On April Fool’s Day this year, Tasplan announced it had completed the merger with the RBF Tasmanian Accumulation Scheme.
But it was no joke.
After three years, the process of rolling the two Tasmanian super funds, and a December 2015 merger with Quadrant, into one defined contribution scheme was finally completed, creating a fund with $7.6 billion in funds under management and 145,000 members.
And now for the first time since the completion of the merger, Ian Lundy, the merged fund’s Chief Investment Officer, has given an insight into the transaction and the lessons learned from the experience.
The biggest challenge in the transaction was the need to split RBF’s assets into two: a defined benefit (DB) portfolio, which was going to be managed by a branch of the Department of Treasury and Finance of Tasmania, and a defined contribution (DC) portfolio to be merged with Tasplan.
“It wasn’t just a merger; it was actually more complex that,” Lundy said at the [i3] Investment Strategy Forum in Torquay, Victoria, earlier this month.
“The way it ended up was that RBF’s $2 billion DB fund was outsourced to an implemented consultant and an administrator. The $4 billion DC scheme entered into a successor fund transfer agreement with Tasplan.
“The greatest complexity was really in the split of the RBF assets,” he said.
RBF owned some high-profile, unlisted assets and all stakeholders had to agree on who got what assets and the valuation of these assets.
“Everyone has an opinion on the valuation of specific assets and RBF owns half of Hobart airport so that was obviously one of the assets that got a lot of attention,” he said.
To avoid a lot of to-ing and fro-ing about dollar figures, Lundy adopted a rather elegant solution.
“One of the important things to get the governance structures to work well is to ensure that we had board level clarity, and that the steering committees agreed on principles, structures and the direction, allowing management to implement” Lundy said.
“So rather than getting the board involved in what each valuation should be, we established a clear process for valuing all the assets up front. We got the process agreed and then management went back and made the decisions. We focussed on ensuring consistency and a process for agreeing any adjustments.
“Across the whole project, anything that was going to be controversial, we took as soon as possible to the highest level steering committee, because you don’t want decisions to be made and then overruled later on,” he said.
Start Early
Although legislation took some time to be passed through parliament, the funds knew the merger was on the agenda for some time. Starting early was a key driver in the success of the transaction, Lundy said. “We started work on the contentious issues well before legislation was passed and before formal documentation was signed.
“There were some direct assets held by RBF: a commercial mortgage portfolio of $110 million, where we actually lend directly into commercial borrowers.
“There were three direct property holdings, half of Hobart airport, so we reached early agreement on how these assets would be split. That early agreement helped us to work through all the things that needed to happen to transfer the assets,” he said.
“There was also a process for splitting assets more broadly. We knew that the DB scheme was going to be managed by an implemented consultant with less interest in unlisted assets so we made sure that the documentation allowed us to ‘trade’ assets by mutual agreement.
If you are smaller than $4 or 5 billion then it does become very hard to do everything you should be doing in terms of the prudential standards and meeting members’ needs.
Another challenge was the different makeup of the funds’ demographics, especially where pension members were involved. The different treatment of capital gains tax (CGT) under pension rules and the split of the assets caused a few headaches along the way, Lundy said.
“The change to pension percentages can make things much more complex than you realise.
“We were really focused on CGT rollover relief. Once we decided not to use rollover relief, some other decisions about the mechanics of the transition were reviewed and changed. Some of these decisions were changed quite late, which made for some uncomfortable meetings.
Besides, the merger wasn’t the only project underway. At the end of 2016, Tasplan introduced a new life-cycle product for members, which was a non-trivial project in itself.
“There were a lot of little side projects going on and in December 2016 Tasplan implemented a life-cycle product. We were able to leverage off the RBF 2014 experience in doing this, but the product design and implementation was quite different.
Benefits of Scale
In the end, Lundy feels the exercise paid off and the merged entity has been able to leverage off its larger scale.
“We created a super fund that has meaningful scale; it is just under $8 billion. It is viable.
“There were material benefits of scale and we haven’t realised all of them yet. That will pay back the transaction costs over time.
“For example, in Australian equities, you get quite steep steps down on fee structures as you get bigger,” he said.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.