Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
CSC’s public offer plan shows nobody is exempt from megafund pressure
When AvSuper’s board decided it was time for the $2.4 billion fund to merge, it found in the Commonwealth Superannuation Corporation (CSC) one of the few operators that would be able to take on the large chunk of members in its defined benefit (DB) product.
CSC had both scale and form, operating a number of closed super schemes comprising a mix of DB and defined contribution (DC) assets, including Military Super, the Commonwealth Superannuation Scheme and The Defence Force Retirement and Death Benefits Schemes, as well as two accepting new members: ADF Super, for members of the defence force, and the Public Sector Superannuation accumulation plan (PSSap), which manages the money of public servants past and present. The funds had similar benefit design and, as a cherry on top, were located geographically close together in Canberra.
There were “a lot of positives”, and the “comprehensive and highly competitive” expression of interest process was over. CSC said that as a result of the merger its members would reap the rewards of “a larger, more diversified customer base”. Its open super products – ADF Super and PSSap – have, respectively, around 33,000 members and $1.5 billion in FUM and 144,000 members and $20 billion of FUM. The rest of its assets sit across the remaining closed superannuation products, while nearly 50 per cent of its total assets are in the retirement phase, accounting for nearly 30 per cent of member accounts.
But the merger was apparently just the first step on a path that could have made that customer base much larger and much more diversified. According to sources, CSC wanted to “open and expand” its business by becoming a public offer fund.
It wasn’t to be. While CSC not only wanted to become a public offer fund, it would effectively have been required to become one by legislation, according to sources. While at the outset of discussions both AvSuper and CSC acknowledged that the merger would require government approval and new legislation, though both sides of politics had agreed in principle to the process. That legislation would have allowed CSC to become public offer and take on members from outside the Commonwealth public service, accommodating the arrangements already in place at AvSuper.
But the change in government and a new legislative agenda meant it was ultimately pushed back and the merger was called off, with AvSuper demurring on the basis that change would take too long and CSC CEO Damian Hill later saying the merger “could not be accommodated within the existing policy and legislative framework for the Commonwealth’s superannuation arrangements”. In the end, AvSuper merged with Australian Retirement Trust (ART) instead, which has made a strong sideline of hoovering up small funds and transitioning corporate plans to its platform.
Other quibbles on the AvSuper side included the question of how well looked after its DC members would be in a fund that had significantly fewer investment options, as well as cultural fit. There was also some concern that the industry funds would be uncomfortable with a government agency entering the superannuation industry proper – and that a government agency would have to compete with the industry funds.
That CSC was willing to rise to that challenge shows how the dynamics of the superannuation system have changed in the last five years. While CSC might be a government organisation, it acknowledges that it “competes in a market for investment opportunities, customers and employees”, and stapling means it will also have to go harder for new members at a time when any fund that isn’t growing is losing market share.
That’s a reality that Av’s ultimate merger partner recognised. There, the motto has been growth (though not quite at any cost). If CSC had pulled the merger off it might have been in a stronger position to do what ART has done: take on the remaining superannuation funds that have come out of the Commonwealth, like Qantas Super, or the still in play Telstra Super – a public offer fund.
And while the legislative hold-up was the main reason the merger fell through, the fact that it did also shows how much skill a merger takes, and how important it is to develop that skill. Those who have been through the process with ART talk in glowing terms of its transition team, while acknowledging that there were bumps along the road. ART could well take the crown of Australia’s biggest super fund (though that crown does sit heavy at times). CSC, by comparison, hasn’t had as much merger experience; it took on Military Super back in 2011, while Com Super was merged into it in 2014.
CSC’s plan to go public offer will likely serve only as a footnote in a volatile period of superannuation history. But that a super fund with robust investment performance and decent size behind it felt the need to compete harder for members and opportunities demonstrates just how volatile that period has been. While it’s the small funds that have come under the most pressure to grow, the wider superannuation industry is rapidly becoming two-speed: the megafunds, and everybody else.
CSC declined to comment.
