The Australian Prudential Regulation Authority (APRA) has indicated it will not shy from suggesting smaller funds merge if they suffer a scale issue.
Speaking at the Investment Magazine Chair forum in Healesville, executive member, Margaret Cole, said funds could not be forced to merge but that they should be acting in members’ best interests.
Of the 136 APRA-regulated super funds as of 31 December, 2021, 96 had less than $10 billion in assets under management and 63 had less than $2 billion. Half of those funds with less than $10 billion faced sustainability challenges, she said, as they had declining cashflow and member accounts.
“APRA cannot directly force even the poorest performing, least sustainable fund to merge, but we have shown a willingness to use the extent of our powers to push certain funds towards this end. You can expect that bias towards action from APRA to continue into the future.”
She particularly highlighted issues with trustees regarding personal egos which were hindering decisions to merge.
“The path to a merger is not always straight-forward, and there are barriers that need to be overcome, such as due diligence costs, finding a suitable (and willing) partner and the application of the equivalent rights test. These are legitimate issues, and APRA is working with industry to better understand how these hurdles can be more easily overcome.
“Rather less legitimate are other regrettably common barriers to merging, such as protecting jobs on the board, preserving payments to sponsor organisations, or petty feuds and rivalries. Trustee boards are no-one’s personal fiefdom.
“At all times, trustees must act in members’ best financial interests, and in some cases that will mean pragmatically – even reluctantly – concluding that members will be better served in another fund or product.”
However, while APRA was in favour of mergers, it discouraged mergers between two smaller funds to create a mid-sized fund. While this may lead to short-term improvements, the regulator felt it was likely they would need a new, larger partner in the long term.