Australia: Pace of consolidation to ease

The pace of consolidation across the Australian pension industry is set to slow as funds deal with the end of capital gains tax rollover for losses and a far-reaching government reform package.

The tax relief window, which allowed merging funds to transfer losses largely accrued during the global financial crisis, closed in September after three years. Meanwhile, funds are preparing to spend much of the next two years implementing the federal government’s Stronger Super package, which centres on the My Super product - a default, low-cost investment strategy aimed at most investors.

“In all my years being in the industry this is probably the greatest challenge that I’ve ever gone through,” Neil Cassidy, the long-serving chief executive of the A$1.45 billion Tasplan pension fund says.

The government package also includes a number of financial advice reforms and administrative measures aimed at lowering costs and improving efficiency across the industry.

The ongoing merger of Vision Super and Equipsuper, which will create one of the country’s largest pension funds with A$9.5 billion in assets, is already grappling with the end of CGT relief. In November, the transfer of about A$3 billion of Equipsuper assets to Vision Super’s pooled superannuation trust was delayed, according to Vision Super chief executive officer Rob Brooks.

“We could not complete the merger of the assets because of capital gains tax considerations,” he says. “This, for us, is a real major issue and difficulty for the merger.”

The issue is also threatening a potential merger between the A$4.6 billion CareSuper and A$1.6 billion Asset Super pension funds, which announced official merger talks in September.

The Association of Superannuation Funds of Australia (ASFA), which represents more than 90% of the pension industry, says without a legislative change, investor returns within newly-merged funds would be reduced by about 2.6% because many funds have accrued significant capital losses amid tough market conditions. “Trustees are saying ‘I’m damned if I do and I’m damned if I don’t’,” ASFA chief executive Pauline Vamos says.

While the government has previously ruled out extending the tax relief, ASFA is continuing to lobby on behalf of the industry and remains hopeful that the exemption will resume from 1 July, 2012. A limited legislative tax relief window remains open for those funds forced to merge to meet the MySuper license conditions.

The number of Australian pension funds, excluding smaller self-managed super funds, fell 9.7% over the 12 months ended 30 Sept., 2011, according to Australian Prudential Regulation Authority data. The industry has been consolidating for several years as employer-run corporate pension funds have outsourced to specialist companies, while other funds have merged in an effort to achieve greater economies of scale.

During the same period, pension fund assets remained relatively flat at A$1.28 trillion due to market weakness. However, asset growth is set to speed up over the next decade after the government pledged to raise the mandatory superannuation guarantee (SG) paid by employers to employees from 9% to 12% by 2019. The government says the increase, alongside its reform package, will boost final pension balances by almost A$150,000 for a 30-year old worker on average full-time wages.

Funds must begin offering MySuper from July, 2013, while employers must make employee contributions to a MySuper fund from October that same year. Existing default balances must be transferred to a MySuper product by July, 2017.

Australian Catholic Superannuation & Retirement Fund (CSRF) chief executive Greg Cantor says implementing the Stronger Super proposals will be a key focus for the A$4.3 billion pension fund.

“It’s going to keep every fund in Australia busy for the next two years,” he says. “That October 2013 date will come around very quickly.”

The legislative overhaul is already prompting funds to reconsider their current portfolio construction strategies.

Australian pension funds’ default investment options are aggressively invested compared to international standards, with between 60%-75% of assets considered to be growth-oriented, such as equities and property.

Cantor says CSRF will spend much of 2012 considering how to implement its own low-cost default MySuper investment approach. “Certainly our investment committee has that as an item front and centre and it will be a standing item for the foreseeable future.”

Many funds will use their current default investment options as the basis for MySuper although there may be a reduced allocation to higher-cost alternative assets.

While funds grapple with a flood of oncoming regulatory changes, 12-month rolling member returns have remained subdued and regaining investor confidence also remains a concern.

“One of the major things going forward for us is to improve our engagement with our members, to full understand who they are and that they fully understand how the fund is performing,” Tasplan’s Cassidy says.

The median balanced fund lost 0.27% over the 12 months ended 30 Sept., according to research house SuperRatings. Three- and five-year returns rose slightly to 1.1% and 0.92% respectively.

Still, discretionary pension investor inflows lifted by 14% in the September quarter - the second consecutive quarter of double-digit growth, according to APRA data.

The ongoing economic turmoil in Europe and weakness in some Asian economies prompted the Reserve Bank of Australia to cut official interest rates by 25 basis points in November and again in December, halting seven consecutive rate rises since October 2009. Australian interest rates remain relatively high at 4.25% reflecting the strength of the country’s resources-led economy.