Merger costs may impact short-term returns: ASI

Merging superannuation funds may see a one-off dip in their investment performance as they recoup transition costs, according to a panel at the 2019 Australian Superannuation Investment Conference.

Appearing on the panel, Tasplan chair Naomi Edwards said she has seen the fund go from $2.5 billion to just under $10 billion through mergers in the last four years.

She said the total benefits for a smaller super fund may be split as 60% on the administration side and 40% on the investment side.

But there is cost to be borne in the short term, before the scale benefits can be fully realised.

"For example with the Tasplan and RBF merger, where we were two $4 billion funds, notwithstanding that we had a transition manager who did a fantastic job, nonetheless on Australian and global equities, we had a probable cost in terms of being out of the market and transacting of probably 20 bps-so pretty high," Edwards said on an ASI Panel looking at the investment implications of a superannuation fund merger.

"So if you look at a balanced fund -- that's assuming it is 50% equities -- that was a 10 bps hit. Obviously that is a one off."

Tasplan recouped the costs in less than two years - or 20 months. Eventually, the fee charged to members fell by a third.

She said the merger costs on the investment side can be higher if the two funds have more pooled investment structures (which have bid offer spreads) instead of mandates or vastly different portfolios.

Treatment of franking credits in equities portfolios

In combining the Australian equities portfolios of two merging funds, can the funds lose the ability to pass on franking credits for a period to their investors if they fail to meet the 45-day holding test, the panel's moderator REST chair Ken Marshman asked.

"That's another one to manage from a timing point of view ... [I guess it is how you] bring together the custody side of the business, whether you've got any contracts that would go for a longer period. They are things to be considered, but there are not too many transaction costs to add to that," PwC partner David Coogan said.

Stamp duty on property assets

Combining property assets of two merging super funds may prove hard and the treatment varies from state to state, Edwards said.

"It's very hard and the treasuries will just keep saying no and even in Tasmania where we had the public sector fund and the government had passed legislation to make us merge together, they still said 'why should we give you stamp duty relief'," she said.

"So it is very tricky, we did eventually get it but it was a year of fighting and arguing.

"I imagine it is very state specific so that can really cost a lot. Obviously with that the key issue is to get the successor fund transfer working in the right direction. So the advice that you get from your advisors around the stamp duty implication should be a key driver of which way the successor fund transfer goes."

Capital gains tax relief

On the upside, merging super funds don't have to worry too much about capital gains tax.

"There is currently some rollover relief for merging funds for capital gain so generally you are okay than that," Coogan said.

Tasplan merged with RBF Tasmanian Accumulation Scheme and Quadrant Super in about four years ago.

It was recently part of another potential merger when Statewide Super, WA Super and Tasplan signed a memorandum of agreement but the talks were unsuccessful.

Read more: TasplanAustralian Superannuation Investment ConferenceAISTDavid CooganKen MarshmanNaomi Edwards
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