Superannuation funds: size isn’t everything

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The prevailing view that superannuation funds must merge in order to survive and achieve scale does not stand up to scrutiny, according to Madeline Dermatossian, Managing Director of FuturePlus. 

“Many funds of a certain size¹ are feeling that they have to merge as it is the only way to achieve the scale required,” she said. 

“There are, however, many models used to achieve scale. The merger path is an option currently receiving the most focus – but it does not always provide the best results.” 

Dermatossian said there are a number of options available to funds, such as outsourcing administration, that can provide them similar benefits to a merger, but reduce the significant risks associated with mergers. 

The impact of regulatory reforms, such as MySuper, is also placing significant pressure on superannuation funds around future change and compliance requirements, said Dermatossian. 

“Funds with outsourced models or that use licensed products can rely on the administrator or vendor to implement changes and they benefit from the cost being spread over a larger client base,” she said. 

“However, funds that manage administration in-house and using bespoke systems will bear full responsibility for the costs and internal work necessary to meet compliance deadlines.” 

The benefits of scale
Dermatossian said benefits from scale primarily come from two factors: scale of funds under management (FUM) and scale of members. 

“With scale of FUM, fees can be lower on a per member allocation basis, as they are usually tiered to reduce as FUM grows,” she said. 

“Additionally, scale of members provides a reduction per member in the allocation of fixed costs and provides economies in functions. Similarly, more favourable insurance premiums and terms can be negotiated where there is great scale of premiums and members.” 

M&A risks for super funds
However, Dermatossian cautioned that mergers do not always work or achieve envisaged benefits of scale. 

In addition to common risks associated with M&As, there are other larger risks around the administration of a large super fund including those of errors and losses in dealing with much bigger entities. 

“The level of benefit from scale is reduced when members are in numerous industries/schemes, administered on several systems or the underlying structures are different,” she said. 

“You cannot combine the members in those cases and are forced to continue operating on a transaction-by-transaction basis so any benefits of scale are significantly reduced. 

“There also comes a point where the law of diminishing returns applies to these large funds and the incremental benefits of scale begin to reduce. As a result, scale for the sake of scale does not necessarily provide you with long-term advantage and scale benefits are not automatic or universal,” she said. 

The role of administrators
Instead of merging to achieve scale, working with an administrator can provide some unique benefits that a standalone fund cannot access or match. 

“As well as gaining exposure to experienced administrators with often decades of experience, funds benefit from a shared service model that gives cost and scale benefits, as well reducing risk,” she said. 

“Funds can also take advantage of innovative services and solutions that would not be available elsewhere, bearing little of the R&D risk and for competitive prices. A larger fund would struggle to match the innovation and creativity, and attract the right people, as well as paying for it all and bearing 100 per cent of the risk. 

“Small-to-medium funds can retain their unique identities, value proposition and the qualities that attracted members in the first place – characteristics that can be lost or damaged in merger situations,” she said. 

It is for this reason that Dermatossian said FuturePlus’ model has evolved its focus to a shared service model and creating innovative solutions allowing funds to engage better with the end customer. 

Addressing non-engagement and apathy, she said, is one of the biggest issues facing the super industry today. This challenge is set to become even more important as super contributions grow to 12 per cent. 

“Administrators now have an opportunity to demonstrate to funds that they can add value and move beyond the traditional role of ‘administration’ and into a partnership with their clients,” said Dermatossian, who added that this approach had been very positive for FuturePlus which recently posted a record profit year. 

“Super funds do not have sacrifice themselves to mergers because they feel it is the only place left to go.” 

¹ Core Data White Paper, Superannuation: Survival of the fittest (August 2012): Looked at the size of funds most under pressure to merge.
 

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