Lower cost option for super mergers needed

The costs to merge small with large superannuation funds can be a make or break for a transition and a lower cost option for smaller funds to move into larger funds is needed, according to a panel.

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Week conference, PwC partner Catherine Nance, said it typically cost 10 basis points for smaller funds to merge and this was “quite a lot”.

“That’s an impediment for smaller funds as some may wipe out their reserve overnight by doing a merger,” Nance said.

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“That’s why some of us are talking to APRA [Australian Prudential Regulation Authority] about finding a lower cost option for smaller funds to move into larger funds.”

She noted that it could also be an impediment on the other side as the larger fund could incur all the due diligence costs and that was hard to prove in terms of members best interests as members were not going to view it as a cost saving but rather a cost to do it.

Also on the panel, Aware Super (formerly First State Super) chief investment officer, Damian Graham, said the long-term benefit of the merger needed to be substantial to justify the cost of the actual movement, the transaction, the transition costs, time and effort, and additional operational risks involved.

“You do have to make sure it’s in the members best interest for both funds and to be a long-term cost benefit for both funds and that can be complex when you’ve got the typical approach where you may have a higher cost fund and a lower cost fund,” Graham said.

“Maybe the lower cost fund is the larger fund and it may not be but say that is the average outcome then you’ve got to have that dynamic well defined to ensure there’s that combined members best interest for a merger and I can see complexity around that and can cause challenges around a merger.

“There’s typically quite strong cost savings in administration and investments to justify that culmination, and certainly can be somewhat challenging for a larger lower cost fund I imagine.”

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