BLOG: Financial System Inquiry - getting the balance right
21st Aug 14
Author: Yasser El-Ansary, AVCAL CEO
Many of you will know that during 2014 AVCAL has devoted a considerable amount of time to the work being done by David Murray as part of the Government’s Financial System Inquiry (FSI).
It didn’t come as a surprise to us that the future of superannuation, and the policy and regulatory settings that relate to this aspect of the financial system, feature prominently in the first report that was released a few weeks ago in mid-July 2014. At $1.8 trillion today, and equivalent to the size of the entire nation’s economic output for a year, it makes sense for this area to be high on the agenda.
For our industry, the most significant challenge is how our financial system will support the next wave of economic growth through expansion of the pool of capital available to invest in Australian businesses.
As an economy, we know that we have to lift our game around productivity, and we have to take decisive action to set ourselves up for enduring prosperity in the face of the major economic forces that are at play all around us.
We know that the peak of the mining investment boom has passed, we know that there is a structural shift taking place across the manufacturing industry as a result of globalisation, and we know that we have an ageing population which, amongst other things, is creating business succession planning challenges.
When you look at the FSI interim report from this perspective, you start to see the reasons why the paper identifies the need for more of a balance between short- and long-term investment strategies for superannuation funds.
Supporting more private capital investment in Australian businesses
The role played by private equity and venture capital firms investing in Australian businesses is very significant. The businesses invested in by our industry support around four percent of the nation’s annual economic output and around half a million jobs across a wide spectrum of industries.
All of this is made possible through the investments made by Australian superannuation funds, along with offshore pension and endowment funds, into a capital pool that is then used by private equity and venture capital fund managers to make targeted equity investments into specific businesses.
In Australia, the amount of capital invested by our superannuation funds into this industry equates to an estimated one percent of the total superannuation savings pool of $1.8 trillion. That’s a very small aggregate amount, especially when you compare that against the equivalent allocation in other markets such as the United States. Over there, the allocation to private equity and venture capital averages somewhere around nine or ten percent.
To underscore the point, the allocation made by Australian superannuation funds to other asset classes, such as equities and fixed interest, is considerably higher – somewhere over 65 percent. The historical long-term returns from those asset classes are not as high as those from private equity.
The interim report points to evidence that demand from superannuation funds to hold highly liquid assets may, in fact, be having the effect of reducing the after-fee returns to fund members. As the inquiry itself identifies, this is being driven by the need for superannuation funds to meet the obligations they face in respect of portability of fund balances, and the recently introduced MySuper default product reforms.
These observations are critically important, and they are entirely consistent with what we have been saying for a number of years.
As a nation, our superannuation savings pool is something that we are all justifiably proud of. But amassing a huge savings pool must be about more than just the headline numbers.
Getting the balance right between short and long-term investment
We have to ensure we get the fundamental structure of our system right in order to make certain that our national savings deliver the best outcomes for retirees, workers, as well as future generations of Australians. If we do that, not only we will see a sustainable retirement income system for all Australians, but by extension, there will be a major economic pay-off to the nation as a whole.
If we don’t look closely at the current policy settings that apply to superannuation now, then we might find in another ten or 15 years that the task has become too hard.
The interim report has given us the framework for a deeper conversation around some of these challenges. A focus on fees is important, but really, the bigger issues relate to whether MySuper will deliver the right outcome for fund members over the long-term, and whether the current rules that allow for three-day portability of fund balances remains appropriate.
This is the debate we need to have now, because the decisions we make about these issues will have a significant bearing on our nation’s capacity to invest in the types of high growth Australian businesses that will drive our economic success into the future.
When you consider the interim report from this perspective, things suddenly look quite different.
AVCAL’s next submission to the FSI
Over the period ahead AVCAL will be preparing its third submission to the FSI, which is due on 26 August. If you have some thoughts on what you think should feature in our submission, please let us know.
[aspects of this blog first appeared in an opinion editorial article by AVCAL published in The Australian newspaper on 18 August 2014].
Author: Kosta Sinelnikov, Senior Research Analyst, AVCAL