Last year we outlined the current situation surrounding Australia and New Zealand’s mega superannuation funds, which are in a state of change, merging and in-sourcing, in a bid to drive better returns and greater operating efficiencies. Today, we’re looking at how digital due diligence can meet increasingly stringent regulations faced by supers, taking them safely through mergers and beyond. Digital due diligence can be instrumental in improving decision making and reducing investment strategy risk, ultimately driving better returns for pension fund members and encouraging safer investments. All critical in providing stability in an uncertain, inflationary world following Covid, the Russian invasion of Ukraine and imminent recession concerns.
The right technology systems can provide a safety net and additional risk management defences during massive superannuation mergers. Equally important, a digital due diligence solution can provide transparency and assurance around the portfolio, to investors, pension holders and other stakeholders, who are understandably nervous during these world events.
Why are Australia and New Zealand’s mega superannuation funds in a state of change?
In 2021, Australia’s Productivity Commission released a ground-breaking report on competition and efficiency, rocketing super fund mergers to the forefront of the Australian market. This followed the Federal Government’s 2020 introduction of a suite of measures, including yearly performance tests.
During the course of the pandemic, low asset prices and poor liquidity met rising unemployment and lower contributions. At the same time, members made more withdrawals, worsening the performance of many smaller funds. Regulators and political leaders have since applied more pressure on small funds, especially those recording continuous losses.
As a result, a wave of superannuation mergers has occurred over the past year. Experts predict this will lead to more mega super funds in the coming years.
Some experts believe that the market will now slow down, but new mergers are regularly announced, so only time will tell.
How technology can accelerate performance and mitigate risks for superannuation funds
While these superannuation funds have historically performed very well, it’s important to remember that mega super funds come with risks. In the past, some funds have developed in-house teams to get control over their portfolio, cut costs and drive profit, but this is not without problems.
For instance, an ever-smaller group of investment managers can result in concentration risks. Essentially, too few individuals are handling too much important information. As these super funds merge, they combine different ways of working and sometimes drastically different strategies and processes. A lot can get lost in the wash. There are huge costs associated with outsourcing some operational and investment functions, which many supers are keen to address. Bringing some functions back in-house and often back to the region from overseas can have tremendous financial results, but may rely on a larger skilled pool of individuals, that can be hard to recruit and retain.
With a platform like Dasseti Collect, supers can scale manager and fund due diligence easily, monitoring and maintaining oversight of the manager universe at a detailed level. Advanced automation allows the platform to do the heavy lifting and small teams are more than enough to administer the platform, run reports and analyze the results. Using pre-defined and customized criteria Dasseti flags and issues alerts when risks arise. Think of a system like Dasseti as a digital failsafe that remains constant across asset classes and strategies. No matter which funds are merging, or which policies are in place, Dasseti streamlines the manager and third party due diligence process AND the investment due diligence process.
ESG and diversity
Collecting and making sense of ESG data has always been important to the Australian and New Zealand supers, and they are considered amongst the most globally mature ESG investors. But now public demand for responsible investing means that pension holders and stakeholder groups are also starting to request sustainability credentials along with diversity, equality and inclusion policies and targets even when firms are not explicitly investing in ESG.
The challenge with ESG and DEI has always been around data; collecting, comparing and making sense of data in the right context. Whilst it is becoming slightly easier to source and benchmark ESG ratings for publicly traded equities, the increasing allocations to private markets remain opaque and hard to research.
Tools like Dasseti enable one to one qualitative ESG and diversity data collection via industry standard DDQs or custom questionnaires. Results can be analyzed and visualized in user friendly dashboards and exported to reports that the business demands. Data collection can be from super to manager or GP and manager/GP to portfolio company to shed light on the whole investment chain, even in the private markets.
Watch our recent webinar with speakers from AIMA and the Principles for Responsible Investment (PRI) to find out what good ESG and DEI data looks like.
Technology is more important than ever
In uncertain times, people want more information. As the cost of living skyrockets, pension holders are understandably nervous about their investments and mega mergers can be unsettling. They want reassurance that their money is safe – a digital due diligence platform can provide assurances internally and externally that investment managers are fit for purpose and investments are faring as predicted.
Get in touch to find out how Dasseti is working with leading superannuation funds in Australia and New Zealand and how our digital due diligence platform can help meet your regulatory commitments.