A merger between two superannuation funds was in members’ best interests but failed because unions would have to give up their seats at the boardroom table, the Hayne royal commission heard.
Energy Super chairman Scott Wilson said merger talks with Equip Super broke down because the chairman of the latter resisted having any union-nominated directors on a newly-constituted board.
Analysis by KMPG found the merger would “conservatively provide members and employers annual cost benefits of up to $20.5 million”.
Energy Super’s membership was stagnating and by Mr Wilson’s own admission, greater scale could deliver lower investment and other fees.
Yet the deal was “sour” from the start because of Equip Super’s stance on union-sponsored directors, he said.
Mr Wilson was questioned by counsel assisting the commission Albert Dinelli about whether a merger could be in the best interests of members without being in the best interests of unions.
“It just so happens when we talk about superannuation funds, the interests of unions and the interests of members of the funds are so aligned as to be indistinguishable,” Mr Wilson said.
“It’s what we do. We look after members’ money through the accumulation and into retirement.”
The commission heard the merged board would have 10 directors, with five drawn from each fund.
Equip Super wanted directors nominated for the new board to be vetted by an independent third party consultant who could assess their skills.
A memorandum of understanding was signed but things started to fall apart.
Mr Wilson said the chairman of the Equip Super board, Andrew Fairley, had been telling people that a “a potential killer or deal breaker would be any union-nominated positions on a merged board.”
“That was the opening exchange between chairs in what was supposed to be a merger opportunity,” Mr Wilson said.
Energy Super operates under what is called an equal representation governance of model. It has one independent director but the remainder are nominated by either unions or employer groups.
The Equip Super board is comprised of three member directors, three employer directors and three independent directors.
Industry funds such as Energy Super have spent many years resisting efforts by the Coalition government to mandate more independent directors on their boards.
Equip Super had $7 billion in funds under management and 48,000 members, Mr Wilson told the committee.
The membership had been “remarkably stable”. Yet operating expenses had growth from $18 million in 2013 to $24 million in 2017.
The annual administration cost to members had risen from $157 to $217 over the same period.
Asked if that was a matter of concern, Mr Wilson said: “No, because it’s relative to the growth of the assets of the fund.”
However, the fund was having problems attracting new members and cash flow, while still positive, was declining.
Mr Wilson acknowledged the benefits of a merger would a bigger membership base and a reduction in costs for those members.
The Australian Prudential Regulation Authority has been jaw boning about mergers for years but says it does not have the powers to force them.
The Productivity Commission has recommended the Australian Securities and Investments Commission “proactively investigate” cases where mergers stall.