Report: Amid Rising Popularity of Mergers, Australia's Superfunds Should Remain Wary of Drawbacks

(August 23, 2011) — A recent report by Russell Investments asserts that the burgeoning trend for mergers among industry superannuation funds may not be serving the best interests of members.

The report — titled “Future Proofing for Industry Funds” — states that while Australia’s superannuation funds merge to create scale and cost efficiencies, members may be better served through mutually beneficial partnerships with other funds. According to Russell’s managing director of industry and government funds Michael Clarke, some mergers may be successful in delivering economies of scale, but over a certain point, complexity can be added because larger asset pools pose additional challenges.

“Growing the volume of funds under management (FUM) and then members you think would deliver more scale economy, but the demonstrated experience is that was not achieved between 2004 to 2010,” Clarke says in the report. “So I am highlighting the fact that achieving economies of scale or what you would hope to get really is something that’s got to be achieved through business strategy and directly targeted. It doesn’t just come with growth and it is quite difficult to get those outcomes.”

The challenges associated with mergers, according to Clarke, include increases in technical governance skills required by trustees as investment complexity grows; accessing increased numbers of managers with growing monitoring and implementation costs; the costs of growing internal investment teams; and the challenges associated with accessing and managing global asset portfolios.

Additionally, the paper notes that funds are most efficient at roughly one million members and $20 billion in assets.

“We’re not saying mergers are never appropriate, but rather funds should be aware alternatives exist that have the potential to deliver better member outcomes,” Clarke says, adding that he encourages funds to consider tailored outsourcing partnerships as an alternative.

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