Government may well end up creating institutions that are too big to fail.