Big, bigger, biggest

More than 30 funds have disappeared from the landscape as a result of mergers and corporate superannuation outsourcing over the past 12 months, but the impact of those changes will be dwarfed by the impact of the merger between the Superannuation Trust of Australia (STA) and the Australian Retirement Fund (ARF).

What emerges from the ARF/STA merger will be a fund that boasts 1.1 million members and more than $18 billion in funds under management.

That will not make it the largest fund in terms of absolute member numbers in circumstances where REST boasts more than 1.5 million members, but with $18 billion in assets under management it is arguably a standout in the not-for-profit sector.

But a question that must be answered is why two very large and successful funds such as the ARF and STA would choose to merge when, arguably, they had the resources and the reputation to continue as stand alone entities.

What becomes evident in speaking to the man who will oversee the new merged entity, ARF chief executive Ian Silk, is that unlike many of the other superannuation fund mergers that have taken place in Australia over the past three years, the ARF/STA marriage has a very different motivation.

For a start, neither fund was particularly challenged with respect to the new choice of superannuation fund regime or gaining their Registrable Superannuation Entity licences.

“By any objective test, it is true to say that STA and ARF are two pretty large and good quality funds, with excellent reputations with most of the major ratings agencies,” Silk said. “The funds could have easily continued to stand alone, but the merger decision was based on a dispassionate assessment of what would ultimately be good for members.”

In truth, the decision to merge the two funds has represented a long and exacting exercise for the trustee boards of both entities, with the initial merger proposal flagged more than 18 months ago and the extended due diligence process only being finalised earlier this year.

The STA and ARF represent cornerstones of the industry funds movement and it is not without significance that their merger is taking place at a time when Industry Funds Management is moving closer to completing an integration with the Super Fund’s Back Member’s Equity.

According to Silk, the primary benefit for members of the STA and ARF likely to flow from the merger is an improved range of products and services — something that flows from the greater influence the combined entity will be able to wield in the marketplace.

“We are now operating in an increasingly competitive industry and that requires that we build a competitive brand,” he said.

But don’t expect the new ARF/STA entity to begin marketing itself as something new or different. According to Silk, the merged entity will continue to position itself as an industry superannuation fund and exhibit all the normal characteristics of an industry fund in terms of a not-for-profit philosophy and low fees to members.

It would, he said, continue to participate with other funds in supporting Member’s Equity and Industry Funds Management, although it was expected that certain benefits would flow as a result of the fund’s size and buying power.

One of the first of those benefits will flow through to members of the two funds within months, with a new insurance contract having been negotiated aimed at delivering a greater range of options and significant benefits in terms of dollar premiums.

Silk has also signalled that the combined entity will be in the business of developing new offerings such as retirement-related products.

However, he said the bottom line with respect to the combined entity would be the delivery of solid investment returns.

“Members are happy to have a wider range of products and services but, ultimately, they demand a solid investment performance,” Silk said.

And for those who think the merger of the ARF and STA reflect a view that big is better, Silk has a very clear message: “The suggestion that size is everything is very superficial.”

“Size of itself does not deliver benefits,” he said. “It is the way in which a fund is managed.”