Smaller super funds forced to consider mergers to survive, as industry consolidates

Up to a quarter of the superannuation sector is being pushed to improve their offerings, or risk disappearing, causing smaller funds to increasingly consider mergers to survive, according to industry experts.

The Australian Financial Review reports up to $143 billion in the sector is up for grabs, as funds worth less than $5 billion are facing pressure to improve.

These funds could be acquired by more dominant players in the sector and chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, told SmartCompany the industry is “in a time of transformation”.

“Like other industries going through enormous change, it is likely that some funds will opt to grow market share by merging,” she says.

Despite this, Vamos says there are “no indications” the merger rate will be above that of previous years.

The executive director of research firm Rainmaker Group, Alex Dunnin, says 56 funds worth less than $5 billion may consider merging, according to The Australian Financial Review.

“There are a large number of funds in this merger zone and every one of them is under significant pressure to get its story straight… and define shrewdly how it intends to compete,” he says as quoted by The Australian Financial Review.

“If they don’t, they won’t be around for too many more years.”

The Australian superannuation sector was valued at $1.8 trillion in December 2013, and the self-managed superannuation sector is worth $543 billion.

Vamos says it’s unclear where the market will settle in relation to the number of smaller funds.

“Competition is working and many funds can buy into scale through service providers. There are many other jurisdictions including the UK where the numbers are much bigger,” she says.

“Consumers are looking for choice of providers and as long as a fund can offer a true value proposition and remain competitive there will not be too many.”

Vamos says the consolidation process of the industry will be expensive.

“Consolidation is an expensive process and must be done in a coordinated way. It not only puts pressure on the funds, but also administrators and custodians and as such it is unlikely we will see and avalanche of mergers in any one period,” she says.

“One of the greatest impacts will be the increase of insourcing, particularly when it comes to investments and customer services.”

Vamos says there is evidence of shrinkage in the corporate fund sector, but cautions it would be a mistake to generalise this to each segment.

“There is pressure on all providers to assess their member value. Even a change on the default framework will take time to have an impact,” she says.