The Australian
31 March 2020
Janet Albrechtsen
Many people are recycling Warren Buffett’s famous quote that it’s only when the tide goes out that we discover who has been swimming naked. And for good reason: one Australian industry is looking pretty ugly right now, its mismanagement and hubris exposed by this current crisis. The naked swimmers are the trustees of the biggest industry superannuation funds and their directors.
This sector rode so high and mighty in the good times that it demanded that the corporate sector, especially the banks, take money from their owners and give it to causes deemed worthy by these industry super funds.
In the midst of this crisis, while the banks are honourably bailing out their customers, these sanctimonious industry super funds demand that ordinary Australians rescue them and their members from the consequences of the sector’s arrogance.
The biggest question is how this group has been protected from scrutiny and sensible regulation for so long, and what can be done to end its immunity from the kind of critical examination the rest of the financial sector has always faced.
Consider the causes of the arrogance and power of large industry super funds. They have been coddled by an industrial relations club that mandates that it be showered with never-ending torrents of new money. Of the 530 super funds listed in modern industrial awards, 96.6 per cent are industry super funds. That’s some gravy train.
With that guaranteed inflow of cash, it’s hardly surprising that industry super funds have grown fat and lazy about risk. They made two critical assumptions. First, that these vast inflows would always exceed the outflows they had to pay pensioners and superannuants. And second, they could keep less of their assets in cash or liquid assets to meet redemptions.
In fact, they doubled down on this bet by plunging members’ money into illiquid assets — they filled their portfolios with infrastructure, real estate, private equity and other forms of long-term assets that can’t be easily and quickly sold to meet redemptions.
These assets can’t be easily valued either — experts will tell you that the valuation of illiquid assets is essentially guesswork. If you don’t have a deep and liquid market into which to sell an asset, you really have no idea what that asset would fetch if and when the time came to sell.
The fact the valuation of illiquid assets is open to huge variation was a terrific advantage in so many ways for industry insiders during the good times.
Industry super funds could use boomtime assumptions to produce inflated valuations to prop up their performance relative to retail funds that don’t have the same guaranteed gravy train of inflows to invest in unlisted long-term asset classes.
That gives the industry funds one heck of a competitive edge and those inflated performance figures make for handsome bonuses for employees of industry funds and asset managers such as IFM.
This apparent outperformance by industry super funds seems to have anaesthetised the Australian Prudential Regulation Authority and many others. They have been able to resist sensible regulation by pointing to their “healthy” performance, and they have received exemptions from the kind of stock-standard rules that govern other trustees of public money.
The upshot is that many industry super funds have ridiculously large boards stuffed full of union or industry association nominees who obligingly pass their directors’ fees back to their nominating union (where, lo and behold, it might find its way to the ALP) or industry association.
But now the music has stopped. What these big industry funds have sold to members as “balanced” funds doesn’t look so balanced any more.
The current crisis has exposed illiquidity issues. Many of their members have lost their jobs or lost hours of work, drying up the guaranteed flow of new superannuation contributions.
And the Morrison government has announced an emergency and temporary exemption allowing members in financial trouble to withdraw up to $10,000 a year from superannuation for each of the next two years.
The liquidity problem facing industry super funds has been compounded by the fact many members have been switching from what the industry funds call “balanced” options into cash options, requiring funds to liquidate long-term assets in the “balanced” options.
This new environment has forced industry funds to slash questionable valuations of illiquid assets in their “balanced” funds to avoid redeeming members or members who switch out of balanced funds into cash options getting a windfall at the expense of members who remain in the “balanced” funds.
So the jig is up. When comparisons between industry super funds and retail funds are adjusted for risk — as they should be — industry super funds don’t look so healthy after all.
Now that the tide has gone out, we can see two issues with greater clarity. First, trustees of industry super funds haven’t done a stellar job of managing risk through the full economic cycle, through good times and bad.
There was too much complacency from more than two decades of uninterrupted economic growth. And maybe some naivety too: Australian industry funds are relatively new, emerging only in the 1980s after the introduction of compulsory superannuation payments.
Second, APRA stands condemned for letting industry super funds get away with second-rate governance and poor management of risk through the full economic cycle.
Consider the hypocrisy of these super funds now wanting a bailout to deal with a liquidity problem of their own making during the boom times. For years, noisy industry funds have sanctimoniously demanded that company boards give up some profit to benefit society.
Now their mismanagement has exposed risks that their members may not have been told about. And the same industry funds want the Reserve Bank of Australia (aka the taxpayer) to bail out their members to protect their boards from claims of mismanagement. The industry funds no doubt will point to the help the government is giving the banks as a precedent for a bailout.
However, they should remember that the quid pro quo for banks getting government help is the banks meeting a stringent set of capital and liquidity rules, not to mention governance requirements such as a majority of independent directors. Do these funds want a similar regime instead of the namby-pamby one that applies now?
To date, and to its credit, the Morrison government has resisted their calls. Scott Morrison and Josh Frydenberg should stand even stronger, demanding APRA lift its game. How did the industry fund sector escape scrutiny of its dirty little secrets for so long?
Part of the reason is sheer thuggery. Industry Super Australia, the representative body for industry super funds, tried to silence Andrew Bragg a few years ago when he was at the Business Council of Australia for exposing the unholy links between unions and industry fund. Bragg, now a senator, is leading the push to reform industry super.
The voting power, and buying power, of huge industry funds is another part of the answer. Their special pleading and scare tactics to ensure they can keep feasting on members’ funds by having the super guarantee charge contribution increased from 9.5 per cent to 12 per cent is the rest of the answer.
The pathetic plea for a taxpayer-funded bailout from mismanaged industry super funds is compelling evidence that workers should be allowed to keep more, not less, of their hard-earned money rather than be forced to shovel more into industry funds and their mates.
