Is APRA’s preferred outcome 14 mega-funds?

First, the Australian Prudential Regulation Authority (APRA) claimed that superannuation funds with less than $30 billion in funds under management were not competitive. Now it is saying that those with assets less than $10 billion are not sustainable.

What APRA really likes is superannuation funds with more than $50 billion and there are only around 14 superannuation funds which fulfill that criteria.

The validity of its heatmaps methodology and that surrounding the superannuation performance test is still be questioned by superannuation funds, but APRA has used that data as the baseline for analysis which concludes that assets over $50 billion are likely to be more competitive.

On two successive days, APRA member, Margaret Cole has referenced the regulator’s research to drive the message that it wants to see further consolidation within industry funds.

And Financial Newswire has been told that her messaging is having an impact with the boards of small to medium-sized funds contacting consultants to scope out merger potential.

However, the APRA analysis of its heatmap data is concerning because it names funds which were not regarded as having heatmap concerns and which passed the superannuation fund performance test with fund executives and industry consultants expressing surprise at some of the funds named as failing three of the criteria.

Unusually for a regulator, APRA is actively claiming vindication for its pursuit of industry consolidation, as evidenced by Cole’s media release pointing out that APRA’s analysis “also highlights the benefits of mergers and simplification programs in improving financial outcomes for members:

• Mergers since the release of the first MySuper Heatmap in 2019 have delivered a combined total fee savings of around $21 million per annum to approximately 350,000 MySuper member accounts (or $60 per account).
• Simplification programs, including product consolidations, have delivered fee savings to approximately 780,000 member accounts, with estimated total savings of almost $16 million per annum (or $20 per account).

Cole claimed the findings proved “that size matters when it comes to boosting financial outcomes for super members”.

“Superannuation is a long-term investment, and how funds are placed to perform into the future is just as important as how they are performing today.

“While bigger isn’t always better, increased scale makes it easier for trustees to build an efficient and resilient business model that delivers strong financial outcomes for members. A fund that is losing members or has declining net assets will face challenges to keep fees and costs low for members, and fund operational improvements that ultimately benefit members.

“With the largest funds growing solidly, either organically or through mergers, the sustainability and performance gaps between the industry giants and the rest will only widen further without urgent action by small to medium funds.

Deloitte superannuation partner, Russell Mason, said he would be concerned at any analysis which did not properly take account of the underlying efficiency, fees and performance of a fund, not just their scale.