Infrastructure investment in superannuation

Trustees should be free to make investment decisions without regulatory influences that create artificial markets for certain classes, writes Pauline Vamos.

Superannuation has played a key role in helping Australia avoid the worst of the global financial crisis.

Recent research conducted for the Association of Superannuation Funds of Australia (ASFA) by the Allen Consulting Group showed that the superannuation industry holds 25 per cent of all Australian equities. Super also holds substantial investments in property and infrastructure here and overseas.

Broad asset allocation and risk-weighted returns are fundamental elements of Australian superannuation funds. Trustees have the responsibility of ensuring they act in the best interests of their members at all times and in line with the fund’s investment policy statement.

There are now significant opportunities for funds in the aftermath of the global financial crisis. One area that the Federal Government has been very keen to promote for investment has been infrastructure.

The Rudd Government saw a need for infrastructure investment from its outset, forming Infrastructure Australia to identify projects of national importance.

As budget revenues became depleted, superannuation has been identified as a logical investor in many nation-building projects. Proponents of this idea include a number of politicians who consider the trillion-dollar superannuation sector as a perfect match for financing new infrastructure projects.

As chief executive of ASFA, the peak superannuation industry association, I believe the Government’s interest in superannuation is important to note and respond to.

But the money in super is neither the Government’s nor the funds’ — it belongs to the fund members and they expect their money to be invested prudently and for the long term.

They want their money to achieve maximum growth, for minimum risk, over the agreed time period.

With any investment — and particularly infrastructure — the fund trustees must:

• be able to assess the risk/return investment profile — short, medium and long term;
• understand the governance structure and risks (including any sovereign risks) of the particular infrastructure investment;
• have the expertise to oversee the performance of the investment;
• understand the costs of managing the investment;
• take into account the liquidity requirements within the fund; and
• be able to value the asset on a regular basis.

ASFA is supportive of many public policy objectives, such as managing climate change, but we cannot countenance government directives to invest or not invest in certain classes of assets.

Trustees should be free to make strategic decisions about investments without regulatory influences that may create artificial markets for certain classes.

ASFA supports the thrust of the current sole purpose test in the Superannuation Industry Supervision Act (SIS) on the basis that savings within the superannuation system should be for retirement income purposes.

The Government has charged trustees with the responsibility of investing that money prudently on behalf of fund members.

The legitimacy of the system is a direct result of trustees’ independent and diligent investment of members’ funds. Excessive government intervention in superannuation would see confidence in the industry eroded.

Voluntary contributions would be greatly reduced and the ability of the superannuation system to provide for people’s adequate retirement outcomes (thus taking pressure off the social security system) would be significantly compromised.

In its submission to the Cooper Review, the New South Wales Government pointed out that there is an opportunity to develop the superannuation sector as a source of funds for projects while other markets are still emerging from the global financial crisis.

Investments such as infrastructure bonds would provide diversification and have the potential to fall within investment mandates, particularly if liquidity issues can be addressed.

It’s also instructive that the NSW Government is aware that super funds should not be compelled into investing.

It argued that “meeting other general policy objectives by mandating the use of superannuation funds would risk suboptimal outcomes and reduced potential for earnings over time. Policy objectives can and should be met by other more specifically designed mechanisms.”

The superannuation industry is already a significant investor in infrastructure. Generally, these projects generate steady earnings and a dependable and often tax-effective dividend stream.

According to the OECD, another benefit of infrastructure investing is that investment performance is not necessarily linked to other asset classes. Super funds can use infrastructure investments as a hedge and, in the process, increase the degree of diversification within a portfolio.

Infrastructure is also a long-term investment proposition, so it is suitable for superannuation funds with a very long-term investment outlook. But it also has downsides. These include difficulty in selling assets quickly if a fund needs to dispose of them, and the problems of attributing increases or losses in value to members leaving a fund.

Infrastructure is not the be all and end all for superannuation fund trustees looking for investment vehicles, but it can and should be a part of the mix.

Pauline Vamos is the chief executive of ASFA.