Three facets of the Australian superannuation fascinate UK policymakers as the UK’s auto enrolment begins to mature, master trusts become the only game in town and ‘green’ is flashing for action.
First, is Australia’s hunger for consolidation as well-established master trusts seek to generate scale and administrative and investment efficiencies. The Australian Prudential Regulatory Authority (APRA) has clearly signalled to trustees that size does matter in gaining value for members from overall investment returns. This is further emphasised by the recent Your Future Your Super (YFYS) reforms which emphasised value for money and sustainable rates of return.
This is reinforced by a decline in employers’ perceptions of the advantages of enhanced employee benefits. A trend can be seen; in 2004 just over 1,000 Australian employers had in-house superannuation schemes but by March 2021 this was down to just 15 employers. A sharp outsourcing shift had occurred towards master trusts and away from in-house pension or superannuation management. In talking with Australian regulators it became apparent that enhanced governance and risk mitigation was anticipated to flow from this trend.
Today trustees need to be mindful of using scale to generate value for money returns for members and accessing illiquid assets. Scale and related cash flow from Australia’s 10 per cent employer and 4.4 per cent voluntary employee contributions have generated $3.3 trillion superannuation assets as of June 2021. A quarter were invested in property and infrastructure. In The Hon. Nick Sherry’s Superannuation 101 document, on Page 24, he suggests infrastructure is 14 per cent of total superannuation assets but if you include listed equities, the overall figure is closer to 20 per cent.
The interest for the UK should be that Australian superannuation funds are leading the illiquidity charge through cash flow and scale into toll roads, airports, rail, ports, and electricity. Through public private partnerships social housings and hospitals have also received investment attention which may provide a useful model of comparison. Companies like Industry Fund Management, a grouping of over 20 Australian superannuation funds, enables superannuation plan members to directly hold UK illiquid assets. And yes, no price cap, impedes this relentless march into illiquid investment – salient for UK politicians and policymakers. It would be interesting to know Nest’s investment in UK centric – infrastructure assets and how it is mirroring UK government policy.
The somewhat spurious, UK employee benefit consultant-led argument that defined contribution schemes shouldn’t invest in illiquid assets – because a daily valuation cannot normally be obtained – doesn’t seem to be a pressing issue in the land down under. The distinction between DB schemes and assets is not there – they are becoming extinct. What is worth noting is how superannuation funds work with governments and enterprises to ‘recycle and reuse’ urban assets to better focus on the immediate needs of growing communities. A very useful political narrative. Communities that may have been starved of transportation and social housing infrastructure for example. Participating in communities can be readily taken up by some master trusts like Hostplus and HESTA who argue that their investment presence can reshape member outcomes. Their investment in a dementia village is notable.
The investment or asset management function of illiquid asset portfolios have been increasingly drawn in house for most large master trusts. Again, this investment or operational function can be correlated with scale and doesn’t simply rely on investing with an infrastructure fund manager with associated fees and charges.
While ESG is in vogue globally, Australia has been slower to embrace this investment class. Continued global low average rates of return has meant that ESG in Australia means taking on board environmental, social and governance responsibilities while acknowledging that mining investments are making good rates of return during the Covid-19 period.
But ‘greenwashing’ is recognised by some Australian trustees as a concern.
The angst over coal mining had one Australian superannuation fund – HESTA – completely divested from ‘king coal’, even though losses would be incurred. This was a response to perceived plan member sentiment.
Other major superannuation funds argue that the best way to modify or change an industry is through being in the tent and exerting influence through investment stakeholder positions. We don’t see a correct or incorrect answer to ESG, but the need to be pragmatic and allow communities to make the transition away from hydrocarbons in a measured and informed manner is a key tenet of some superannuation fund thinking.
Social and Governance considerations will become more pressing for trustees as they seek greater certainty that all investments meet domestic and internationally accepted standards.
Paul Leandro of Barnett Waddingham suggests that: “With the consolidation agenda firmly in play, it is clear the DC market is evolving and at pace. We hope this does not give rise to some unintended consequences: like having an industry solely fixated on accumulation, with homogenous looking products and a race to the bottom in terms of investment charges and a lack of diversity of assets.
“Instead, the UK industry should see this as hotbed of opportunity; with scale comes great responsibility! And we wait to see what initiatives will be introduced from the COP26 summit. For scale, the industry should invest more in high yielding infrastructure (an ideal asset for long-term saving), infrastructure built to combat climate change and infrastructure to improve people’s lives in less affluent regions.
“This evolution should also bring useful at-retirement products which make use of the best tool the pensions industry has – inertia. We know innovation is coming and we expect products, set as default options, which create safety nets for people to prevent them from making irrational and inadequate decisions at retirement. These products should also have the flexibility to change the shape of someone’s retirement income as their circumstances change and cater for a retiree’s spending habits (not just providing an income rising with inflation). The trick will be to help people keep reserves for when they have to pay long term care costs.”
Colin Williams, managing director, pensions and savings, Standard Life sees a lot of potential comparisons with what is occurring with the Australian master trusts and the emerging UK market: “More and more retirement income solutions will be at the forefront of trustee and employer minds. Finding seamless solutions that take members to and through retirement is becoming more pressing. We will increasingly need to consider ESG aspects in both consolidation, illiquid investment, and retirement income solutions. Equally employers are increasingly believing that it is their fiduciary responsibility to have retirement income plans in place, to support their employees in retirement.”
Today, as in tomorrow, the Australian experience regarding superannuation will be closely analysed by UK policymakers looking for inspiration and guidance.
There is no right or wrong answer, just a need to find a sensible and fair solution for most plan members.
