The impacts from COVID-19 are expected to accelerate sustainability challenges for the funds – declining returns, reduced portfolios and membership bases alongside cost pressures.
Rice Warner chief executive Andrew Boal told Investor Daily there may not be more mergers, but the process may be sped up in the short-term, after observing funds now ramping up talks and eyeing potential partners.
APRA has also reissued a similar warning to what had been heard in the lead-up to its heatmap launch, perform or exit.
There are 185 funds, which offer more than 40,000 investment options, which the regulator has said shows the industry is not performing to maximum efficiency – it wants more mergers in the industry, after a number have already taken place in the last couple of years.
“Those discussions have probably been amplified through this process, it might be a weighing up about whether or not they should consider it now, as a response to COVID,” Mr Boal said.
“It doesn’t mean they’ll necessarily decide to do a merger, but at least it must be considered as one of the possible responses to it. The COVID crisis might have disclosed or unveiled some areas of deficiencies that are best addressed through a merger.
“And so the consolidation that might have otherwise happened over a [five-year] period might now happen over a [three-year] period.”
He added there has been more intensity and more motivation in the conversations among funds, fuelled not only by the crisis, but by other mergers that have already taken place.
First State Super will have teamed with VicSuper from July, with WA Super also looking to join the combined fund. Sunsuper and QSuper have also indicated they’re inching towards a consolidation.
“Those activities alone would have prompted many others in the industry to go, ‘hang on’,” Mr Boal said.
“The competitive landscape has to change once you start to have a number of [mega funds].”
Over the next five years, more funds are expected to surpass $150 billion in assets, becoming “mega funds”.
As Mr Boal pointed out, the only fund previously fitting the category is AustralianSuper, which had $172 billion in total assets at June 30, 2019 – but the mergers between VicSuper and First State Super in addition to SunSuper and QSuper could soon change that.
Other funds will need to reassess their competitive positions.
“The landscape changes pretty quickly when you’ve got four or five [mega funds],” he said.
“There was already a momentum building because of these large mergers that have been announced. Other funds will think about their future too and COVID, I think, has sped those discussions up.”
