One of the most important components of the due diligence process in superannuation fund mergers are cost projections and agreeing on whose members are paying for what. There are many risks involved in mergers, but equally there are opportunity costs and risks associated with not doing it.

If cost projections are assembled by inexperience or hypothesis (or delusion), mergers can be sorely compromised or even fail. With the right knowledge and real-world experience, costs can be accurately determined and managed to ensure merger benefits are preserved.

Preparation is key

Successor Fund Transfer’s (SFT) are a long game, can be very conceptual in the planning, can cause significant fatigue with each milestone, become very brand personal and force a lot of change into an organisation.

There isn’t a cheap option when it comes to SFT’s. An attitude to minimising cost without sacrificing execution and outcomes is important. Cutting corners invariably results in highly regrettable expense, potential failure and member backlash not too far down the road.

Like with most complex projects, costs have a habit of creeping up due to unexpected events, environmental factors, delays and human error. These risks must be foreseen and managed with close oversight.

Not being properly prepared, getting a major decision wrong or not getting the design of the merged fund right, risks significant costs during the merge of the supply chain. Worse is realising the hidden cost of technical or cultural debt that got accidentally baked into the outcome throughout the merge process.

Cultural debt comes from organisation not ‘walking the walk’ post merge. Often this can be due to underestimating the impact of the changes or overstating the benefits when establishing the business case. For the fund, it is demonstrated by good staff, fatigued by the process and leaving the organisation due to dissatisfaction with the new operating environment.

Potentially worse still, are relationships with providers in the supply chain becoming strained to the point that they negatively impact the service to members. The worst outcome is that fund goes into negative growth (member and or FUM) suggesting that members and employers are leaving because promises are not being met or their experience with the fund has been negatively impacted.

Technical debt relates to future issues impacting services as a result of taking a short cut or implementing interim technical solutions during the merge. Commonly this occurs due to pressure on a project budget or time frame, without proper consideration of the impact on ongoing maintenance and/or future integration with other technology. Then there are issues that result from implementing a product rule or related process without resolving all the requirements or migrating data that has not been properly translated, or is missing (not enough of the history migrated).

The debt is realised in subsequent remediation projects when the problem has been complicated and compounded by the years of processing on top of the original error. Using short cuts rather than addressing root cause of technical issues will eventually have a negative impact on the people, process or technology supporting the service and inflate the cost of maintenance.

No-one knows if estimated costs were too high until they have ticked off everything they had set out to do, and member behaviour correlates with growth in the fund (not directly related to the merge). For e.g. Annual Fund inflows exceed outflows, new entrants exceed exits, roll-ins exceed roll-outs, more members take up retirement products, more members engage with more products and are using more self-service channels effectively, member contacts exceed complaints.

Motivations for consolidation

The biggest motivator for consolidation in the last 15 years is likely to have been the cost of compliance rather than funds establishing more competitive positions with each other. By and large funds have tended to focus on their retention strategy by trying to increase member’s level of engagement with the fund and its products.

In 2004 the Howard Costello government introduced several changes to superannuation. Included were the licensing of large eligible funds, employee choice of fund and access to superannuation before retirement in the form of a pension (e.g. transition to retirement). At the time were more 1100 APRA regulated funds. By June 2008, the number of funds had reduced by 76% to 432. Less than 175 funds submitted an APRA return in June 2019.

The suggestion is that the consolidation of funds has been due to the increasing cost of compliance, while competition based on improved scale (i.e. funds providing greater benefits for a lower cost) is yet to achieve the level of consolidation that occurred between 2004 and 2008.

What’s next?

The recent mass member driven migration from retail funds to industry funds, motivated by the Hayne Royal commission is evidence of what can happen to a fund if they behave non-competitively

It is difficult to understand what will drive the next significant round of fund consolidation. Could an upsurge in financial awareness of superannuation drive members to force funds to be more competitive? Will members demand more from their Fund in terms of brand and culture and less about fees and returns?

Regards

Michael

Michael Quinn – Executive 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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