Super fund mergers: Are you really better off?
You open your email inbox and there it is - a "significant event" notice from your superannuation fund informing you it will soon be merging.
In explaining the thinking behind the merger, it assures you that you'll see benefits in the form of "scale", which will then make the fund more "efficient". But what does that even mean, and are you really better off?
When it comes to industry consolidation, those have been the two big buzzwords used by super fund marketing teams in recent years, as the number of mergers has steadily ticked up and up.
Consolidation has come largely on the back of the Productivity Commission's January 2018 report, which made clear there were too many overpriced and underperforming MySuper offerings operating to the detriment of members. And, whether by choice or force, super funds took notice.
The concept of a super fund merging is not new. AustralianSuper, the country's largest fund, would not exist had the Australian Retirement Fund and Superannuation Trust of Australia not merged in 2006.
We've seen the number of super funds shrink at an accelerated pace since the Productivity Commission released its findings, dropping from 212 to less than 180 at last count.
Most recently we saw one of the biggest mergers to date in that of First State Super and VicSuper.
There's also been the merger of Catholic Super and Equipsuper, and LESF Super accounts transferring to Smartsave, including all those attached to disruptor start-ups Grow and Zuper.
Meanwhile, mergers between Cbus and Media Super, MTAA Super and Tasplan and First State Super and WA Super are all expected to finalise later this year.
But we're still a long way off the "optimal" number of super funds, which consulting firm Right Lane pegs at 15.
"An idealised structure for the superannuation system would have three to five generalist mega-funds and seven to 10 specialised funds with no fewer than 500,000 members," says the consultant.
And the prudential regulator is also pushing for consolidation, publishing its first "heatmap" in December last year, highlighting the funds that have work to do.
"Despite recent merger activity, APRA's heatmaps make it clear that there is still a glut of underperforming funds delivering poor returns for high fees in their MySuper products," says Xavier O'Halloran, director at Super Consumers Australia.
"Behind the scenes we know that APRA has approached more than a dozen funds asking them to remedy their poor performance, including considering mergers, or face enforcement action."
For those super funds that have merged, it's generally accepted that the benefits will be twofold - a larger pool of assets opens up greater investment opportunity while reducing the cost to members.
But as AustralianSuper has grown, so too has its fees, including the addition of a new fee earlier this year to offset the impact of the Protecting Your Super legislation. Many criticised the move on account of the fund's size, saying it should have been able to absorb the added costs.
So, is bigger really better?
Pooja Antil, research manager at Rainmaker Information, which publishes Money, says that while a lot has been said in favour of consolidation, it's when the merger actually happens that the rubber meets the road.
According to Rainmaker analysis of the majority of super fund mergers that have occurred in the past three years, when it comes to costs members do end up substantially better off. Fees dropped by an average of 0.32%.
The benefit isn't quite so pronounced when looking at the major fund mergers that have taken place more recently, but members still come out on top with their fees dropping by an average of 0.13%.
"Through a member's working life this can translate into massive fee savings and boosted savings. But fees are just one component of a bigger set of umbrella issues that could be significant enough to impact the member account balance at the time of retirement," says Antil.
"Just like one should never look at short-term performance, the effect of merger may also take some time to show tangible better member outcomes. For reductions in fees to matter, they of course have to be reflected in improved net investment returns and extra money in members' accounts."
When it comes to insurance cover, the jury is still out - Rainmaker found close to no change when looking at the mergers of Hostplus and Club Super, LESF Super and SmartSave, Catholic Super and Equipsuper and First State Super and VicSuper.
But at the end of the day what a super fund member cares most about is performance - and it's again something that can't currently be accurately compared.
Covid-19 has thrown such a spanner in the works for super funds that making any judgement calls on investment returns would be plain unfair. But to get an idea, we can look to last year's merger between Hostplus and Club Super.
Before merging with Hostplus, Club Super achieved returns of 7.9% over three years while Hostplus members saw 9.9%. Following the funds' merger in November 2019, Hostplus achieved a three-year return of 10.4%.
While we all know the classic "past performance is not indicative of future performance" line, Bravium financial planner Scott Farmer says when it comes to a merger, past performance is relevant.
"Part of it is about understanding why a fee is cheap or expensive and why the return might be good or bad. A lower fee is certainly more money in your retirement savings, but there's certainly examples of low-cost options that don't perform well as well," says Farmer.
"And it also requires some thought around what it's actually invested in."
For those who aren't particularly engaged with their super and are happy to be defaulted into the balanced option, Farmer suggests taking five minutes to look at the asset allocation of that portfolio.
"As a consumer, you see the 'balanced' label and you make an assumption as to what that means, but it can be wildly inaccurate with some funds. If a fund is 80% growth assets and another is 55% growth assets but they've got the same return, that's important to know," he says.
Ultimately, the fee is important but the key is understanding what you're actually getting for that fee, he adds.
"I think if you want to spend as little time as possible on your super fund you should at least understand that bit, and then take a look at what return that has provided to members over one, three and five years," says Farmer.
O'Halloran agrees, but warns that being able to compare across funds isn't always easy.
"It is important to compare the fees, returns and insurance offerings of your new fund compared to your old fund. This can be hard to easily come across, so it is worth asking your fund what the key differences are," he says.
"If they can't provide an easy answer, this is a big red flag."