How mergers are squeezing the super consultants and service providers

Amid the announcement of two major superannuation mergers in less than two weeks the reality is dawning that service providers such as asset consultants, administrators, fund managers and technology providers are facing diminishing returns in a fast-consolidating industry.

With the Australian Prudential Regulation Authority (APRA) placing ongoing pressure on funds to merge to gain scale, some of the chief executives running smaller funds are pointing out that in an industry with fewer but larger funds the service providers are going to take a hit.

Legalsuper chief executive, Andrew Proebstl has told Financial Newswire that he believes that the regulators and the policy-makers need to recognise that the fall-out from fund mergers extends well beyond the funds themselves.

“People need to be careful what they wish for,” he said pointing out that the creation of larger funds is likely to lead to the increased internalisation of functions such as investment management and administration.

“That is going to put a lot pressure on investment consultants and other service providers,” he said.

Proebstl’s view was backed by Deloitte’s Russell Mason who said that a contraction of the superannuation service provider market seemed inevitable with the tightening already being felt.

He said that even with mergers such as that of NGS Super and Catholic Super major asset consultant, Frontier would find itself with one rather than two clients, while the Hostplus merger with Statewide Super would have a similar impact on JANA.

He noted that with AustralianSuper announcing this week the start of a merger process with LUCRF, the larger fund had already internalised many of its investment management functions.

“Even without the major funds internalising some functions, the asset consulting market is shrinking,” Mason said.

Another small industry fund chief executive told Financial Newswire that he believed the Government had failed to recognise the degree to which the mergers were not only creating mega-funds but “concentrating power in the hands of a few”.

“The Government is going to find that it has created a situation where funds have become so large that they are no longer price-takers but price-makers and nothing is off the menu,” he said.

Legalsuper’s Proebstl said he believed that rather than looking to pursue numbers, regulators such as APRA should look to the outcomes which were ultimately delivered to members and very often better outcomes were delivered by smaller, more focused funds.