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Pension roll-ins devilishly detailed

As evidence emerges that pension best-practice increasingly manifests in mega-funds, mergers to capitalise on the benefits of economies of scale abound. Amanda White looks behind the scenes of the roll-in of the $3.4 billion state-based Westscheme into the $37 billion AustralianSuper, and finds it’s not as glamorous as it sounds.

A Western Australian state-based fund, the $3.4 billion Westscheme will roll-in to Australia’s largest industry pension fund, the $37 billion AustralianSuper before June 30. With this roll-in, Westscheme members and most AustralianSuper members in Western Australia will come together in the Westscheme Division of AustralianSuper.

It is understood a report from PricewaterhouseCoopers to the WA fund’s board, which said members’ best interests would be served as part of a larger fund, was the catalyst for the decision.

It is believed other state-based funds such as Sunsuper, Tasplan, and South Australia’s Statewide Super are considering their future, and apparently have been meeting since 1995 to share their experiences.

As with roll-ins and mergers in other industries, the decision to merge and the strategy setting are the easy part. The devil is in the detail.

Decisions have to be made about trustee boards and service providers, internal teams as well as merging ideas, investment strategies and technology.

Westscheme has historically had a complex investment lineup – its consultant, Access, often advised up to 50 per cent in alternatives – and AustralianSuper already has the internal team and service providers in place to be able to handle Westscheme’s complex private equity and infrastructure portfolios. AustralianSuper has more than nine service providers in both infrastructure and international private equity.

But decisions around the non-listed portfolios will have to wait.

According to Peter Curtis, senior manager of investments at AustralianSuper, who is tasked with the roll-in from an investments point of view, the fund is still analysing the portfolios “so we understand how to plan the overall merger”.

In the first instance the focus will be on combining the listed portion of the portfolios, and in the new financial year the manager line up will be assessed.

In both international and domestic equities there is no manager overlap, and Curtis said, an analysis of Westscheme’s active managers will be done to “see how they stack up against ours”.

Late last year Westscheme decided to appoint four Australian equities managers only: Bennelong (14 per cent), CFSGAM (14 per cent), Macquarie Funds Management and Ankura (both 36 per cent). It also has four international managers only – AQR, PanAgora, MFS, and Real Index.

Meanwhile AustralianSuper has 10 domestic equities managers and 11 international managers, after a much-publicised equities review a few years ago.

“We may look at rejigging and expanding, we are not ruling out expanding the number of active managers,” Curtis says.

But that is still a way off. At the moment the analysis is about the best way to transfer the assets to get the best outcomes, which centres on tax.

And according to Curtis, there are a number of options.

“We could have a global transfer, where we take all the tax-parcel history, or transfer on an individual basis where we realise the losses/gains in the Westscheme entity and then transfer them,” he says.

There are certain rules around a global transfer, where Curtis says unrealised losses have to be at the fund level.

“It depends on what markets are doing as to how we proceed,” he says. “To some extent the less history you take across, the easier to transfer and reconcile assets. But we are working on the best tax outcomes for Westscheme members.”

KPMG has been hired as tax adviser, and AustralianSuper’s custodian has a dedicated transition team.

“You need bandwidth and dedication for a merger like this,” he says.

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