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Funds grapple with ‘clumsy regulation’ while retail super reinvents itself

Megafunds are outstripping APRA’s ability to regulate them effectively, according to a panel of super executives, while private asset valuations are a source of “real tension” between funds and the government despite its big nation-building push.

Speaking on a panel at the Milken Institute Global Conference, Mine Super CEO Vasyl Nair (pictured) said that the term merger is a “misnomer” for small funds and that any fund considering one needs to realise that it’s more like a takeover where they stand to personally lose out.

“The human condition seems to get in the way of mergers, where it’s just self-interest,” Nair said. “People sit at the table and try to negotiate different outcomes and that’s, unfortunately, when mergers start to fail. I think, having the courage to take your fund to a larger fund, there’s significant job loss associated with that. No more director seats.

“That is probably the biggest impediment at this particular point in time, that self-interest. Obviously the introduction of the performance test… does encourage more fund mergers and the regulator does put an enormous amount of pressure on funds to merge. So that will fix some of it, but a lot of funds won’t merge until they actually need to merge.”

Mine Super is currently in the process of a merger of its own with TWUSuper that would create a new $20 billion fund. But while proponents of superannuation consolidation believe that a smaller number of larger funds should be easier to regulate, Nair believes that the massive size of many funds has actually crimped the ability of APRA to cover them.

“What we’re finding with the regulator is that they’re regulating more but they haven’t actually increased the size of the supervision teams,” Nair said. “So the regulation is actually quite clumsy. So you will get – just as some examples – clumsy, late requests; the regulator pushing the deadline back.”

“We understand that they’re resourcing up to meet the demands, but if anything we think the funds are starting to move beyond the regulatory capacity at this point in time because they are growing so quickly. And I think this government has a great opportunity to reset the legislative landscape, provide some more stability to the system, let the regulator catch up and start to regulate in a more focused, coordinated way.”

Small funds will be particularly challenged in the new era of consolidation and scale that superannuation finds itself in, Hostplus CEO David Elia told the same event, with limited ability to access and dictate the terms of the unlisted asset deals that have helped larger funds outperform. Elia isn’t sweating competition from the big end of town either, saying that industry funds “will always outperform” their retail fund brethren because they aren’t required to pay a dividend and that even the recent entry of Vanguard into the superannuation market is unlikely to challenge their primacy.

“In relation to Vanguard, they’re actually very expensive – incredibly expensive… The advisers have worked it out,” Elia said. “They’re effectively selling a passive investment option and they thought they could compare that against our default options, which are slightly more expensive because they’re much better diversified and have allocations to unlisted infrastructure and private equity, etc. But Hostplus has an indexed balanced option for six basis points; it’s much cheaper than Vanguard’s and performs a lot better.” (ed: Vanguard Super’s Lifecycle option charges 0.58 per cent per annum).

“So advisers have worked out – and they do rely on advisers to a large degree to promote their products – advisers themselves have to act in the best interests of their clients. I think they’ll struggle on the distribution side and they are struggling on the distribution side. Having said that, we’re certainly alert to the competition.”

Still, HESTA CIO Sonya Sawtell-Rickson noted that many of the retail players had reinvented themselves since the excoriating experience of the Hayne royal commission and were looking to take back market share from the industry fund sector.

“We’re seeing them coming in as much stronger competitors into the market; they’ve really sliced their fees,” Sawtell-Rickson said. “There was a bit of gouging going on… I think that’s been stopped, and some of the investors are very incredibly sophisticated investors that are trying to maximise that opportunity.”

While Elia backed the concept of nation-building, saying it could create an enormous amount of economic activity and pointing out that industry super already owns “all the major airports” and a slew of energy assets and toll roads, the “real tension at the moment” between funds, government and the regulators is around unlisted asset valuation protocols.

“Clearly the government is very, very keen on (nation-building),” Elia said. “Over the last couple of days the government has made several announcements around quantum computing and the new sciences and they specifically called out superannuation funds as needing to invest alongside the sector. I think most of us would understand that we don’t sit here and value our home every day.

“So we’re trying to do the right thing, because we are long-term investors,  by investing in those asset classes… and then coming up against this notion of ‘Well, how do you value this? Are your valuation protocols robust enough?’. That conversation is still ongoing but the tensions are absolutely real. And I know some funds are more sensitive to that tension than others. But to me, that really will dictate, I think, the extent to which funds will continue to commit to making these genuine long-term investments in the unlisted area.”

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