Need to know
- Super Consumers Australia analysis shows that super fund mergers are benefitting fund members
- Despite increased merger activity, a 'long tail' of underperforming funds remains largely in place
- A new yearly performance test for super funds is expected to lead to more mergers and, ultimately, help people retire with higher savings
Super funds that aren't efficient charge their members higher fees than their more efficient competitors. These fees erode your savings and mean you have less to spend in retirement.
Mergers are one way to achieve economies of scale. These are the cost advantages that a company can achieve through the scale of its operation, which enables it to offer its services at a lower price to each customer. In the case of a super fund, economies of scale could let a bigger fund offer its members lower fees.
Such consolidation involving the exit of chronic underperformers is long overdueProductivity Commission
The Productivity Commission found that people would benefit from a smaller number of super funds that were more efficient at looking after people's retirement savings. "Such consolidation involving the exit of chronic underperformers is long overdue and should be welcomed," it said.
Analysis by Super Consumers Australia confirms that fund mergers bring substantial benefits for members. Of the funds that merged between January 2018 and October 2020, their fees have fallen by an average of 13.4%.
Over the course of a working life, this reduction in fees would mean you retire with $14,830 more in your savings.
That's a substantial amount to add to your nest egg – without having to work another day or save another dollar.
New performance test should see more mergers
Over the past couple of years, the federal government has introduced a range of measures to encourage fund mergers. The most powerful tool yet created to drive these mergers is the yearly performance test announced in the 2020 federal budget.
This test, which will apply from 2021, means that if a fund fails two performance tests in a row it won't be allowed to accept any new members until it improves.
Underperforming funds need to find a partner or get off the dancefloorXavier O'Halloran, Super Consumers Australia
Super Consumers Australia director Xavier O'Halloran says the test will light a fire under struggling funds.
"Being barred from adding new members creates a very powerful incentive for funds to either shape up or merge," he says.
"Underperforming funds need to find a partner or get off the dancefloor."
How many underperformers have merged?
However you slice it, only a minority of the underperformers have exited the market.
Many of the funds involved in mergers were already good performers.
Comparing the funds involved in a merger as of June 2019, 14 of the 18 were above-average performers. Of the other funds, one was right on the average, and the remaining three were well below average.
This suggests the existing measures to encourage mergers aren't flushing the worst performers out of the system.
Would mergers of small funds help members?
The Productivity Commission found that more mergers would let funds provide a service to more members with a lower (average) cost.
It also found that mergers among funds with less than $1 billion in assets would particularly help.
But only four of these smaller funds have merged so far.
Again, many small funds that may find it harder to cut fees for their members remain in the system.
Are members better off once their fund has merged?
Super Consumers Australia analysis found that recent mergers had delivered lower fees on average to members.
Aware Super (formerly First State Super) merged with Vic Super and WA Super during 2020. This merger has already led to many members paying substantially lower fees for their super.
It's not a cause for alarm if your fund merges ... In fact, you might be better offXavier O'Halloran, Super Consumers Australia
Michael Dundon, executive consultant corporate development at Aware Super, told Super Consumers Australia that these mergers are in the long-term interests of members.
"We believe that size and scale really do matter," Dundon says.
"Through mergers we can generate economies of scale and access a broader range of investment opportunities which support us to deliver strong, sustainable long-term returns to our members and reduce fees over time."
The two mergers have also helped reduce fees for retirement products. Members in these products now pay at least eight percent less and some pay up to 40% less.
What should I do if my fund merges?
If your fund is involved in a merger, you should receive a 'Significant Event Notice' with the details.
You don't have to take any action to move your savings into the new fund.
This can also be a good opportunity to review the fundamentals of your super, particularly to ensure that:
- you don't have unwanted multiple super accounts
- you're in a fund that has performed well over the long term
- you're not paying too much in fees
- your insurance is right for you.
Super Consumers Australia director Xavier O'Halloran says members should contact their fund directly if they're unclear on how a merger will affect their super and insurance.
"It's certainly not a cause for alarm if your fund merges," he says. "In fact, you might be better off.
"We're hopeful the new annual performance test will drive more mergers and, ultimately, benefit fund members through reducing fees."
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.