Published in Superfunds, No. 97, December, 1986 pp. 9-14.
At the November 1986 ACTU Special Unions Conference the investment policies of superannuation funds came under scrutiny. A policy concerning the utility of current trends and practices was adopted by this Conference.
This policy proposes a phased reduction of offshore investments by superannuation funds to 15% by 1992 and the establishment of a National Development Fund to direct resources to Australian industry. The fund would be partly funded by requiring all superannuation funds to set aside up to 20% of future income for prescribed purposes.1
No doubt most fund managers and investors will be interested to know the background to this policy and understand the motivations of the unions in putting forward such prescriptions. The purpose of this paper is to explain the unions’ position.
Why Superannuation Fund Investment Decisions are ‘Union Business’
With the unions playing an increased role in the development, coverage and improvements in superannuation entitlements of the Australian workforce, it is only natural that unionists and union officials are spending some time thinking about issues such as prudential investment portfolios and the impact that superannuation fund decisions can have on the Australian economy.2
Those concerns are not, of course, limited to the union movement: a cursory glance at newspapers and economic journals reveals a significant preoccupation with such issues. In a recent issue of Superfunds Mr Ray Greenshields of the AMP Society commented that: “It is the superannuation funds that move markets. They determine the fate of companies in takeover battles, determine the extent of movements in the bond markets, the futures and options markets and the property markets; and also have their impact on the currency market.”3 Mr Greenshields posed several provocative questions about the future, especially given the growth in funds with increased superannuation coverage:
• What will be the impact of increased savings on financial markets?
• Will Australia’s future be enhanced by the increased flow of productive investment, or will it lead to even more short term, performance-dependent, volatile markets?
These are important questions, which directly relate to the unions’ concerns about enhancing Australian employment and economic growth.
A traditional objective of the labor movement is to secure the economic conditions of full employment.
Indeed the Accord, the agreement reached between the ACTU and the Federal ALP in 1983, recognises the continuing importance of this objective and the difficulties associated with its realisation:
It is with this (recent) experience in mind that both organisations have seen fit to try to develop a mutually agreed policy on prices and incomes in Australia for implementation by a Labor government. Such a policy offers by far the best prospect of enabling Australia to experience prolonged higher rates of economic and employment growth, and accompanying growth in living standards, without incurring the circumscribing penalty of higher inflation, by providing for resolution of conflicting income claims at lower levels of inflation than would otherwise be the case. With inflation control being achieved in this way, budgetary and monetary policies may be responsibly set to promote economic and employment growth, thus enabling unemployment to be reduced and living standards to rise.4
The union movement, over the last four years, has stressed the need for improved investment policies within Australia and highlighted the problems associated with the low level of investments in manufacturing industry and the problems this causes: obsolete capital stock, lower worker productivity, lower competitiveness and so on.
The unions emphasise the need to develop the principles contained in the Industry Development Policy and Technological Change sections of the Accord where inter alia the following comments are made concerning the characteristics of a comprehensive industry development policy:5
• “recognition of the difficulties involved in generating sufficient production to absorb all unemployment and labor force entrants. Improvements must be made to our capital base.”
• “there is a need for the regulation of/and increasing availability of finance necessary for investment purposes.”
With the devaluation of the Australian dollar, the worsening of Australia’s balance of trade figures and the worsening of Australia’s terms of trade reflecting our reliance on the exports of commodities, a great deal more attention is now being paid to the issues of import replacement, the regeneration of manufacturing industry and the creation of new areas of employment.6Attention has also focussed on the traditional sources of investments and the behaviour of superannuation funds in the development of their investment strategies.
Of course, investment by companies does not occur in splendid isolation of the overall economic scene. Investments creating jobs are determined by factors such as capacity utilisation, availability of skilled labour, infrastructural support, market conditions, level of interest rates and a project’s profitability.
But it is also clear that superannuation funds by providing finance can have a major role in influencing the number and kind of investments which occur.
For example, superannuation funds currently control around 17% of the stock market value of shares, with the likelihood that that figure will escalate significantly in the next decade.7
The union movement believes that it has a responsibility to influence some of this investment into areas of productive job creation and the funding of enterprising new companies. To do otherwise is to complacently accept the current situation and fail to act to realise the union movement’s objective of full employment and economic growth.
The Current Investment Scene
It is estimated that the total assets of superannuation funds is currently around $35 to $50 billion, with a growth rate of $5 billion p.a. If the unions were eventually successful in achieving a 3% productivity increase across the board this would add a further $3 to $3.5 billion in new money for the funds to invest.8
This means that on current figures (where most funds have invested about 20% of their funds offshore) between $6 to $10 billion dollars is currently invested offshore and this amount is likely to increase over time. Given the huge amounts available for investments it needs to be asked ‘Should these amounts be utilised more effectively for employment generation and economic growth?’
One answer to this question is to assert that the trustees of superannuation funds have a responsibility to maximise investments of contributors and prudentially ensure the highest rate of returns on investments.9
On this view, investments overseas, for example, are justified on the ground that a high rate of return is its own justification. Certainly, investment returns achieved from overseas investments by those funds that moved in that direction over the last few years have supported the aim of achieving the best possible return for their members within acceptable risk parameters.
However, this summary of the position simply describes the current situation and does not address itself to the larger questions of: ‘Should the law be changed? What should be the regulations/guidelines concerning the investment of funds?’
Some Pros and Cons of Overseas investments
This section attempts to outline the pros and cons linked to overseas investments, as they are perceived in relation to the Australian context. The points apply to financial institutions in general concerning the principles involved in overseas investments. For space reasons it is only possible to mention these points.
The advantages and disadvantages of offshore investments can be summarised under the following rubrics:
— Increased Investment Opportunities
— Broader Diversification — Lower Risk
— Ability to Invest in Industries not Represented in Australia or Listed on Australian Stock Exchanges
— Liquidity Opportunities
— Opportunity to Profit from Currency Movements
— Opportunity to Hedge Investments
— Improved Investment Performance
Increase Benefits to Contributors
— Lack of Experience
— Potentially Higher Costs, Custody and Management Fees, Brokerage, Dividend Withholding Taxes.
— Adverse Currency Movements
— The Potential Loss of Jobs in Australia
For a detailed summary of the arguments pro and con the reader is referred to the document issued by the Labor Council of NSW, Discussion Paper Concerning Foreign Investments by Public Sector Superannuation Funds.11
One view popular in some union circles is the argument about the employment consequences of offshore investments. It has been argued that by investing overseas, institutions divert funds from the domestic financial markets. Investments in the local economy would suffer and consequently, fewer jobs would be created than would otherwise have been the case.
Theoretically, it is true that funds invested in Australia could result in job creation and that this job creation would spark off a multiplier effect which could provide the basis for other jobs being created. It is also possible that investments can be undertaken to rationalise the production process in a way which causes labour to be substituted by capital equipment.
The link between investment and employment may not be unique, direct or certain, but the general causality is known and predictable –that is, a change in investment leads to a positive change in employment.
However, the fact that investments take place in shares may not directly translate into jobs. Increases in share prices brought about through trading would only benefit the company and result in job creation if the company, based on sales expectations and future profitability, decided to expand.
Summary of Major Arguments Concerning Overseas Investments
There is no guarantee that at any given time the part of a portfolio invested overseas will outperform investments made in the local markets. Whether this is the case or not will depend on the particular time-horizon focused on, and on the specific fund manager’s skills in structuring the portfolio in a way which guarantees a competitive rate of return without jeopardizing the funds involved. For many in the union movement the most interesting point to acknowledge in this debate is the point stated in the previous section, which concedes that investments in the share markets (either onshore or offshore) does not necessarily lead to productive investments eventually leading to employment growth.
For example, the battle to control BHP over the last twelve months – which has led to a significant increase in the value of BHP shares – will not, of itself, lead to the creation of one extra job or new investment decisions by that company whoever its eventual managers may turn out to be.12
This point leads to a consideration of the general question as to the utility of superannuation investments.
Productive Investments – Some Suggestions
The arguments that superannuation funds (and some other financial institutions) should not be required to budge from current investment strategies rests on a number of arguments concerning what is prudential and in the best interests of contributors; these arguments have been summarized above.
One argument so far not discussed is that overall developments within the Australian economy are relevant to the ultimate benefits to contributors.
It would be ironical if the net result of the union movement’s campaign for increased superannuation coverage and benefits was to be ever burgeoning amounts of money, conservatively invested and earning reasonable rates of return while the Australian economy slides into continuing recession, with an overall decline in the standard of living.
In my view, the union movement has an obligation to promote an alternative to this scenario.
An example of what might be done is indicated by recent experiences in Michigan, USA. In that state, the government determined that 5% of the $US10.5 billion State Pension Fund would be earmarked for investments in high-risk, high-return investments. According to a report in the New York Times, “Michigan has set up an $80 million fund for investments in industries selected because of their employment potential and because they look like winners: automotive suppliers, forestry, food processing and tourism, among others”.13
The reasoning behind such moves is to foster the diversification of Michigan’s economy away from smokestack industries.
It can be argued that it is more prudential that superannuation funds invest a portion of moneys available for investments in this way than to allow investments to only proceed along present paths. After all, the Michigan strategy offers a chance to revive an economy through more productive investments and to improve the standard of living of the State’s inhabitants, including its superannuation contributors.
It is suggested that fund managers should consider allocating a percentage of superannuation funds for the purpose of (i) venture capital investments; (ii) investments in the area of research and development projects; and (iii) investments associated with the development of particular industry policies between the Federal Government, unions and employers.
Of relevance to this suggestion are the recommendations of the Espie Committee Report on Developing High Technology Enterprises.14 Part of this report states:
Failure to Create Growth Enterprises Employment in Australian manufacturing industry decreased by 100,000 between June 1969 and June 1981, and the number of establishments employing more than 1,000 people fell by 25%. Clearly, Australia is failing to generate new establishments which grow and replace those being lost in the large establishment sector or manufacturing.
Studies overseas have shown that nearly all the nett new jobs in the private sector have been generated by young high growth companies and that those in the high technology sector have the fastest growth.
Australia is failing to grasp the opportunities offered by high technology industries for wealth creation and employment growth.
The Report also observes:
From its investigations the Committee has identified several impediments to the creation of viable, new high technology enterprises. A major obstacle is the absence of appropriate sources of capital to enable these enterprises to establish and develop. There is no venture capital market in Australia.
Recently some superannuation funds have allocated a relatively small amount of funds in the area of venture capital companies. Much more could be done in this area. Such funds that have been invested aim to achieve a good rate of return over a longer time period than is usual, within the framework of a prudent investment policy.
Some other specific steps which would encourage innovative fund usage include the use of venture capital companies as intermediaries with small, highly innovative companies; and encouraging funds through tax incentives to take out corporate debentures and new share issues rather than only purchasing existing shares as the issuing of debentures and new shares are generally associated with expansion and capital acquisition by companies.
The ACTU Conference
At the Special ACTU Conference of unions held on 6th November, 1986, a detailed resolution concerning the economy including the wages system was adopted. Relevant to this article is the section of the resolution concerning investments. This reads:
To increase growth it is recognized that investment must increase. Increased investment must be led and industry policy becomes the vehicle for leading investment.
The ACTU reaffirms the policies to develop manufacturing industry.
In addition, the ACTU believes that in leading investment,
(a) the general macro-economic policies must continue to be conducive to growth;
(b) we should invest in Australia in productive capacity. To this end, the target of not more than 15% overseas investments by superannuation funds should be established. This target to be enforced by the Tax Act.
The target to be phased in over 6 years:
20 — 1987 17 — 1990
19— 1988 16— 1991
18— 1989 15 — 1992
A National Development Fund to provide loans at concessionary rates by:
A National Development Fund to be established in consultation with the superannuation industry and the government requiring all superannuation funds to set aside up to 20% of future income to provide loans at concessional rates. Such a fund to be supplemented by a 1% tax on imports.
This fund would direct resources to develop Australian industry which provides the basis for sustained growth –
• Manufacturing Industry
• Housing and Construction
• Export Industries
• Import replacement industry
• Service including Tourist Industry
• Research and Development
It is important to recognise that the status of this resolution is a recommendation to the ACTU Executive which, in turn, will pursue discussions on various areas of policy with the Federal government.
No doubt, many fund managers and others will object to the idea of strict limits on the percentages of funds allowable to be invested offshore. Arguments against the ACTU’s regulatory approach will spotlight the issues in favour of offshore investments, criticise the proposed percentage figure as unnecessary, wrong in principle and/or too low for all circumstances. For the unions’ part it would be ironical if by stipulating the maximum figure of 15%, that one of the unintended consequences would be that some funds – such as public sector funds – decided to lift their relatively very small percentage of funds invested offshore closer to the 15% level.
The Federal government both prior to and after the ACTU Special Unions Conference has expressed skepticism concerning the unions’ proposals with respect of offshore investments.15 However, the Federal government is to examine offshore investment policies for superannuation funds in conjunction with industry representatives. The Minister for Employment and Industrial Relations has announced that the government is prepared to establish a consultative committee with superannuation industry representatives on this matter.16 It is likely that the government will not agree to any regulatory limits on offshore investments. It is more likely that changes to tax law may be made affecting offshore investments.
This, in fact, was the position favored by the ACTU Executive at its May meeting where it resolved in a long resolution on the economy that, “No tax concessions should be provided for all overseas investment.”17
The principle at issue here is whether superannuation funds –which are not taxed by the Australian government on their return on investments – should continue to enjoy this protection for offshore investments. This matter needs to be seriously considered by the Federal government’s consultative committee.
As earlier intimated, the most interesting aspect of the ACTU Conference policy is the question of encouraging more productive investment policies. In my view the unions would probably accept the position that there be no public policy policing offshore investments provided that there is some regulation of investments (“up to 20% ” is a flexible amount) in the areas described in the ACTU resolution. The workability and details of such an approach will continue to be developed by the ACTU now and into 1987 in discussions with the superannuation industry, employers and the Federal government
The concerns expressed by some unions concerning the investment policies generally pursued by superannuation funds and the ways that some of this investment may be channelled to productive enterprises is of immense importance to the current debate about lifting Australia’s economic performance.
It is in this context that the resolution of the recent ACTU Special Unions Conference concerning the issue of the existing and future investments overseas and within Australia by superannuation funds should be seen.
According to a recent report prepared for a major employer association: “Based on current industry normal distribution of assets and making due allowance for growth both in superannuation and in stock market values, 50% of the stock market would be owned by superannuation funds by the year 2000, and 75% by the year 2020. Part of the assets are likely to be invested overseas, and if a conservative 10% were so invested, the flight of capital would amount to $1.64 billion in the first five years alone”.18 Thus superannuation funds will play an enormous role on the stock exchange and elsewhere due to the huge amounts of funds under their control.
The managers of superannuation funds cannot be “blamed” for deciding to invest large amounts overseas. In a real sense they are gambling with people’s futures and their prudential responsibilities, especially in recent times, have directed their attention to offshore investments which in the last few years have generally paid handsome dividends.
However, much of the recent trends in investments by the funds has escaped widespread public attention and debate. At least the union movement – by adopting a policy – is encouraging a stocktake as to the utility of those trends.
As discussed earlier, important to bear in mind is the caveat that the investment patterns in the economy are related to a number of factors, including trade policies, currency and interest rate fluctuations, entrepreneurship and imagination, availability of labour, labour skills, government assistance and training and so on. All of these factors are inter-related and should be considered in any assessment of what should be done concerning the future investment practices of superannuation funds.
Without the union movement playing a constructive role in encouraging public debate concerning these issues and the need for some superannuation funds to be directed to more innovative areas of investment, nothing much will change. This laissez faire approach, especially at a time of deteriorating economic fortunes, cannot be realistically entertained. Nothing less than the future of this country is at issue.
1. See the text of Resolutions Adopted by the ACTU Special Unions Conference, 6 November, 1986. Incidentally, such a policy approach is not only favoured by the union movement — see, for example, the Premier of Victoria’s speech to the ASFA Twenty-fifth Conference, Melbourne, 16 October 1986.
2. Cf. Weavan, Gary, ‘Superannuation: The Great Leap Forward – An Outline of the ACTU’s Strategy for the Establishment of Universal Superannuation Coverage’, Superfunds, February 1986.
3. Greenshields, Ray, ‘Industry Superannuation — Where Will All the Money Go?’, Superfunds, p. 4.
4. Statement of Accord, pamphlet published by the ACTU, 1983, p. 2.
5. Ibid, p. 9.
6. The ACTU recently sent nine leading union officials to a Study Mission to Western Europe which, in particular, investigated the various experiences of the Scandinavian countries, West Germany and Austria. The activities of superannuation funds and their role in the investment areas in those countries were studied. See Overview TDC — ACTU Mission to Western Europe, 20th August – 22nd September, 55pp. This document and the views of the Mission’s participants has considerably influenced the union movement’s views concerning superannuation funds and the development of industry policy.
7. See the Report Superannuation and the Accord, A Report for the Metal Trades Industry Association, prepared by Noble Lowndes International Holdings, February, 1986, pp. (i); 22. Henceforth, this Report will be referred to as the Noble Lowndes Report.
8. See Noble Lowndes Report, Ibid and Greenshields, Op. cit. p. 6. The differences in the estimates of these two sources is partly due to Noble Lowndes more cautious approach and exclusion of Life Offices Funds from their calculations.
9. Comparisons between funds as, for example, calculated by the Investment Measurement Services (IMS) and published and circulated throughout the industry has certainly facilitated this view.
10. Cowan and Others v. Scargill and Others, Weekly Law Reports, 10 August 1984, pp. 501-502.
11. See Labor Council of NSW, Discussion Paper Concerning Foreign Investments by Public Sector Superannuation Funds, published by the Labor Council of NSW in various versions, May-August 1986.
12. Recent investment decisions and the improved productive capacity and output of BHP, it should be noted, has everything to do with the Steel Industry Plan and little to do with share price movements.
13. States Try New Routes to Reviving Industries, The New York Times, 30 November 1985, p. 8.
14. High Technology Financing Committee of the Australian Academy of Technological Sciences (Chairman: Sir Frank Epsie), Developing High Technology Enterprises for Australia: A Report Prepared by the High Technology Financing Committee of the Australian Academy of Technological Sciences for the Minister for Science and Technology, Parkville, Vic: Australian Academy of Technological Sciences, 1983.
15. See for example, Mr Keating and the Superfund’s (editorial) Sydney Morning Herald, 24October 1986, and Greenlees, Donald, ‘Walsh Dismisses Concern on Superfund’s Flowing Out’, Australian Financial Review, 6 November 1986, p. 3.
16. See the Report concerning the immediate reaction of the Federal government to the ACTU Conference in the Australian Financial Review, 7 November 1986, p. 4.
17. ACTU Resolution on The Economy, Minutes of ACTU Executive Meeting, 26th-30th May 1986, p. 23.
18. Noble Lowndes Report, p. (i). The estimates contained in this Report are based on existing trends and the additional funds flowing to superannuation funds over time through the 3% productivity improvements (which would probably add $3 billion per annum to the funds). See also Greenshields, Op. cit., pp. 4-9.
At the time this was written, I was the Assistant Secretary of the Labor Council of NSW and a trustee member of the NSW Public Authorities Superannuation Scheme (PASS) Board. The Minister responsible for NSW superannuation legislation, The Hon. Patrick Darcy Hills (1917-1992), was shocked to discover that the PASS Board had made some overseas investments and he mentioned to the then Secretary of the Labor Council of NSW, John MacBean, that he was considering legislating to prevent investment outside of Australia or, in the alternative, that no more than 5% of total PASS assets could be invested offshore. I thought that would be a retrograde step and that the Board trustees, not the minister, should make the investment decisions. Restrictive rules in NSW that limited investment focus of the superannuation assets might mean relative under-performance compared to other funds, etc.
So, I decided to write a paper on the issues. I recall circulating a draft and getting detailed feedback and advice from Shaun Mays in “State Super” [the NSW government scheme for public servants], Leigh Hall (AMP), and Phil Kelly also from State Super, as well as some union colleagues.