Superannuation talks raise more questions about under-performers

The announcement that the well-performed Equip and Catholic Super are in advanced merger talks comes hot on the heels of a similar release issued by two other respected not-for-profit funds, First State Super and VicSuper.

While the Equip-Catholic Super talks focus on a shared trustee model, with the funds retaining their separate brands and stakeholder relationships, for all practical purposes the level of collaboration at the back end of operations - trustee, investments, member administration, custodial services - aims to eventually yield economies of scale similar to a full merger.

In the context of the recent Productivity Commission recommendations for rationalising the number of players in the superannuation industry, these two fund merger negotiations notably have one common dimension. They are discussions between funds that are consistently among the industry’s better performers.

While there is little evidence that their current scale is compromising member outcomes, their forward-thinking management and boards have recognised that they can still enhance their capacity to improve member retirement outcomes through the benefits of increased scale.

Meanwhile, the success of these negotiations will do nothing to address one of the Productivity Commission’s fundamental concerns about the superannuation sector. They will do nothing to eliminate any fund that the regulator, APRA, has already identified as under-performing.

It’s a case of the good getting better, while other sub-scale funds with little to justify their existence twiddle their thumbs at the expense of their members.

Amid the debate about the purpose of super, its role and responsibilities to members and whether it has any broader community obligation or purpose beyond that, the answer is always first, foremost and by regulation, to act in the best interests of members.

The Productivity Commission’s proposal for the selection of ten ‘Best in Show’ default funds selected by an expert panel was flawed and tackled the wrong end of the sector.

APRA’s member outcomes metrics are probably the most promising basis on which to assess fund capacity to sustainably deliver better financial results for members saving and investing for retirement. Thanks to the 2018 Hayne Royal Commission, it’s looking increasingly likely that the regulator will use these as a basis for driving under-performing funds out of the industry.

There is nothing mysterious about what APRA’s member outcomes test metrics look like and the boards of funds that cannot identify their failure to meet them could only be generously described as asleep at the wheel.

The bigger question is why we’re not seeing more of these under-performers announcing advanced merger negotiations like the aforementioned funds. The one event that self-interest shouldn’t want to win is the race to the bottom.

Disclaimer: I consult to Equip on corporate communications strategy.