Path to $4.1 Trillion Puts Australia Pensions Among World Giants
A handful of Australian pension funds are emerging as global competitors for the established giants in North America, Europe and Asia, as a wave of mergers and huge inflows fuels the rise of local megafunds.
The industry Down Under will grow about 80% to A$5.4 trillion ($4.1 trillion) by the end of this decade, thanks to the system of compulsory contributions, KPMG forecasts. That will leave less than 90 funds, down from more than 200 last year as poor performers are swallowed up and others shutter, according to the estimates.
Megafunds from AustralianSuper Pty to QSuper will get even bigger as they capture the lion’s share of about A$40 billion in net inflows a year, making them priority relationships for bankers seeking backers for new investments. And with firms opening offices across Europe, the U.S. and Asia, they’ll compete with the world’s largest for the best deals, according to David Knox, a senior partner at Mercer, a unit of Marsh & McLennan Companies Inc.
“An advantage of some of our new megafunds is that they may be able to play in that game,” Knox said in an interview.
Here are some expected impacts from the consolidation over the next decade, based on conversations with bankers and pension funds, some of whom spoke on the condition of anonymity to discuss sensitive matters.
The growth of Australia’s so-called superannuation sector, worth around A$3 trillion, is having a knock-on impact across securities firms and capital markets. Goldman Sachs Inc. has grown a team focusing on sovereign wealth funds and pension firms to position ahead of the expected surge in assets. JPMorgan Chase & Co.’s asset management unit is on track to almost double its assets under management in Australia, partly through specialist investments the pensions can’t do themselves.
“I see this as an opportunity,” Rachel Farrell, the unit’s Australian chief said in an interview. Partnerships with global managers will become more involved with everything from trade execution and co-investing in countries where they have little presence, to simple tips on managing complex global organizations, she said.
MTAA Super completed its tieup with Tasplan at the start of April to create the A$23 billion Spirit Super fund. Before that, Chief Executive Officer Leeanne Turner, who has seen plenty of change in her more than 35-year involvement in the superannuation sector, said she is already looking for the next merger. She says the “sweet spot” of about A$30-A$40 billion for a firm’s size is getting bigger.
QSuper and Sunsuper’s A$200 billion merger this year underscores the need for large and small peers to re-assess their competitiveness. Between eight and 10 funds are forecast to grow to more than A$250 billion within five years and account for about 70% of the inflows from compulsory pension savings. Construction & Building Unions Superannuation said it is trying to almost double its A$59 billion in assets through fund mergers in three years to ensure its business stays relevant.
The number of Australian pension funds has almost halved since 2013 and there are at least 15 funds currently in talks about potential mergers, according to the country’s banking regulator. KPMG forecasts there will be just 85 funds by the end of the decade, down from 217 last year.
Regulators will have the power to shut funds if targets are missed, part of a swath of reforms proposed in parliament earlier this year. This follows a government inquiry in 2019 which found more than a quarter of funds were persistently under-performing and one in three accounts were unintended duplicates that cost workers A$2.6 billion a year in unnecessary fees and insurance. Some A$1.8 billion in fees could be saved if the 50 highest cost funds merged with the 10 lowest cost funds, their analysis showed.
“We’re anticipating a lot more involvement by government and regulators in the performance of funds,” said David Bardsley, a partner in KPMG Australia who’s spent more than 20 years in the pensions and banking sectors. “And so there is going to be a natural inclination to undertake mergers that just didn’t exist three years ago.”
Australia’s biggest pension funds are increasing their contact with Canadian peers to discuss business strategy, according to people familiar with the talks. Big firms in Canada have a global reach that stretches from offices in Toronto to London, Mumbai and São Paulo.
AustralianSuper, the nation’s largest pension fund with about A$210 billion, is exploring options for opening a second office in Asia after building out its team in London and New York. While a decision hasn’t been made, it’s likely to be in Singapore, Carl Astorri, the firm’s head of asset allocation said in an interview last month.
The Canada Pension Plan Investment Board, that country’s biggest, has about C$476 billion ($378 billion) in assets, while California Public Employees’ Retirement System, or Calpers as the biggest public U.S. fund is known, manages about $447 billion. Stichting Pensioenfonds ABP, one of Europe’s largest funds, has about 493 billion euros ($585 billion).
Pressure on fees and returns is also forcing pensions to be more aggressive on M&A transactions. AustralianSuper in December offered to buy New Zealand’s Infratil Ltd. for $3.8 billion. It marked the first big unsolicited approach from an Australian pension fund. Until then, funds had typically been more comfortable participating in auctions alongside private equity or once a company had already put itself up for sale, rather than pre-empting a deal.
There is evidence pension funds are placing a greater emphasis on social, governance and environmental issues. Recent moves include pushing for a ban on single-use plastic bags in Australian supermarkets, demanding companies hire more female directors and putting pressure on the world’s biggest mining company, BHP Group, to help mitigate their customers’ carbon emissions.
Corporate misbehavior is also in their firing line. Australia’s pensions were integral in forcing the resignations of former Chief Executive Officer Jean-Sebastien Jacques and two senior executives after Rio Tinto Group destroyed a 40,000 year old Aboriginal heritage site. Chairman Simon Thompson won’t stand for re-election to the board next year as funds considered his position untenable when he downplayed the incident to investors.
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