Securing our future: challenges for industry superannuation, national
Infrastructure and investment
Address to ACTU Investment Forum
This is the first time I have addressed an ACTU Investment Forum as Secretary, and I’d like to begin by explaining why I think superannuation continues to be a key area for the ACTU and the union movement.
The way industry funds invest workers’ money is an area that the ACTU intends to take a particular interest in over the years ahead.
I come from the AMWU – a union with a proud history of not only advancing workers’ rights, but of thinking more broadly about the kind of society we should have.
When I first joined the AMWU in the 1980s my workmates and I were among the two-thirds of ordinary working Australians who did not have superannuation. Retirement meant relying on the age pension and any savings you managed to scrape together after you paid all your monthly bills – which usually didn’t amount to much.
This was obviously unfair. People who were already well-paid often received additional super. Meanwhile the least well-paid were expected to live on an age pension, which in those days, was close to the poverty line and unlikely to provide a comfortable or dignified life after work.
So the people who spent their lives performing the most dangerous and physically demanding work were often those least likely to experience a decent retirement.
And so the AMWU was one of the unions party to the National Wage Case in 1986 – the result of which was that all award workers received employer contributions of 3 per cent into a superannuation fund. Over the next 5 years superannuation coverage across the private sector jumped from 32 per cent to 68 per cent.
Following the introduction of the SG Act in 1992 this jumped again to over 90 per cent.
This was trade unionism at its best. Working with a Labor government to deliver concrete reforms that benefited all working people.
But we have come a long way since the days of Bill Kelty, Bob Hawke and Paul Keating. I want to outline where I think progress has been made and where work still remains to be done, because one thing has not changed – superannuation funds are workers’ money. Where we invest and how we invest must be to the benefit of workers.
There are two areas that unions take very seriously and want to see improvements: super fund governance and investment in infrastructure.
Over 95 per cent of employees are entitled to super contributions of at least 9 per cent. After years of inaction by the Howard government, the Gillard government has legislated to increase the compulsory rate to 12 per cent by 2019.
As a result, the average difference for a low-paid worker in their twenties today, will be $100,000 in extra super at retirement. This will make a real difference to their quality of life in their later years.
Superannuation is the main financial asset held by households. The average value is around $150,000.
Perhaps of more interest to those here today is the increase in assets held by funds. These have more than doubled in value over the past decade – to around $1.3 trillion (or 90 per cent of Australian GDP).
I am particularly pleased that industry funds have grown at twice the rate of retail funds.
Australia has the fifth largest pool of superannuation assets in the world.
The trends are clear.
Our mandatory contributions system is fuelling the growth of one of the most important sources of wealth and investment in our country. The recent consolidation of funds means they are better placed to secure higher returns for members, with lower costs.
These numbers and trends were unimaginable 30 years ago.
But let me now focus on the important work that remains to be done.
Super fund governance
Rarely has the quality of fund governance been more important than it is today. The Global Financial Crisis is now into its fifth year. There is growth – but it is fragile. The global investment environment is perhaps more risk-intensive and difficult to navigate than at any time in living memory. The situation in the Eurozone remains perilous.
Austerity across Europe is having a devastating impact on jobs and public services. Consumers are reluctant to spend and companies are reluctant to invest. In this context the last thing Australia needs is a Coalition government that will dogmatically pursue austerity at the expense of supporting growth during one of the most turbulent times in the history of the world economy.
Unfortunately, it is not clear that the lessons of the GFC are being learned. Many policymakers appear intent on trying to return to the world at it was in 2007. However, we need to develop a new growth model, based on a more equal distribution of wealth and greater respect of workers’ rights.
The model fuelled by debt, job insecurity, rising inequality and attacks on workers’ rights has failed. We need to find a new way forward. That is why unions take ESG (environmental, social and governance) issues very seriously. Their more widespread and vigorous application has the potential to help reduce risk, increase stability and improve the quality of decision-making.
Some Australian super funds have led the way in promoting quality governance. The equal representation model – where directors represent employers and employees – has been in place for 20 years. It has a proven record of providing diligent and honest governance.
Unions are rightly proud of the role they play in helping to run some of the largest and most successful funds in the country. As you will know, on average industry funds continue to outperform retail funds in delivering net returns to members.
There is no mystery to this. On average, retail funds charge more than industry funds and are more interested in making profits for the institutions that own them than getting the best possible deals for fund members.
We won’t tolerate politically motivated attacks from the Coalition on the industry funds model, which ignore the results we have delivered and attempt to smear the integrity of industry funds by asserting that somehow union involvement in making sure workers have the best possible retirement is driven by our desire to sit on boards, not further our members’ interests.
I applaud the comments that John Ingram, an employer nominated director who sits on the board of Australian Super with me, who wrote in the Financial Review last month:
“The ideological view of industry funds as being union controlled is divorced from reality.”
“The Coalition”, he said, “should stop using these funds to score political points.”
In fact, many retail funds are governed by directors who are also employed by the same corporate group that sell services to the funds. This is one of the most serious conflicts of interest in our super system.
So at our recent ACTU congress we adopted a new policy on superannuation governance that we will be campaigning to see implemented. We want to see the whole super industry embracing a new transparency agenda:
- Members must be able to able to find out easily who the directors of their funds are, what they are being paid, who employs them and what other directorships and senior management positions they hold.
- Funds must disclose the details of all related party transactions.
- There should be full disclosure about who provides services (such as investment services), their relationship to the company that owns the fund, how much is being paid and for what.
For too long parts of the super industry have viewed member contributions as a quick and easy source of profit.
In a mandatory system, where most employees do not have the time and skills to make informed decisions, that situation is indefensible. It is time to shine a brighter light on who profits from superannuation and how.
Investment in national infrastructure
Another area where more work needs to be done is in relation to investment in infrastructure.
I think investment, and particularly investment in infrastructure and Cleantech, require more attention from unions, from funds and from those who advise us how to invest.
When I think back to the 1970s and 1980s, when unions were fighting for employer contributions and for funds that worked for members rather than shareholders, superannuation was about more than just having more money at retirement – as important as that was and remains.
Super was also about building our nation, growing our economy and providing decent jobs constructing the roads, ports, railways, public buildings and social housing that we desperately needed – and still do.
In recent months, I have been involved in the Prime Minister’s Manufacturing Taskforce – a body established by the government which includes representatives from unions and employers. We were asked to develop a series of recommendations that will help Australia to develop a more competitive, productive and innovative manufacturing base.
One of the key areas that unions agreed was essential to the future of our manufacturing industry was improving the quantity and quality of our infrastructure. We need better infrastructure to enable the more efficient movement of people and goods – across Australia and to other countries.
Unions accept that we need to find ways to increase productivity, but we don’t accept the low road of attacking workers’ rights and penalty rates.
Productivity is a debate we are interested in, but I won’t delve deeper into that today, except to say, there is little point in a company struggling hard to reduce the cost of the goods that leave the factory gate only to find that such reductions are being cancelled-out by the rising cost of transporting those goods to market.
We are a large country with a relatively small population and tax base. This is where superannuation should be playing a key role – in helping to bridge the gap between what governments can afford and what we badly need to help generate more growth, jobs and wealth.
The IMF has estimated that for every dollar invested in infrastructure, our GDP is boosted by $1.80. And yet we face an estimated ‘infrastructure investment gap’ of around $700 billion over the next decade.
Failing to close this gap in infrastructure investment could cost Australia more than $1.2 trillion in lost GDP.
This would mean hundreds of thousands of Australians missing out on jobs, and the whole nation missing out on the wealth that an extra $1.2 trillion in GDP would generate.
As a country with one of the largest pools of superannuation assets in the world, we should not accept a situation where we cannot fund the infrastructure that we need. This is a situation we can overcome.
Of course many funds already invest in Australian infrastructure: in many of our major city airports, railway stations, toll roads and power generation. Organisations such as Industry Funds Management have played a leading role in developing new and innovative ways of mobilising investment.
But it is also the case that our super funds, on average, invest around only 5 per cent of their assets in infrastructure. And a lot of that investment is overseas. It makes sense for union and fund members to want their contributions to play a bigger role in building Australia’s infrastructure – and building sewage plants in Scotland is not enough. If we can build in Scotland, why not here?
Of course strengthening the connection between our funds and our infrastructure is not a simple and straightforward process. There are real obstacles and problems.
At the end of the day, while members may want more and better infrastructure, funds must have regard to the overall composition and risk-return profiles of their portfolios. This is one of the reasons why the ACTU continues to oppose investment mandating.
I’m sure many of you here today grapple with these issues on a regular basis.
I am not going to propose a simple solution to all these problems. But there are some encouraging developments which suggest that real progress may soon be possible.
This will require some new and creative thinking by funds and by government.
Funds are consolidating. The number of funds is falling and will continue to do so. In most cases this is a welcome development. It should deliver scale benefits to members leading to reduced costs. There remain some barriers to consolidation – and the ACTU will remain active in making the case to government that they should be removed. Nevertheless, the trend toward consolidation is clear.
One barrier to infrastructure investment has been the number of small and medium-sized funds that do not have the scale to diversify into infrastructure. Nor do they have the in-house capacity to evaluate investment opportunities and undertake due-diligence. This is changing.
When thinking about infrastructure, we should recognise these facts:
Returns on infrastructure have been 10% over the past 20-25 years, while cash has been 4 to 5%, and equities somewhere between 8 and 10%.
Infrastructure has proven to be a far more secure, less volatile investment. In addition, good infrastructure assists our cities and the businesses within them to attract the best and brightest talent. Australia’s liveable cities are a key collective asset and advantage for our economy.
It’s important that we maintain this advantage by investing in both social and physical infrastructure. The government’s investment in high-speed broadband network is an example of this.
The NBN is wiring us up for the future of collaboration between business and research. Unlocking a pool of funds to increase investment in building safe, reliable, and liveable cities will unlock greater potential in our economy, and therefore more investors in our funds.
But a greater willingness and capacity among funds to increase investment in infrastructure must be paralleled by the existence of greater incentives to make those investments in Australia. The government has a key role to play.
The ACTU’s updated policy on superannuation also included a call for government to consider the development of new flexible long-term bonds that are explicitly designed to attract workers’ capital from within Australia.
Infrastructure Australia has also recently called for the government to encourage the creation of new investment products tailored to super investors.
Some of you will be aware of an initiative in the UK involving the Treasury and British pension funds. The UK’s future infrastructure needs cannot be funded solely by government.
The British Treasury has recognised there is an obvious fit between the long-term nature of infrastructure investment and the time-horizons of pension funds. They have therefore established a formal working process with the aim of designing investment platforms that facilitate much greater pension fund involvement in their public infrastructure.
This is an initiative we should all follow closely and learn from.
I know the Federal government is currently considering new ways of attracting infrastructure investment. Unions will continue to argue that workers’ capital has a potentially vital role to play.
Shifting to a low-carbon economy
Another area where increased investment is vital – but where progress has been uneven so far – is in Cleantech. I know Minister Combet will touch on this later, so I will keep my comments brief.
Australian unions believe the case for increased investment in Cleantech is overwhelming. Contrary to the views of certain would-be Fairfax directors or would be Prime Ministers, we acknowledge that human-induced climate change and resource scarcity are real threats to our collective future.
Unions strongly support massively increased investments in new technologies to facilitate the shift to a sustainable low-carbon economy – in Australia and around the world.
To achieve this we need to remove some of the obstacles that are discouraging investment in Cleantech.
Government has an important role to play in helping to generate regulatory certainty and stimulating new investment.
The new Clean Energy Finance Corporation, working initially with $10 billion of government funds, is a very welcome initiative. But private investors, including super funds, must also play a bigger role.
Many in the fund management industry are unfamiliar with the dynamics of Cleantech, preferring instead to focus on more traditional forms of infrastructure assets. In part this has been because of a small supply of projects. So a vicious circle has emerged of low supply and limited demand.
Nevertheless, we have seen the emergence of a number of sizable clean energy funds around the world in recent years. By aggregating capital into large diversified funds they are able to re-package Cleantech investments in ways that diffuse risk, increase liquidity and avoid expensive due diligence processes.
In some cases the establishment of these funds has been driven by pension funds who have commissioned a fund manager to build a vehicle for the express purpose of obtaining exposure to Cleantech.
With a few honourable exceptions, I doubt many super funds in Australia have asked their fund managers to do the same. How many investment consultants have suggested to fund directors they might want to consider such a strategy? Not many I suspect.
There is much we can and should learn from such initiatives and the ACTU is keen to foster a dialogue and further action so that super funds take more initiatives in this regard.
Unions have played a key role in building and reforming our superannuation system over the past 40 years. It is a role that I am proud of and believe we must continue. We have come a long way since unions had to strike to force employers to allow workplace super. But, as I have suggested, there is more to do:
- We need to maintain our focus on improving adequacy – for low and middle income workers, and for women workers in particular. 12 per cent is a big step forward but few believe that will be enough – especially for those who cannot spend 40 years in continuous full-time employment;
- We need to continue to press for more investment in infrastructure, to secure the good jobs and sustainable growth we need. Having one of the largest pools of super assets in the world offers enormous opportunities to build our nation. We cannot afford to that let slip past us;
And, finally we need to make sure that ALL our super funds are governed and run to serve their members first. We have some of the best super funds in the world – it is time every fund met that standard. In our compulsory system we should accept nothing less.