There is considerable regulatory pressure on funds to explain how they are delivering the best outcomes for the members, with returns and costs being the key assessment criteria. Increasingly, regulators are checking that Trustees are achieving “economies of scale” and “the benefits passed through to members”.

The opportunity

A Successor Fund Transfer (SFT) or merge is an opportunity for funds to create greater scale that can be readily translated to benefits for the member. In the simplest of terms, this is lower fees and higher returns. A secondary benefit, commonly associated with more engaged members, is the quality of service.

In an environment of increasing investor advocacy, a merge that builds “cultural” scale could be an alternative for funds with a strong member voice.

The balancing act – Risk vs Reward

One of the earliest benefits to be derived from the SFT is the reduction of costs through rationalisation of both the Trustee office and the operations of the supply chain. Ideally, the partner funds will be attracted to one another on a basis of strengthening their strengths and addressing each other’s weaknesses. Product and operational weaknesses are identified through analysis of the fund’s operational performance to identify gaps and weaknesses that negatively impact the member experience.

Example:

• “Our members have an appetite for self-service, but our website is limited in its functionality”.

• “The take up of the funds post accumulation products is low. Most members rollover to different pension products.”

• “We are unclear about what our complaints and contact centre data tells us about our members.”

Without exception, the projects are complex, hard work and come with significant cost. A common approach to managing delivery risk is to minimise other changes during the transition and merge. This needs to be balanced with the risk of missing opportunities for implementing alternative services or solutions that bring forward future benefits or efficiencies.

Regardless funds must plan to avoid the trap of spending a lot of member money during the project that does not produce the commensurate value for members. Potential conflicts of interest need to be carefully considered from the member’s perspective and managed appropriately.

Size matters

In addition to the many internal factors that a Trustees needs to consider and plan for, there are equally as many external factors that cannot be ignored. The overwhelming trend within the industry is that FUM and members are increasing, while the number of the providers is steadily decreasing. A significant amount of merger/SFT activity between 2004 and 2009 was Corporate Funds of all sizes moving into Retail Master Trusts or Industry Funds. More recently, the merges have been between the industry funds and other activity coming from acquisitions within the retail space. There is little merge activity between the profit and non-profit sectors. With the regulator reluctant to issue new licences, it is difficult to see anything getting in the way of further consolidation.

While many of the industry attributes remain (Corporate, Industry, Public Sector, Retail, SMSF) size and the ability to create scale is the more common measure of competitiveness. With the largest funds consistently ranked within the top performing funds, consolidation looks to be achieving the targeted outcomes. When it comes to borrowing from members to achieve the Trustees strategic goals, the biggest funds start with a distinct advantage.

What’s your budget if you have to take the members into account? The following illustrates the comparable average buying power of funds (grouped by FUM) if they were to borrow $20 from each member – highlighting the gargantuan gap smaller trustees have to face.

Knowing what members want

Ideally, the Trustee will have established a relationship with the membership that provides for a conversation about borrowing from them to provide for a better future for all. Each Trustee will have to gauge where they are with their member relationship and moderate the level of candour with which they can approach the conversation. More importantly will be how they respond to the range of responses from the various voices within the membership.

That said, the membership of the fund is unlikely to provide the Trustee with a mandate to spend the money to merge the fund to support the opportunity for future benefits. If asked about a potential merge, the most likely response from the members is a deafening silence. For highly un-engaged funds, scarier would be if members were given the option to contribute $20 to fund the merge or a night of pizza and wine.

Accordingly, it is crucial that the Trustees and Executives play their roles in the decision-making process. Commonly the Executive has the responsibility for constructing the business case for how the merge will be done and it is up to the Trustee to confirm that the expense is in the best interest of the members.

And there may be a case for Trustees not being too close to their members. How does a Trustee respond to a membership that shows collective negative bias in contrast to a high-level of consensus from a broad range of informed stakeholders? Does a strong member voice speak louder than the fund, regulator or industry?

Ultimately when it comes to who pays – trustees must make these sorts of existential inquiries:

What sort of fund are we; a merger or an SFT candidate? What are the options for a small fund to be a merger?

What benefit is there in the merge for the various stakeholders; How can we demonstrate future scale as a tangible benefit to our members? What can the membership look forward to? How have the benefits been embedded into the guiding principles of the project?

How do the engaged members of the fund know they have been heard, even if the outcome does not agree with what they said?

Can you convince them to hand over their $20 pizza and wine money for a better retirement outcome?

Regards

Michael

Michael Quinn – Director (Co-founder)

QMV provides trusted advisory, consulting and technology to Australia’s leading superannuation, insurance, banking and wealth management organisations. For further information please telephone our office p +61 3 9620 0707 or submit an online form.

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