Industry super funds –natural partners of government for economic growth
Posted: Tuesday 19 May, 2015
Speech by David Whiteley, Chief Executive, Industry Super Australia at Australian Workers Union National Conference 2015 on Tuesday 3 March 2015.
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There is an emerging understanding across the community about the implications of the ageing population and the trailing off of the mining investment boom. People are asking what the new drivers of our economy will be.
Understandably Australians are increasingly concerned about job security, the cost of living, and the future. Our research consistently shows that people are worried about whether they will have enough to retire on, whether the pension will exist, and what the future holds for their kids – what jobs will there be? Can they afford the cost of education? Will they be able to buy their own home?
There is no doubt that any government will have to deal with the challenges of an ageing population and that it will be necessary to build a more efficient and fairer retirement system. Australians understand this and are looking for leadership.
Most obviously this would come from governments, but the super industry also has a role to play. Industry super funds have a significant stake in the debate because we are responsible for the retirement savings of more than half the working population.
Superannuation cannot provide a silver bullet to address all of these challenges but it is all about the future and does offer an important part of the solution. Super is currently doing more than you might immediately imagine, and the type of fund a worker is a member of will make a significant difference to how their future looks.
First, it is important to recognise that super is already delivering. It has generated around $1 trillion in savings that otherwise would not have been available for investment and provides over $70 billion in retirement benefits each year – double the cost of the pension.
What I would like to do today is look at how we can build on this by improving our super system in two important areas. Firstly, to make sure that the reality of a comfortable retirement is available to as many working Australians as possible – through improving tax concessions arrangements. And secondly, to ensure that policy settings do not impede or even prevent long-term investment which delivers better returns to members and drives productivity growth and job creation.
Tax settings for super
One of the key economic challenges for Australia is the ageing of the population. Superannuation is a central part of the solution to this as it was designed to deliver retirement incomes while taking pressure off the age pension. What must be addressed is the significant cost of super tax concessions. There is a growing consensus that these concessions aren’t equitable, efficient, or sustainable in their current form. Most obviously perhaps, tax on super earnings alone is set to double over the next three years.
The starting point is agreeing on an objective for super – we believe it should be to provide a comfortable retirement to as many Australians as possible. This begins the discussion about how tax concessions can be best directed and where concessions are not meeting the policy objective, most obviously estate planning. It is inevitable, for example that the tax benefits enjoyed by high net worth individuals through self-managed superannuation funds are going to come under significant community scrutiny. This is appropriate.
In contrast, from 2017 low income earners, including two million working women, will lose access to any tax concessions meaning they will pay more tax on their super than they do on their take home pay. This is deeply inequitable.
These are difficult and necessary economic decisions that are in the long-term interest of our country and they will only progress if they are made in a consultative manner. There will need to be bi-partisan support for change and the superannuation industry will need to constructively participate, recognising that its very existence is built on the foundation of compulsory super, and its purpose is to serve fund members.
Most obviously, we need to ensure that lifting the pension age to 70, or increasing the age that people can access their superannuation beyond 60, are the last resort. We must look to other options. We cannot assume that everyone will be able to work to 70.
The second issue I would like to cover is the contribution that super has made to building our economy, and the potential of superannuation to contribute to our nation’s economic future.
The fact that our national super savings has eclipsed our national GDP is not news locally, but it is world leading. The current pool of $1.8 trillion dollars is on track to reach $7 trillion and eclipse bank assets by 2030. Superannuation will become a complementary and competing source of capital to the banks.
The real news is how deeply compulsory super has penetrated our day-to-day economic life to the benefit of millions of every day Australians, often without much fanfare:
From 2003 to 2014, superannuation contributed an estimated total of $201 billion to Australia’s capital stock
Currently the super system is investing $30 billion a year in infrastructure, private equity, and direct property
Super’s $11 billion stake underpins the commercial property market, with a 140 per cent increase over the last decade
Super now accounts for two out of every three Australian dollars sourced by private equity for investment
By taking a counter-cyclical (long-term) approach to investing compared to other market participants, super acts as a stabiliser not only as the GFC bit into market prices – saving Australia from the worst effects – but also moderating the intensity of rising asset prices in the good times.
What does this mean to working Australians?
Well, these types of capital deepening investments – investments that enable greater economic output, like major office blocks, ports or airports – are responsible for over half of Australia’s recent productivity growth.
It is time to build on this, unlocking the power of super as an even greater and more efficient generator of capital. We can do this by identifying and replicating the parts of our super system that are working.
For example, in the area of infrastructure investment – industry super funds are committed to long-term, patient stewardship of key infrastructure assets, because they benefit our members through broader economic growth as well as strong investment returns.
Over the coming decades, Australian governments can generate jobs, boost growth, and become less reliant on foreign capital by putting in place policies that better facilitate the transformation of national savings into capital investments. Part of this is ensuring that the system preferences super funds that use the stable inflows from the superannuation guarantee to invest for the long-term benefit of their members and all Australians.
Over the coming months, we will be highlighting what needs to change in terms of thinking and policy so that super and the finance system can work alongside each other to improve the lives of Australians. Most importantly we need to ensure that government policy does not inhibit long term investing.
I have outlined the two priorities for Industry super funds during this year.
Unfortunately we may be forced to address a debate that is much less worthwhile for the country. While industry super funds are looking to the future, the banks are lobbying government to remove consumer protections for the more than eight million workers that do not choose their own super fund and to change the governance structure of industry super funds.
This follows the banks’ lobbying of government in 2014, under the shadow of financial advice scandals, to remove consumer protections that require financial advisers to act in their clients’ best interests; and to bring back a whole range of kickbacks that encouraged financial planners to sell bank products.
I want to outline the banks’ agenda for super:
Banks want to scrap the default fund safety net
Eight in ten Australians don’t choose their super fund – instead they rely on the default fund at their workplace which is generally selected by their employer
For a 25 year old with a wage of $50,000 pa in 2010, the difference between being in an average bank fund and an average industry super fund is $267,000 by retirement, assuming the current differential continues into the future. This difference is made up of profit margins for bank-owned and retail super funds, outperformance due to superior industry super investment strategies, and higher real wages arising from greater long-term capital investment.
This is why there is a safety net overseen by the Fair Work Commission to ensure that only the best super funds are eligible to become default funds
Industry super funds, with a history of strong returns and low costs, make up a large part of the safety net
Three inquiries in the past five years have concluded that a default super safety net is necessary but the banks continue to argue for it to be scrapped
Banks want to bundle up their business banking services to employers with the default superannuation arrangements for employees. This:
Is uncompetitive and will remove consumer protections
Creates barriers to entry for super funds not owned by banks but with a better record of investment returns
Is contrary to the recommendations of the 2010 Cooper Review, 2012 Productivity Commission review and the 2014 Murray Inquiry report
Risks creation significant conflicts of interests. Recent research by UMR found 26 per cent of employers had been approached in the last year about transferring their employees’ default superannuation to their business bank’s retail super fund and almost half of those employers were offered benefits to change
Concerns about bank bundling are not new. In 2010, Colmar Brunton conducted research for the ATO that found that 13 per cent of employers admitted to receiving a direct or indirect benefit from a superannuation provider. This latest research study provides consistent results with the earlier research conducted for the ATO.
The governance of super
The reasons for industry super outperformance are structural, which is why the banks want to change the structure of industry super
Industry super funds are governed by boards appointed by employer groups and unions made up of people who have experience in diverse aspects of Australia’s real economy, rather than finance industry insiders
Such “representative boards” are the prevailing structure for pension funds across the OECD
Industry super fund boards have made hard-headed decisions that have paid off for their members – investing for the long term in the assets that underpin real economic growth, refusing to pay sales commissions and keeping fees low
These decisions are a direct result of board members being drawn from a wider social and economic gene pool than just finance experts – they are worlds away from the values and “group think” that has been demonstrated by the finance sector
The bank lobbying campaign comes at the same time as bank-owned super funds are dealing with an irreconcilable conflict between their fiduciary obligation to members and requirement to deliver margins to their parent banks.
At the same time that the regulator is considering higher capital requirements on banks because of poor governance and risk management arising from financial advice scandals.
At the same time as evidence suggests widespread systemic breaches of the law prohibiting incentives provided to employers to select their bank’s super fund as the default fund.
At the same time as calls from politicians from all sides of politics are calling for a Royal Commission into the banking and financial advice industry.
It is hard to take their calls for changes to the governance of industry super seriously.
Banks and the mainstream finance sector are confronted by the success of “run only to profit members” industry super funds. Their solution is to lobby the government to change the essential character, the DNA, of industry super funds and create an unlevel playing field that suits their own vertically integrated business models.
Industry Super Australia, with unions and employer associations, will resist these efforts on behalf of over five million industry super fund members and the broader working population.
I have covered a lot of topics, but I wanted to leave you with one clear message.
This year is likely to be one where we, as a society, consider how to deal with the ageing population.
Because of the foresight and vision of the union movement and employer associations, we start from a foundation of a superannuation system of nearly two trillion dollars. This is too often forgotten.
Industry super funds are working hard to develop solutions that are fair and economically sustainable, whether considering taxation settings or removing barriers to long term investment that generates productivity growth and creates jobs.
Industry super funds are the natural partners of government:
Run only to benefit members; and
A membership base of over half the working population and supported by hundreds of thousands of contributing employers.
For example, this week we are convening a symposium on infrastructure development that includes employers and unions, the Government and Opposition, the United Nations, the World Bank, the Asian Development Bank and a range of Embassy officials from across the world.
Meanwhile, the banks are looking to increase the pension age, remove consumer protections for the eight million Australians that do not choose their own super fund and change the DNA of industry super funds.
The profound disconnect in priorities perhaps best exemplifies the difference between industry super funds run only to benefit members, and bank-owned super funds run to deliver profits to shareholders.
 Productivity Commission, 2006, Potential Benefits of the National Reform Agenda, Report to the Council of Australian Governments
 Example represents individual investor aged 25 in 2010, 40 year contribution period, starting wage of $50k, wage growth of 1.8% and portfolio return of 5%. It uses differential of annual fees charged by retail relative to industry funds. It uses the difference in the historical 3 year return between retail and industry funds. Includes ISA analysis estimating the impact on real wages and returns to capital. Source: APRA Superannuation Fund-level Profiles and Financial Performance, June 2013 (issued Jan 2014). Past performance is not a reliable indicator of future performance. Consider a fund’s Product Disclosure Statement (PDS) and your personal financial situation, needs or objectives, which are not accounted for in this information, before making an investment decision.