Home / Analysis / ACCC wins no friends with early views on Pillar sale

(pictured: Rod Sims)

Analysis by Greg Bright

It’s not just the Link Group’s board and management that are displeased at the ACCC interim view on the proposed Pillar purchase, announced last Thursday. The NSW Government, too, along with Pillar staff, may well be the biggest losers.

The final date for bids has been pushed back a couple of weeks, to early November, under a process being run by KPMG. What are considered the three most likely bidders are Link, Mercer and Anchorage Capital, the private equity firm involved with the Dick Smith disaster. Less likely but possible are Queensland-based IFAA and Sydney and Wollongong’s Recreo, which last year won its first big admin client, Mine, Wealth + Wellbeing. If it is allowed to, Link would be the clear front runner for several reasons:

• Pillar has lost seven of its 13 clients in the past few years and has required two capital injections totalling $15 million in 2016 and 2015. The NSW Government has become a more-than-willing seller and Link, whose admin business is its core competency, making up 57 per cent of group revenue, has the most to gain from a purchase.
• Link is likely to make a compelling case to the NSW Government over the retention of the politically important Wollongong operations and staff. Under the proposal the Government requires a 10-year retention of the operations and two-year guarantee on most staff.
• Link argues that Pillar is not really a competitor at all, and the two have not been involved in a tender against each other for more than three years. The biggest group of competitors to Link is, in fact, the funds themselves, with government and some industry funds with insourced operations making up the largest share of the market, by fund members, at more than 50 per cent. Link has 34 per cent, Pillar 4 per cent and Mercer 2 per cent. Of the top 10 super funds in Australia by assets, Link has only two as clients – AustralianSuper and REST. The others use inhouse systems. This is a crucial consideration in any deliberation by the ACCC: what is the definition of “the market”.
• The AustralianSuper admin transition from the old SuperPartners is scheduled to be completed within a few months, freeing up time for Link to handle another group of smaller funds. Pillar’s main clients could take comfort in how surprisingly well the transitions have gone.
• It is unlikely that Mercer would be able to hang onto at least one of Pillar’s big four clients – its consulting competitor Aon. The other three biggest clients are: First State Super, NSW State Super (STC) and PSAP and ADF (Commonwealth Super).
• The deal is relatively small for all players, with an estimated $70 million in Pillar annual revenue just a blip for the likes of both Link and Mercer. For Anchorage, which would be looking for changes and then a new buyer, it is a different proposition. Link could simply shrug its shoulders and aim to take its pick of the clients to bid for singly when they come up for contract review. The first of these, First State Super, is scheduled for about a year’s time.
• The inhouse competitors to three admin providers may receive a fillip from the recapitalisation of two big systems companies: Financial Synergy, which is the systems provider for Pillar, has just been acquired by IRESS and Bravura is about to do an IPO.
• It is likely that if John McMurtrie, the Link boss, met with Michael Dwyer, the boss of First State Super, the biggest client, he would have been able to point to the fee reductions he had given the five former shareholder funds in SuperPartners and hold out the promise of similar if he was successful. And it is likely, given the tight-knit nature of not-for-profit funds, that Michael Dwyer would have already known that.
• The big not-for-profit super funds have a habit of getting their way with service providers on fees and charges. Just ask any fund manager. They also have powerful associations, such as AIST, ACSI and ISN, to represent their interests. Jeff Bresnahan, founder of SuperRatings, has publicly criticised funds for not paying enough to allow the admin providers – specifically SuperPartners – to reinvest in their technology. The late Mavis Robertson, AIST co-founder, once mused in print that perhaps the funds had gone too far in screwing down the admin companies on price.

Rod Sims, ACCC chairman, said: “The ACCC is concerned the possible acquisition is likely to substantially lessen competition in the supply of superannuation administration services by entrenching Link’s dominant position, resulting in lower service levels or higher prices, which will ultimately be passed on to fund members…

“The ACCC is concerned that the possible acquisition will remove the only alternative superannuation administration services provider with the demonstrated capacity to supply administration services to larger funds in competition with Link…”

The ACCC will be accepting further submissions from the interested parties up until October 28 and anticipates making its final decision on December 15.