Mergers and scale in an uncertain future “Everybody wants to go to heaven, but nobody wants to die”

PRESSURE ON COSTS Distribution model changing. Alternative channels costly. New low cost competitors Demography, fund outflow and/or proliferation of products and fees Consumer preference for bundling delivered through mobile technology PRESSURE ON COSTS Distribution model changing. Alternative channels costly. New low cost competitors Demography, fund outflow and/or proliferation of products and fees Consumer preference for bundling delivered through mobile technology PRESSURE ON COLLABORATION Increased scope for competition between funds Self reliance, insourcing, investing in brand challenges existing collaborative ventures Consolidation and fund inflows see disparity in size and scale between funds PRESSURE ON COLLABORATION Increased scope for competition between funds Self reliance, insourcing, investing in brand challenges existing collaborative ventures Consolidation and fund inflows see disparity in size and scale between funds

Big isn’t everything, but it’s not nothing

Fund growth is uneven Net contributions – industry and public sector funds 2012/13 Source: APRA

As is labour market growth DEWR projected employment by industry 2018

What’s the question? What will define our fund’s footprint into the future? Do we have a stable, predictable, secure and low-cost source of new members and cash in-flow? Would our fund win its current default business in an open tender? Is self-interest a factor in our decision?

Are mergers the answer? Scale in administration and investments Reduce/eliminate competition between NFP funds May secure reliable cash flows to merged funds Should only be pursued where: – merger will improve net investment performance for the majority of the members of the merging funds – offer members complementary product and service range – Merging should strengthen distribution capability

AGEST looked for growth first FundFUM ($bn) FUM CAGR* (%, 5 year) FUM CAGR* (#, 000s) # member CAGR* (%, 5 year) Net contsNet conts as % of FUM AustralianSuper %1,5023.5%3.19.5% Fund A %5382.6% % Fund B287.8%4705.2%1.65.6% Fund C %2533.9% % Fund D %9834.8% % AGEST %1682.2% %

Selected tender process

Programme of work Due diligence and cost-benefit analysis – Detailed review of economies in admin, trustee, and investment – Post-merger valuation alignment – Group life insurance – Finance and tax policies, including any contingent tax liabilities, stamp duty for each asset, DTA, present entitlements to trust distributions Implementation planning, governance and responsibility Relationship with service providers, especially outgoing providers

Risks One-off merger costs are excessive – Reserve equalisation, run-off insurance, staff redundancies, long-term leases, administration and custodian transitions, due diligence, member communications, stamp duty The benefits of the merger are not realised – Poor execution, wrong partner selection Diminished affinity with fund amongst members, employers and stakeholders