The merger between the Health Employees Superannuation Trust Australia, known as HESTA, and Brisbane-based Mercy Super fund has become the latest in a slew of consolidations in the Australian superannuation space. The trend is the result of new performance tests and fund comparison tools by the Australian Prudential Regulation Authority (APRA) in past two years.
By merging with the smaller Mercy Super, HESTA has boosted its assets under management to $57 billion (A$70 billion) and membership to 970,000.
Most mergers within the Australian pension sector over the last two years have been triggered by the declining performance of funds and pressure on costs caused by Covid-19, which prompted APRA to urge supers to consolidate. But HESTA and Mercy Super say they have merged from a point of strength, with both funds having rounded out the 2021-22 financial year with strong long-term investment returns.
“The merger between HESTA and Mercy Super marked an important milestone for the fund and our members. Merging from such a position of strength means members will continue to benefit from being part of a leading superannuation fund,” Debby Blakey, CEO, HESTA told AsianInvestor.
The deal was underpinned by a strong alignment between the funds, with their dedication to serving the health sector and shared focus on delivering better retirement outcomes for members, according to Blakey.
“We’ve been able to deliver a smooth merger in just eight months, which has involved great collaboration with Mercy Super and HESTA colleagues across so many teams. The implementation of the merger, which has a typical timeframe of 12 to 18 months, was a great exercise in building capacity for future merger opportunities,” she said.
Since the introduction of APRA’s prudential framework in June 2013, the asset pool being managed by APRA-regulated funds as of September 2022 has more than doubled to $1.55 trillion (A$2.32 trillion). Meanwhile the number of APRA-regulated funds has nearly halved, from 279 to 154 over the same period, according to data from Global SWF.
To date, consolidation in the public pension fund sector has involved total assets under management of $639 billion and 8.7 million members. Due to increasing scrutiny from APRA, these numbers are also likely to increase.
Superannuation in Australia is not a discretionary option for its nationals but is compulsory and essentially represents a compact between the country’s working citizens and the government, according to John Livanas, CEO of State Super.
“Australians are compulsorily required to contribute part of their earning to one of these super funds and in turn the government through its regulators has a duty to ensure that those funds are doing the investments to the best interests of their members,” Livanas told AsianInvestor.
The Australian super industry in its beginnings was relatively small but has since grown to represent a figure that is over 200% of the country’s GDP. Along with that growth, the performance hurdles and regulatory scrutiny set out by APRA for super funds to clear has also increased, he said.
“APRA has set out these regulations and guidelines on how a good superannuation fund should run and it is putting quite a lot of demands on the sector. The natural outcome is that funds who are not able to respond to these demands or find themselves increasingly more challenged—in terms of performance and regulatory compliance —have been under pressure to either vacate the market or merge for scale,” said Livanas.
“As the industry has grown, these mergers really are a natural maturation of the space and the regulation that governs it,” he said.
YOUR FUTURE, YOUR SUPER
The Your Future, Your Super (YFYS) performance test was introduced in July of 2021 through legislation in an effort to protect Australians' retirement savings by holding super funds to account for their investment performance as well as their fees.
Under the YFYS performance test, each year APRA constructs an individual benchmark for every MySuper product, or default pension products, based on the product’s asset allocation. Each product will then be compared against its benchmark with about 50 basis points of legroom, according to Andrew Boal, partner at Deloitte Australia.
“The idea behind the legislations was that there had to be a hard line for super product performance that was not discretionary, which meant that funds that failed the test would be obligated to take action,” Boal told AsianInvestor.
By the end the first year of the test, 13 funds had failed to meet the benchmark, and as a result they then had to write a letter to their members within 28 days informing them that they had failed, he explained.
“That’s a pretty dire consequence for these funds to have to make an announcement of poor performance,” said Boal. “If a fund fails a second time, then they actually have to close the fund off to new members until they pass the test down the track which obviously stops more member money from coming in.”
The APRA performance test also introduced an “admin fee” component, which measures each fund’s fees against the average administration fees of a similar group of MySuper funds.
“If you're 10 basis points more expensive than the average or the median, then it also counts against you. In this way, YFYS is also getting rid of expensive funds and underperforming funds,” said Boal.
Boal sees the regulations as a net positive for the Australian super industry as its puts pressure on underperforming funds without scale to either “merge or get out.” However, he explained, there have been some hiccups with the test and there are more improvements to be made.
“The first issue was that when the test was introduced, it initially covered a seven-year period but the first six years had already happened. So, nobody knew what they were being tested against for those first six years,” said Boal.
“Another problem was APRA’s benchmark for listed infrastructure,” he said. “Only 3% of the infrastructure assets held by fund’s are in Australia meaning they were being measured against the Australian benchmark while 97% of these assets are offshore. That clearly wasn’t an appropriate benchmark.”
These and other issues are quickly being solved, according to Boal, and going forward he believes the regulator will predominantly be focusing on the sustainability of funds and keeping a close eye on those industry funds which may be falling into negative cash flow. These factors point to many more mergers announced in the coming years, he said.