Need to know
- The number of super funds and products in Australia is going down as more funds merge
- Mergers can make the industry more efficient, meaning you could end up with more retirement income
- Super Consumers Australia says a merger is an ideal opportunity for you to check that your fund is doing a good job of building up your retirement income
Generally speaking, mergers can be good for fund members. They often happen when the two merging funds recognise that they can deliver a better product if they combine forces rather than go it alone. One of the most obvious ways people experience this is through a super fund passing on the benefits with fee reductions, meaning people can enjoy more income in retirement.
Last year, there were more Australian super fund mergers than ever before, and even more funds have merged this year or are looking to merge. The average size of mergers in 2020–21 was also significantly larger than the average fund mergers over the previous decade. For instance, the average size of the receiving fund (the fund that continues after the merger) was $76 billion in 2020–21 – up from $32 billion in 2017–19.
Regulators and industry experts expect more funds to merge in the future.
Why are so many funds merging?
The mergers have been driven by the increased scrutiny on funds brought about by the new super fund comparison tool and its performance test. This test shone an unprecedented spotlight on funds that weren't competitive in terms of fees and investment performance.
The funds that didn't pass the test faced the prospect of not being able to take on any new members if they failed again. This has driven change – 10 of the 13 funds that failed the performance test have since left the system or are in the process of merging.
In extreme cases, the regulator can step in and force funds to merge. For instance, APRA has directed two underperforming funds, EISS Super and Christian Super, to merge with better-performing funds.
New spotlight on dud funds
Another relevant change to the super industry is APRA's publication of 'heatmaps'. These 'maps' are a colour-coded presentation of how funds are performing on fees and net investment returns. In 2019, APRA published a heatmap of the MySuper products (these are the simple super products that you can be defaulted into) and in 2022 it expanded its heatmap to include some choice products (the ones you need to make an active choice to join).
The most recent heatmap showed widespread underperformance and high fees (with some products falling into both categories) across the choice sector
The most recent heatmap showed widespread underperformance and high fees (with some products falling into both categories) across the choice sector. The increased scrutiny may have indirectly contributed to some struggling funds seeking merger partners. When APRA published the second version of its MySuper heatmap, APRA deputy chair Helen Rowell said it "shines a light on those trustees who are failing their members by charging high fees and not delivering good long-run returns".
Rowell also said the regulator published the heatmaps to pressure underperforming funds to "lift their game or risk being forced out".
Combined savings of $21m a year
Analysis by APRA found that the wave of mergers since it published its first MySuper Heatmap have saved about 350,000 account holders combined savings of roughly $21 million a year.
Super Consumers Australia has analysed the impact of mergers on consumers in the past and found that they lead to lower fees on average. For instance, for the funds that merged between January 2018 and October 2020, their fees fell by an average of 13.4%. This fee reduction would give you $14,830 more in your retirement income.
Scale and why it matters
Generally, scale (or size) is a good thing for super funds. APRA analysis shows that large funds can more easily spread their operating costs across their member base (meaning costs are lower for each member) than their smaller counterparts can.
Although the overall trend is that bigger funds perform better than smaller ones, it's important to clarify that not every big fund performs well and not every small fund is an underperformer. Recently, some small new funds have closed, admitting that they simply couldn't reach the scale needed to be competitive.
It's important to clarify that not every big fund performs well and not every small fund is an underperformer
According to outgoing APRA chair Wayne Byres, the super industry would look a lot different if you designed it from scratch today. He went on to outline the large number of relatively small funds – 72% of the funds collectively manage just 8.5% of the total money in super (meaning that just 28% of the funds manage 91.5% of the money).
Too many funds, too many products?
The Productivity Commission also identified a huge number of "little used and complex products" in the choice sector, running to tens of thousands of products.
The report says this proliferation drove up fees without improving net returns and made it harder for members to make effective decisions about which product to choose. APRA executive board member Margaret Cole has also picked up on this theme, saying, "Historically, the choice sector's complexity, variety and sheer volume of options have helped to shield poorer performers from scrutiny."
In response to industry changes, many funds have been simplifying their super offerings and now have fewer products. According to APRA's calculations, this simplification has saved almost 800,000 members a total of $16 million a year on fees.
How do you know if your fund is merging?
You'll get a notification from your fund if it's about to merge. The law requires funds to issue a 'significant event notice' (SEN) if it intends to merge. ASIC says this notice "must include the information that reasonably enables fund members to understand the nature and effect of the change or event".
Information in the SEN could include:
- the timeframe of the merger (including when the fund will make the first pension payments to new members)
- any lockout period (during which you can't make any changes to your super)
- fees for the new product
- details of the new product, including a breakdown of how your super will be invested across different asset types, and how this differs from your current product
- how any pension or defined benefit will be paid
- details of your disability insurance and how your cover will be affected
- how access to customer services such as phone numbers and websites will be affected
- and any action(s) you need to take.
Super Consumers Australia policy manager Franco Morelli says, "We would expect a good SEN to be clear and concise on how the merger will impact a member's benefits, fees, investment allocation and insurance. It's about informing members, not doing marketing for the fund."
Making the merger process smooth for members
Bear in mind that there'll probably be a period where you can't make changes to your super as the merger is completed. But according to Morelli, funds should minimise this disruption for their members.
"In some mergers, we've seen members unable to change how their super is invested for weeks," he says.
"Funds need to give their members enough notice to prepare for a lockout period, and need to do everything they can to make this period as short as possible."
Morelli says if you're unhappy with how your fund is handling a merger, the first step is to raise it with your fund. If your fund doesn't resolve your complaint to your satisfaction, you can escalate it by contacting the Australian Financial Complaints Authority (AFCA).
Tip: If your fund merges, check the fundamentals
Merged funds should, in theory, be more efficient and pass the savings on to you. But this doesn't always happen, so make sure your new fund still meets your needs. Check that:
- you're in a high-performing fund
- you're not paying too much in fees
- your insurance won't put barriers in your way if you need to make a claim.
The simplest way to check how your fund stacks up on performance and fees is by using the ATO's super fund comparison tool. See our guide to using it.
If you're not sure whether the disability insurance you get through your super is right for you, email or write to your fund. We've created a template you can use for this purpose.
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.
Stock images: Getty, unless otherwise stated.
