Mergers and scale in an uncertain future

“Everybody wants to go to heaven, but nobody wants to die”

PAST SUCCESS * Not-for-profit *simple products and fees * low-cost distribution *collaboration *stable cash-inflow *little demand on

PRESSURE ON COSTS• Distribution model changing.

Alternative channels costly. New low cost competitors

• Demography, fund outflow and/or proliferation of products and fees

• Consumer preference for bundling delivered through mobile technology

PRESSURE ON COLLABORATION• Increased scope for competition between

funds

• Self reliance, insourcing, investing in brand challenges existing collaborative ventures

• Consolidation and fund inflows see disparity in size and scale between funds

Big isn’t everything, but it’s not nothing

Fund growth is uneven

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

Net contributions – industry and public sector funds 2012/13

Source: APRA

As is labour market growth

ManufacturingMining

Agriculture, Forestry and FishingInformation Media and Telecommunications

Electricity, Gas, Water and Waste ServicesRental, Hiring and Real Estate Services

Arts and Recreation ServicesWholesale Trade

Financial and Insurance ServicesOther Services

Transport, Postal and WarehousingAdministrative and Support Services

Public Administration and SafetyAccommodation and Food Services

ConstructionProfessional, Scientific and Technical Services

Retail TradeEducation and Training

Health Care and Social Assistance

-100 -50 0 50 100 150 200 250

DEWR projected employment by industry 2018

What’s the question?• What will define our fund’s footprint into the future? • Do we have a stable, predictable, secure and low-cost source

of new members and cash in-flow? • Would our fund win its current default business in an open

tender?• Is self-interest a factor in our decision?

Are mergers the answer?• Scale in administration and investments• Reduce/eliminate competition between NFP funds• May secure reliable cash flows to merged funds• Should only be pursued where:

– merger will improve net investment performance for the majority of the members of the merging funds

– offer members complementary product and service range– Merging should strengthen distribution capability

AGEST looked for growth firstFund FUM

($bn)FUM

CAGR* (%, 5 year)

FUM CAGR* (#, 000s)

# member CAGR*

(%, 5 year)

Net conts Net conts as % of

FUM

AustralianSuper 33.0 8.6% 1,502 3.5% 3.1 9.5%

Fund A 19.1 10.1% 538 2.6% 2.0 10.5%

Fund B 28 7.8% 470 5.2% 1.6 5.6%

Fund C 7.2 10.6% 253 3.9% 0.8 10.5%

Fund D 2.0 76.0% 98 34.8% 0.7 32.8%

AGEST 3.8 18.5% 168 2.2% 0.5 12.8%

Selected tender process

Programme of work• Due diligence and cost-benefit analysis

– Detailed review of economies in admin, trustee, and investment– Post-merger valuation alignment – Group life insurance – Finance and tax policies, including any contingent tax liabilities, stamp duty

for each asset, DTA, present entitlements to trust distributions

• Implementation planning, governance and responsibility• Relationship with service providers, especially outgoing providers

Risks • One-off merger costs are excessive

– Reserve equalisation, run-off insurance, staff redundancies, long-term leases, administration and custodian transitions, due diligence, member communications, stamp duty

• The benefits of the merger are not realised– Poor execution, wrong partner selection

• Diminished affinity with fund amongst members, employers and stakeholders