Just how challenging the process can be was highlighted in late May when Equipsuper and Vision Super discontinued their planned merger after three years of discussions. That said, it is also possible to point to numerous successful deals, including last year’s tie up between First State Super and Health Super. Furthermore, there are other formal discussions still underway, such as those between Asset Super and CareSuper.

The overriding reason for funds – especially not-for-profit groups – to consider mergers is to find scale ahead of the government’s coming Stronger Super reforms. Indeed, Rice Warner forecasts that the number of industry funds alone will fall from 65 in June 2011 to 42 in June 2016, even as the sector’s total funds under management rise.

By teaming up with others, smaller funds can better invest in modernising their back-office processes, expanding their secretariats, applying greater resources to developing new member benefits (including a MySuper product) and ensuring regulatory compliance, which involves an obligation to set aside new levels of risk reserves.

In addition, scale can also help superannuation funds begin to introduce more compelling insurance products as well as to pursue better investment strategies.

Valuing a merger

However, size isn’t everything. Particularly when it comes to not- for-profit funds, there are important questions of mission and culture to consider. To understand how funds can navigate this minefield, I spoke to KPMG partner and superannuation specialist Guy McAliece.

The first thing to keep in mind, says McAliece, is that the merger of two not-for-profit funds is not a typical commercial deal. In the merger of two for-profit businesses, the negotiation is heavily focused on the value of each enterprise and getting the best deal for the respective shareholders. It’s inherently adversarial, even if the transaction might present synergies.

In the merger of two non-profit superannuation funds, there are only members, so the key question is whether a merger would add or subtract value for those individuals. The key to answering that is to know what the merged fund would look like and how it would work.

Without forming this vision and modelling associated costings, budgets and implementation times, the respective due-diligence teams cannot advise their boards. As McAliece puts it, “You’ve got to know what the final merged entity looks like to be able to say to the existing funds that they’ll be better off.”Another helpful tool is to establish a joint working group that has the sole purpose of helping the two funds work together – as partners rather than as adversaries. That working group would typically comprise executives from each fund and at least one neutral adviser, typically an accountant.It’s also vital to get the boards of both funds involved early and to reach the point of being able to sign a memorandum of understanding that sets out key points, such as the number of directors and their roles in the final fund.

If the funds can agree that a merger makes sense, it becomes the job of the working group to help executives and others from both sides work through the planning. According to McAliece, this working group plays an essential part in maintaining momentum, especially when the teams hit thorny questions stemming from differing histories and cultures.

“If you have a strong group in the middle that is focused on making the merger work and you hit roadblocks along the way, then you’ll have a method for thinking about those roadblocks and working through them,” he says.

“You will also have a mechanism to respect and work through the requirements of both parties.”

Michael Baldwin is chief executive of the Fund Executives Association Limited. This initiative is made possible by the support of BNP Paribas Securities Services. 

AUSCOAL Super is one of a  number of members of the  Fund Executives Association  Ltd (FEAL) that have participated in  net promoter score (NPS) research since  2009. Bruce Watson, CEO of AUSCOAL,  says the fund uses the results  in its customer engagement metrics and  shares them – including verbatim comments  from members – with its entire  customer-facing team.  “NPS is a key metric in our business,”  Watson says. “We are absolutely focused  on customer intimacy and this is a very  strong way for us to gain feedback over  and above the thousands of phone calls  and one-on-ones that we do each year.  “It’s one thing to have a customer  satisfaction score or a belief. But it’s an  entirely different question when you  ask people if they would recommend  you to one of their friends,” Watson  says. “That’s the power of this – it’s really  understanding how satisfied people are.”

The net promoter score  The NPS was developed by Fred  Reichheld, an American management  consultant, in 2003 and has since  been taken up by many organisations,  including large companies such as  American Express, GE and Microsoft.  It is taught by Associate Professor Mark  Ritson at the Melbourne Business  School, who teaches the branding  module in the FEAL masters program.  It was this connection that led to  discussions about whether NPS could  give super funds a way to measure  member satisfaction and share insights  about their performance.  “At the time, many funds still seemed  unsure of whether they were offering a  competitive service or had truly satisfied  members,” says Professor Ritson. “With  the market for superannuation likely  to open up over the next decade, it was  a precarious position for funds to find  themselves in.”  FEAL invited members to participate  in the initial NPS survey in 2009. The  study was run by Customer Service  Benchmarking Australia and has been  repeated in 2010 and 2011. The crucial  question asked in the survey is how likely  members would be to recommend their  fund to others.

Their answers are rated  on a scale from 0 to 10 to generate the  NPS, which is created by calculating  what percentage of a fund’s members  are “promoters” then subtracting the  percentage that are “detractors”.  Promoters give a score of 9 or 10  for their likelihood to recommend and  are seen as loyal enthusiasts. Detractors  score their likelihood of recommending  their fund from 0 to 6. They are unhappy  customers or people who would not  recommend a fund on principle or  because they have a limited relationship  with it. In between are “passives” who  provide scores of 7 or 8, showing they are  satisfied but unenthusiastic (see Box).  In 2011 the overall NPS across  the 2952 members from 27 funds who  participated in the survey was +17. This  was an increase on +10 in the 2010  survey and +13 in 2009.  The highest score in 2011 was +48  and the lowest was -45. Twenty-one of  the 27 funds surveyed had positive scores.  To put these results in perspective, a  score of +50 is considered to be excellent  in NPS surveys. The extremes are +100,  where every customer is a promoter and  -100, where every customer is a detractor.  The results can also be compared to other sectors, such as banking. The major Australian banks have received scores of around -20 and a runaway success like the Apple iPhone has recorded an NPS as high as +73.