CHAPTER 7
SUPER FUNDS AND SOCIAL OBJECTIVES
7.1 The essential question raised by the Committee's terms of reference
is the compatibility of the furtherance of broader objectives, whether
they be economic, social, industry or indeed other policy objectives,
with the fundamental obligations flowing from the trust relationship,
supplemented by legislative requirements. The trust relationship is pivotal
to our superannuation system, has shaped its development to date, and
has been its fundamental and defining characteristic. The Committee notes,
however, the Budget 1996 announcement that retirement savings accounts
are to be set up outside the requirements of trust law.
Broader objectives
7.2 Social investment has been described elsewhere in this report as
investment which may involve accepting a higher risk or lower return to
achieve a socially desirable goal. This is in contrast to economically
targeted investment (ETI) where investment at a competitive rate of return
will also provide desirable identified economic benefits. It is also being
used in contrast to socially responsible investment, which is investment
within the present regulatory environment which might also meet socially
desirable goals.
7.3 The furtherance of broader objectives, or socially responsible investment
as it has been referred to elsewhere in this report, is not necessarily
incompatible with trustees' legal and fiduciary obligations. In a discussion
of the breadth of trustees' duties, Mr Ian Court, President of the Australian
Institute of Superannuation Trustees (AIST), told the Committee:
There is never a simple answer ... it is a question of balance.
The key thing that was picked up in the SIS legislation ... was adopting
the modern portfolio approach. Under the old trust legislation, each
investment had to be looked at on its own merits. Under the SIS approach,
diversification is the key. In other words, if you have got a spread
of investment - short-term investments, long-term investments, growth
investments, defensive low-risk investments - which produces an overall
risk in return profile which meets your trustee responsibilities, that
is the key to it. Within that, those trustees that are a bit more energetic
- and I use that word because I think this comes down to it and some
managers can be quite lazy - if they are prepared to spend the time
and put the work into it, they can construct their portfolio to produce
some other benefits as well without compromising that first benefit
[ie maximising returns for the members] and that is very important.
[1]
7.4 The furtherance of broader objectives happens in practice. Mr Court
also told that Committee of a large industry fund which has a provision
in its investment policy statement that, all things being equal in terms
of returns and risks, trustees will prefer a project or investment 'which
has job creation benefits or maximises job creation'. [2]
The fund was a significant investor in the building industry in accordance
with that policy. Mr Court said:
[W]e have to be careful that by doing that we are not asking
our members to sacrifice returns because our primary responsibility
or only responsibility is to those returns. But within that there are
ways in which you can achieve both - good returns and maximise jobs.
[3]
7.5 ASFA described what it believes has been an 'overly cautious' approach
to investment by some trustees and their investment managers, stemming
at least in part from a false perception of 'prudence'. ASFA referred
to this as 'reckless conservatism'. [4]
7.6 ASFA pointed out that there are strong technical reasons which should
prompt superannuation trustees to consider investing in development capital,
infrastructure and other types of non-traded asset classes. It will become
harder over the next decade for super funds to make significant gains
in the highly efficient markets in which they operate. Thus alternative
asset classes that are suitable for super funds in a risk-return trade-off
need to be identified. [5] Others also
noted that the increasing efficiency of the market would force trustees
and their investment managers to range more broadly in developing appropriate
investment strategies. [6]
Economically targeted investment (ETI)
7.7 The Committee was told that some industry funds have shown an interest
in ETIs, and have reported positive feedback from members who are keen
that their investment have a positive social side as well as being a good
investment. Within a diversified portfolio, a small percentage of it may
be invested in this way in ETIs. [7]
7.8 The Committee was told that relatively little of this type of investment
has occurred, however, even in the United States, in part because it has
been thought that ETIs are incompatible with the fiduciary obligations
that apply under ERISA, in addition to the complexity that is usually
associated with evaluation of ETI options. An ETI clearing house arrangement
was proposed to overcome these difficulties by providing the information
necessary for the evaluation of an investment, although it was not proposed
that it would obviate the need for trustees to make their own inquiries
and judgements. [8]
Socially responsible investment
7.9 It was suggested to the Committee that fund members could make their
views on desirable kinds of investment known to their trustee representatives.
It was recognised, however, that trustees were primarily bound to act
according to their legal and fiduciary duties, and seeking the best return
for the members would not necessarily result in the kind of investment
otherwise sought by the members. [9]
7.10 Trustees are required to make decisions in which the strict risk/return
analysis and their duties under the law leave little room for the consideration
of objectives other than enhancing their members' financial interests.
Funds may demonstrate preferences in their investing, to the extent that
returns are not compromised. [10] In
the Australian context, there is little in the way of social investment
beyond this, because of the conflict with trustees' legal and fiduciary
obligations. The Committee was told that at least one fund had considered
the issues of ethical and environmental investment, but had 'been unable
to come up with a screen on our investment managers which could be applied
effectively and which would not compromise returns'. [11]
7.11 This kind of social investment is more common in the United States,
although no concrete and detailed examples were given. A structure was
described where 'traditional financial equity analysts' carry out a traditional
financial analysis, identifying a list of equities for purchase. A second
team which has expertise in various social issues, perhaps involving churches,
environmental groups and others, 'put[s] a screen over that and sift[s]
out the ones that perform best by criteria which have been given to them
by their investors'. [12]
7.12 The Committee was warned that such an approach alone might not have
much impact on corporate behaviour despite its potential to make a fund
member 'feel good':
You can feel good by not investing in tobacco but, if you wanted
to effect some outcome because you had a view about tobacco, you would
probably need to look at corporate governance as well. It was pointed
out to me that in the US the twin approach of having some say through
voting shares as a shareholder and having your social objectives screened
gives you the best chance of whatever outcome you are after. [13]
7.13 Although Australian markets have not yet developed the maturity
of American markets, an increasing breadth and depth will evolve as super
funds and investment managers seek out new areas of activity. The introduction
of increased investor choice will hasten this development.Once fund members
are being encouraged to more actively consider the kinds of investments
they want to be involved in, it is to be expected that funds will seek
to differentiate their products. One way of doing this will be to focus
on particular areas of investment. Provided other regulatory requirements
are met, the Committee considers this an entirely feasible approach and
would expect to see this kind of trend emerging in the near future. This
is what it would describe as socially responsible investment. In these
circumstances, the Committee sees little need for government intervention
at this point.
Informed choices
7.15 Fund members will need information to assist in making their long
term investment decisions. They will need to be educated generally, so
that they are aware of the primary purpose of superannuation saving, and
they will need to be educated about the kinds of investment that are possible
within the regulatory framework. In particular, they will need to understand
the necessary long term perspective.
7.16 To the lay person, superannuation is already a difficult issue to
understand. This needs to be kept in mind in future education and information
campaigns. If people feel hopelessly overwhelmed by the information and
choices available to them, a level of mistrust about the system generally
may develop, and this would not be helpful.
7.17 Already funds are required to provide certain information to their
members. To require them to provide more detailed information has cost
implications, although members faced with choices about investments will
need to be in a position to make informed decisions. The Committee views
the publication of an investment strategy to be a useful step in promoting
informed investing. Fund members should also be encouraged to engage in
dialogue with trustees as a means of enhancing the representative nature
of trusteeship.
A national strategy to harness super savings
7.18 A view was put to the Committee that there was a need to develop
a 'conscious national strategy' to take advantage of the asset of super
funds to determine our social and economic future. The recent pattern
of decline in Australian public investment, resulting from both reduced
public investment and a trend towards privatisation, formed the backdrop
against which it was said that there was a need to harness for social
and economic purposes the potential of savings in the form of superannuation.
[14]
7.19 To maximise the use of super funds in this way, it was said there
would need to be a representative community input to decisions regarding
the use of the funds. Government, industry and unions should also be represented
at the decision-making level, it was argued. What was also required to
make such a scheme operate satisfactorily, even if its application were
limited to only a small portion of the aggregate of super savings, was
'a strong level of government guarantee and government protection':
If the government not only underwrites or guarantees the outcomes
and the safety of such investments but also considers the possibility
of a top-up rate to ensure the attractiveness of the return, then that
would add to the saleability of the proposition ... Alternatively, it
could be dealt with by preferred tax treatment... [15]
7.20 Two methods of reconciling this approach with trustees' current
obligation to maximise returns for the beneficiaries were proposed: one
was to change the law and the other was to change the perception of the
beneficiaries so that this kind of investment was something that they
would want. [16]
7.21 Notwithstanding a certain allure in this proposal, the Committee
is unable to foresee sufficient parliamentary will to revise our super
system in this way. This is particularly so given the developments in
investment patterns and in financial markets that the Committee has identified
and described throughout this report. It also reflects a firm view that
the key purpose of superannuation savings is to provide retirement income:
the assets of super funds should not be regarded as a public asset. To
the extent that retirement incomes can be self-funded, thereby reducing
the pension burden for future taxpayers, and to the extent that increased
domestic saving leads to higher levels of domestic investment, all Australians
will benefit from the system presently in place.
7.22 In the Committee's view, it is also highly unlikely that future
governments would be inclined to underwrite such a scheme. With the growth
in super savings that has been witnessed over recent years and that is
forecast to continue, this would amount to a very significant financial
commitment indeed. Government involvement in such a way would be at odds
with the general nature of the Australian super scheme, in so far as it
has been left to the private sector to invest and manage super monies.
7.23 If a government in the future wished superannuation investment to
promote some objective beyond the benefit of its members, then it would
need to give consideration to how it might do this - whether by regulation
or incentive, for example. It would also need to give consideration to
how the appropriate standards of behaviour on the part of trustees might
be judged, and to the effect of consequent leakage from the superannuation
system.
Conclusion
7.24 Australia's superannuation system is rapidly growing, dynamic and
complex. The Committee has found that the investment sector reflects these
characteristics, and is generally developing a maturity and sophistication
in accordance with its proper responsibilities. One measure of the significance
of superannuation investment is the holding in equities of some 25 per
cent of the total market capitalisation of the Australian Stock Exchange.
7.25 There are signs that the existing structures of the superannuation
system may be changed so as to have an impact on the investment sector,
notably with the introduction of Retirement Savings Accounts without trust
structures. The Committee considers there is a need for Parliamentary
oversight of such changes.
Recommendation 7.1
| The Committee recommends that a review of superannuation
investment policies and practices be undertaken by this Committee
in three years time. |
Senator John Watson
Chair
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Footnotes
[1] Evidence, pS115.
[2] Evidence, pS114.
[3] Evidence, pS114.
[4] Submission SI-11, p1.
[5] Submission SI-11, p1.
[6] See, for example, Evidence (Mr Costello),
pS35; (Mr Campbell), pS57.
[7] Evidence (Dr Anderson), pS28.
[8] 'Yours, Mine or Ours?' Is There a Case
for Directed Superannuation Investment? Parliamentary Research Service
Research Paper No 32 1994/1995, paras 13.1.2-3.
[9] Evidence (Committee members, AIST representatives),
ppS115-16.
[10] Evidence (Mr Court), pS114.
[11] Evidence (Mr Court), pS114.
[12] Evidence (Mr Court), pS116.
[13] Evidence (Mr Court), pS116.
[14] Evidence (Mr Michael Salvaris), ppS97-8.
[15] Evidence (Mr Salvaris), pS99.
[16] Evidence (Mr Salvaris), pS99.
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