Melbourne-based superannuation funds Equip Super and Catholic Super announced plans Wednesday to merge using a "groundbreaking" structure that allows for consolidation of investment and back-office operations while maintaining the distinct brands familiar to their respective members.
Equip Super, with A$16 billion ($11.3 billion) in superannuation assets and more than 72,000 members, and Catholic Super, with A$9.7 billion in assets and 75,000 members, signed a memorandum of understanding to establish a "joint venture trustee" overseeing roughly A$26 billion for 150,000 members.
In an interview, Equip Super CEO Nicholas Vamvakas predicted the "house of brands approach" — a first for Australia's fast-growing, not-for-profit industry fund sector — will open the door for the pickup in super industry consolidation Australian regulators have been calling for.
The heavy investments super fund providers have made to establish their brands and forge links with employers have been stumbling blocks in merger talks where discussions inevitably turn to the disappearance of those brands, said Geoff Brooks, a spokesman for Equip Super. "This structure was created in part to address that hurdle."
A number of superannuation funds have garnered an extended public offer license — allowing their boards of trustees to offer more than one MySuper default option, which effectively paves the way for a multibrand structure. Equip is the first to move ahead with the plan.
Danny Casey, the chair of Catholic Super, in a joint news release, called the joint venture structure "the perfect pathway, bringing our members the benefits of scale while retaining the Catholic Super identity and strong connect with those working in Catholic institutions and communities."
A merger with Catholic Super would be Equip Super's second major combination within two years. On July 1, 2017, the Melbourne-based fund, with assets of roughly A$8.5 billion at the time, merged with the A$5.7 billion Rio Tinto Staff Superannuation Fund.
Equip Super's annual report for its fiscal year ended June 30, 2018, said members should enjoy A$12 million in fee and insurance premium reductions during the current fiscal year as a result of the economies of scale the merger with Rio Tinto produced.
Mr. Vamvakas conceded that the joint venture structure for the coming merger — where it won't necessarily be obvious to Equip Super members and Catholic Super members that any significant change has taken place — could yield less in the way of economies of scale than a full scale merger resulting in a single brand.
Equip Super did research on the benefits various approaches to merging — including full-scale mergers creating a single brand and mergers under the proposed joint venture structure with multiple brands — would bring in terms of economies of scale, Mr. Vamvakas said. He declined to go into details.
Still, the removal of what has been a significant roadblock to mergers in recent years will set the stage for some immediate scale gains, while presenting opportunities to revisit the question of a full scale merger in subsequent years, he said.
For example, Mr. Vamvakas said, members could be asked in two to four years whether they'd be open to a merger creating a single brand if the fees they paid would fall materially as a result.
The prospect of consolidation and rationalization for the external manager lineups of the two funds can't be a happy one for money managers.
Equip Super's merger with Rio Tinto left the combined group with more than 70 asset managers, which were whittled down to 40 by the June 30, 2018 close of the latest fiscal year.
Catholic Super's latest annual report listed 64 external managers, only 13 of which overlapped with Equip Super's manager list.
On the positive side, Equip Super, which managed roughly 30% of its investment portfolio internally as of June 30, 2016, subsequently decided to outsource 100% of its assets.
Mr. Vamvakas left open the option to revisit that question as mergers and market growth boost the size of the organization's portfolio.
The organization's next tentative target is to achieve a scale of A$35 billion with 250,000 members by 2025. At that point, it may be time to reconsider the investment model, he said.