Investing in a fairer nation: Address by Jeff Lawrence to the ACTU Investment Forum, 17 June 2011

Australian $20 and $10 bill
Introduction: unions and super

I want to start by mentioning the special relationship that unions have with the superannuation industry in Australia – and with industry funds in particular.

Many of you here today probably have little regular contact with unions.

It is probably true to say that many of those who have joined the investment industry in recent years have little understanding of why unions are represented on many fund boards, why super is regarded as an industrial issue, and why unions take a very close interest in the organisation and performance of the industry.

So I wanted to start the day by briefly recalling the significant contribution that unions have made, and continue to make, to our superannuation industry.

It is easy to forget that until relatively recently most workers in Australia did not have their own superannuation account. Most employers were not obliged to make contributions. The super industry was dominated by a very small number of retail funds that made a lot of money from fees, charges and commissions of debateable value to fund members.

Much has changed over the past 20 to 30 years: much of it in a progressive direction. And unions have been at the forefront of initiating and driving that change.

It took years of hard industrial and political campaigning by unions to force many employers to include superannuation provisions in industrial awards and enterprise agreements. It was unions – when they saw how expensive many retail funds were – that established and built the first industry funds.

And it was unions, working with Labor in government, which secured a mandatory contribution system in which millions of workers for the first time gained the right to accumulate their own superannuation savings.

So as Secretary of the ACTU I want to highlight the enormous contribution unions have made to building and shaping our superannuation system. A large proportion of the money you manage and invest is available only because unions fought for the right of millions of workers to be able to invest for their own retirement.

Economic challenges

I also want to comment on some recent press coverage of unions and wages in the Australian economy.

High and volatile levels of inflation erode savings, returns and investor confidence. Governments are therefore right to be concerned with creating a stable low-inflationary environment.

But according to some recent press coverage unions are putting low and stable inflation at risk. Some newspaper editors, commentators and employer groups are currently claiming that Australia is experiencing, or is about to experience, an unsustainable wage-price spiral.

Wages, we are told, are about to ‘break out’. The economic sky may fall on us at any time and, if it does, unions are to blame.

The official statistics, however, paint a very different picture.

Wages growth is running well below its long-term average. In 2010 real unit costs actually fell.

Many of the rather wild and politically motivated forecasts of doom are based on generalising from some sectors, such as mining, across the whole national economy.

Wages for some in mining have been rising at above average rates because of increased demand. That is what happens in most competitive markets. Some newspapers and employer groups seem to want a competitive market for labour – just as long as it only serves the interests of employers.

The present resources boom is strong and may continue for some time. In common with many of you here today, many in the union movement are also keeping a close eye on developments in China.

But the likely continued growth of our important resources sector does raise a number of challenges that unions believe require a co-ordinated response involving government, employers and unions.

The industry will require a steady supply of skilled workers who are treated fairly at work because they are represented by unions who are recognised and respected by employers. Such a framework will facilitate real dialogue, real co-operation and minimise industrial disputes.

The ACTU has been pressing for a joint approach with government and employers to the problems raised by the resources boom. I am glad to be able to report that progress is being made and that moves toward establishing a means of joint working are being made. This makes sense for the industry, for workers and for our broader national economy.

I want to turn now to superannuation and some of the issues we will be discussing today.

Achieving more secure retirements for Australian workers

We are meeting today in a year that may prove to be historic for superannuation in Australia. I think this is so for a number of reasons.

Firstly, as many of you will be aware, two years ago the government initiated the most comprehensive review ever of the Australian superannuation industry. This resulted in a set of proposals that the government has been consulting on for much of this year. The ACTU has played an active role in these consultations.

A key outcome will be the new MySuper product: a transparent, low-cost product mainly for default members that will be designed to minimise unnecessary costs and fees.

Unions have welcomed this focus on protecting the interests of the majority of fund members who, for a range of reasons, do not take an active interest in their superannuation. We look forward to the government announcing the final design of the MySuper product soon.

But perhaps more importantly, and of more immediate relevance to our agenda today, are the intended changes to the Superannuation Guarantee rate.

For the first time since 1992 the government is now intending to legislate for an increase in the SG rate. Legislation is expected to be presented to the Parliament by the end of this year.

For nearly a decade now the SG rate has been at 9 per cent. When the Keating government first introduced mandatory contributions nearly 20 years ago it was intended that the SG rate would eventually reach 15 per cent.

However, a change in government in 1996 meant that further increases beyond 9 per cent were deemed unnecessary and unaffordable.

Unions, along with many others concerned with combating poverty in retirement, have long argued that 9 per cent would never be enough. When Labor returned to power in 2007 we reminded the government that there was unfinished business in this important area of policy.

We pressed the case for an increase in superannuation at the most senior levels. After the passage of the Fair Work industrial relations laws we again highlighted the importance of this issue.  The government listened.

And in its response to the Henry Tax Review it acted.

An eventual increase to 12 per cent is a step in the right direction – although perhaps the step is not as large and as quick as many would have liked. One of the priorities for unions this year is to help ensure the legislation to deliver on this commitment is passed.

This is something Minister Shorten may comment on later today.

But in addition to helping to tackle poverty in retirement the SG increase, if passed by the Parliament, will have important implications for investment by funds.

At present Australian super funds have around $1.3 trillion in funds under management. It is estimated that the additional compulsory contributions will mean an additional $85 billions over the next 10 years and $500 billions by 2036.

This will mean Australia will probably have the largest per capita investment in managed funds in the world.

That presents enormous opportunities. Greater scale will increase the capacity of funds to deliver the returns and security in retirement that members rightly regard as their number one priority.

But it raises some important challenges for funds and their relationship to the investment management industry. I want to touch on two of those issues.

Keeping investment management fees low

Firstly, industry funds have a proud record of delivering good quality, low-cost products and services to members. Low cost is one of the reasons that industry funds outperform retail funds on a regular basis.

In the future there will be even more pressure from regulators and inter-fund competition to reduce costs further and keep them low.

Funds all have their own strategy for keeping costs down. But there are certain costs confronted by most industry funds which they would all like to see come down. If they cannot come down then they should result in better returns.

This raises the issue of investment management fees. Many of you will know the arguments and criticisms. Why should fund managers receive higher fees simply because the market has gone up? Are the base-fees charged by many managers justified?

I think it is right for trustees to ask if the fees that are paid are always aligned to returns in ways that maximise benefits for members. The experience of funds will vary. But I know many trustees and fund CEOs believe there are improvements that can and should be made.

The view of unions, and of many industry funds, is that the steady rise in the size of funds under management over the coming years must first and foremost be a source of higher net returns for members. The investment industry must be willing to engage in a real dialogue with funds about how that can be attained in ways that better align costs with results.

There is a debate about how best this cost agenda can be pursued. Should funds walk away from those managers who refuse to agree to a better alignment between fees and returns? Should the larger funds bring more investment functions in-house? Can we develop more collective approaches to the fund management industry that will deliver the changes we need?

The experience of Industry Fund Management suggests we can. IFM has been successful in pushing down fees and developing innovative methods and forms of investment.

This is an issue that will not and should not go away. It is one that unions and many trustees will be giving greater attention to in the months and years ahead.

Investing in workers’ rights and society

The second issue I want to raise is the social role that funds should play.

When unions fought for compulsory super and the industry fund model we now have we did so in the firm belief that the capital generated by workers contributions should play a role in helping to build our nation. It should also be managed in ways conducive to promoting a sustainable future in which corporations deal fairly with employees and communities.

In recent years the media have regularly featured stories about how gaps in our economic and social infrastructures are inhibiting our growth and eroding our quality of life.

Ships queue at our ports to load-up on minerals. Limited public transport pushes people into their cars. Our cities groan with congestion. Our schools and important public buildings creak and leak from underinvestment.

And yet it is often the case that it is easier and more profitable for Australian funds to invest in building infrastructure in London than Sydney or Melbourne.

But investing more in our national infrastructure must not mean compromising benefits to members. It is for government to design a tax, asset and procurement framework appropriate to the particular needs and interests of super funds.

For many years the ACTU has been arguing there are a number of ways in which government could tap more of workers’ capital to help build our national economy.

A major way in this could be achieved is for the government to offer ‘national development bonds’.

These bonds could make an important contribution to reducing a backlog in infrastructure investment that is estimated by some to be valued at over $450 billion.

But to be successful, such bonds would need to offer a risk/return profile that suits industry fund members.

If the government were to move in this direction, this will be a welcome development.

We also face the challenge of using the considerable financial power we have to shape the behaviour of the corporations we invest in.

Industry funds invest for the long-term in some of the largest corporations in the world. That will continue to be the case.

These corporations employ millions of workers in thousands of offices, factories, farms and mines across the developed and developing world. They can exert considerable influence on labour markets, natural environments and the policies of national governments.

Unions believe that funds have a duty to ensure these companies do not put members’ investments at risk by adopting poor and unsustainable employment and environmental practices.

The Cooper review of the super industry painted a mixed picture of ESG in Australia.

On the one hand it reported research that found the large majority of fund trustees consider that integrating ESG issues into their investment decisions is part of their responsibilities and is consistent with their fiduciary duties.

On the other hand there was evidence that Australian investment managers and asset owners have lagged behind their counterparts in other leading economies when it comes to integrating ESG issues into their investment decisions.

This presents challenges for trustees and the investment industry.

For trustees there is considerable scope to use their influence to promote systematic consideration of ESG risks by the asset managers and consultants they deal with.

Being responsible investors must mean making sure funds use their understanding of ESG risks to shape the behaviour of those they pay to act on our behalf. That means not just asking an occasional question about ESG during board meetings.

It means having a coherent ESG strategy that requires evidence from managers and consultants that they not only take ESG risks seriously – but that they act on those risks in ways that are clear, consistent and evident to trustees.

For the investment industry it means doing more than paying lip-service to ESG issues. Some already do.

But many more need to consider how they can respond to the concerns of funds and unions in ways that indicate real efforts are being made to identify investments that are consistent not only with sustainable growth – but with the rights of workers to organise and be represented by trade unions.

This will be a priority for the ACTU not just in the superannuation industry but also in the government sector. There is little point having Fair Work laws which protect the rights of workers to associate in unions and to bargain collectively if they are in name only and can be flouted by public agencies or by companies which depend upon government procurement.

As we move towards a rise national superannuation and a new regulatory regime for superannuation and financial advice, this will be one of the many issues which I am sure union-appointed trustee directors will be pursuing.

Conclusion

This is a challenging agenda. I hope the discussions we have today will help to clarify some of the issues in ways that are interesting and which will help make that agenda a reality.