The Australian Prudential Regulation Authority (APRA) has used its quarterly Insight publication to chasten the fund trustees for throwing up unnecessary hurdles to mergers.
“Mergers are often stalled or abandoned by trustees that appear to take an overly narrow or restrictive interpretation of the legislation governing mergers,” the regulator said.
“APRA expects trustees to take a pragmatic approach to this assessment – a holistic and ‘on balance’ assessment of equivalency, rather than a line-by-line ‘same rights’” approach.
Further, the regulator said that where equivalence remained an issue, the trustees involved should actively consider negotiating trust deed amendments in relation to member rights, rather than abandoning the possibility of a merger.
APRA said that resistance to consolidation was not isolated to the crimson sections of its MySuper Heatmaps.
“…even stronger performing funds can be quick to present arguments why a potentially advantageous acquisition gets consigned to the ‘too hard basket’,” it said.
“These trustees, that are otherwise open to acquiring funds, express legitimate concerns about the due diligence costs and effort involved. They worry about what liabilities they are taking on: unit pricing errors, insurance disputes, inadequate reserves that would otherwise provide some recourse to being indemnified for these unknowns,” APRA said.
It said these issued then impacted on their appetite for taking on a merger given they needed to assess whether it is in the best interests of their existing membership.
“To overcome this, trustees that may be seeking a merger should take steps to address these issues to improve their prospects of finding a suitable partner. For example, ensuring reserves are sufficient to cover expected liabilities is something that funds should be acting on now,” the APRA article said.
“When developing a business case for a merger, trustees undoubtedly need to consider the costs associated with the merger and the impact those costs will have on their members. However, these costs need to be considered over the medium to long-term, and need to be balanced against the benefits to be gained from the merger over the same period. This recognises the relatively long horizon over which a trustee manages members’ retirement savings.”