Super Tax Concessions Debate: Industry Must Step Up on Social Licence

Why is it that we are talking about super taxation concessions and not negative gearing? The superannuation industry needs to recognise that it does have a social licence.

In the ASFA Magazine June 2014 I wrote an article “Superannuation’s Licence to Operate”. The article is re-produced:

Superannuation’s Licence to Operate

Western Australia Premier Colin Barnett recently delivered a blunt speech to Western Australia’s booming gas and petroleum industry.

Barnett stated “I put it to you, it’s a hard narrative to sell to the community or a government that we are going to increase production of gas and we are going to export it and in the meantime gas supplies might be diminished and the domestic price will go up. I am a politician. I am pretty good at selling a story. I find that one tough to sell. You can’t say to people gas production is going up and by the way your supplies are going down and the price is going up. Stop reading American management books. Think a bit broader. The ultimate social licence is not what you may think it is.”

Barnett went on to state, “the ultimate [social] licence is getting agreement and alignment with both the national and state governments in Australia. That’s the licence that counts. That’s the one you must secure to develop Australia’s natural resources.”

Whilst focused on the gas industry, Barnett’s comments raise the question what does ‘licence to operate’ mean for the superannuation industry?

Social licence is at best a fuzzy term. Unlike our driving licence there is no grand department where companies and industries can line up to have their ‘social licence’ stamped and renewed. The best definition of social licence can be described as a stakeholder perception of the legitimacy of a project, a company or an industry. Using that definition the superannuation industry has a problem.

Over the last few years superannuation has taken a battering that shows no sign of abating. In the last months alone media commentators have lambasted Australia’s superannuation system and have gone as far as saying that superannuation has failed. How did we get here? More importantly what we can do about it?

A starting point is to understand why stakeholders may be criticizing super. Rather than jumping into a debate on fees, investment returns and customer service, let’s take a step back and look at the different groups of stakeholders that have a problem about super; members, government, civil society and business and try to understand what they are concerned about.

For superannuation members the challenge is that superannuation at its heart is a product that is based on an aspiration that life in the future can be better. Perhaps that is part of the problem. The promise that superannuation is holding out, to make the future better, may be in itself a source of stakeholder discontent. The problem with an aspirational product is that if the reality falls short of the objective then the customer is left more dissatisfied than if the product was just an everyday consumer good where there weren’t great expectations.

For twenty years following the introduction of the SG the superannuation industry didn’t have to worry too much about aspirations falling short. That was because most of the people in our system had not retired. For those that retired in the last 15 years they knew that they were late to super and therefore their expectations were lower. However as the baby boomers reach retirement we are dealing with a group that does have aspirational expectations in regards to their super. For Generation Y and Z, who are entering the workplace with the expectation that they will retire at 70 there is a cynical view as to whether a better future is possible at all.

The second key stakeholder is government. Superannuation has been cast as a two pillar relationship between member and fund. In fact it has always been a three pillar relationship – member, fund and government. There are many ways over the last twenty years that the Federal Government has demonstrated that they are a key part of the superannuation system. By and large however Governments have been a silent stakeholder. When economic times were good and the cost of superannuation on the Federal Budget was manageable, the Government largely left superannuation funds alone.

The future fiscal position for Government is not so rosy and will be a major reason why the Federal Government focuses on superannuation. Over the next two terms of parliament we can expect to see more focus in this area to make the system sustainable. To understand the reason why this will happen we need to unpack the Federal Budget. We know from the work of the Grattan Institute that the deterioration of the Government’s fiscal position is largely based in a blow out of health expenditure. As the Grattan state, the increase in government spending is driven above all by health spending, which in the past 10 years has risen by more than $40 billion a year in real terms. The cause is not the ageing population but the fact that people are seeing doctors more often, having more tests and operations, and taking more prescription drugs.

We have yet to feel the full impact of our aging population on the Government’s position. Over the next decade a significant portion of baby boomers will retire. By the time the baby boomers have left the work force we will see a permanent change in the structure of the proportion of workers supporting pensioners. This will further erode Government’s fiscal position as the full cost of pensions hits the Federal Budget.

Superannuation is one of the biggest expenses the Federal Government faces. There is a significant political debate about how Governments should handle this. One example is the debate about accessing the pension at 70. Whilst this doesn’t change the amount of money in an individual’s superannuation account for many Australians it will significantly change what they can do with that money. For those, including blue collar workers, that are unable to work until 70 due to physical health, the increase in access age will in reality mean that superannuation will be used to pre-fund retirement before accessing the pension at 70. Instead of super being a top up to the age pension it will be become a pre-funding account.

The age pension debate illustrates why the third major stakeholder, civil society, criticizes super. Superannuation is now in direct competition with other ways that government can spend money. In order to demonstrate why a particular way of spending money is desirable, it is necessary to demonstrate why government expenditure on super is not effective in meeting social goals.

The fourth area of criticism about super relates to the way super invests. When the Australian economy was strong and unemployment was trending downwards – which represents most of the history of the SG – the way in which super invested was largely ignored.

Whilst long predicted by economists it is now clear that the mining and resources boom is on the wane. As manufacturing industries contract there is understandably angst in the community about where jobs are going to come from.

Superannuation collectively is the biggest pie in the Australian economy. How superannuation funds invest will make a material difference to the way in which the economy develops. The Financial System Inquiry will focus on the role that superannuation plays in capital formation. Whatever the Inquiry concludes Australia’s political parties of all persuasions will increasingly focus on how superannuation invests.

To understand why this will happen, it is only necessary to go back to Colin Barnett’s comments at the start of this article. Barnett is right; politicians know how to sell a story. But what he doesn’t say is that they also know how to shift blame to someone else.

The best example of this is the banking industry which has a long history of being the scourge of politicians. In the late 1990’s the banking sector was on the front pages of papers on a regular basis as banks closed branches, increased bank fees and made record profits. There were numerous banking inquiries that provided ample opportunities for politicians to criticize banks. Labor at the time went so far as developing a banking social charter as a core part of its election commitments in the 2001 Federal Election.

One of the things that came out of the period that the banks were subject to public criticism was that the major banks all developed their own commitments to corporate social responsibility and sustainability. Compared to 13 years ago the banks are now regarded as leaders when it comes to sustainability and CSR. This is not to say the banks are perfect, but they have realized that the only way to address social licence issues is by focusing on the issues themselves.

This is also the answer for the superannuation industry. No amount of media campaigning will result in positive outcomes if the fundamental issues that are of concern to members, governments, civil society and business are not addressed. So, how do we start?

The first place to start is to acknowledge that superannuation, like other sectors of the economy, is subject to a social licence. We need to learn the lessons from those that have been here before. One of the lasting outcomes of the early campaigns against Nike and Shell was the development of sustainability reporting. A couple of funds in the superannuation industry have dipped their toes into this area but largely our industry has believed that CSR/ sustainability reporting is for others. It is not.

Sustainability reporting is not an end in itself. It must be back by real concrete work that seeks to address the issues that are of most concern to stakeholders.

The superannuation industry must be careful not to be complacent about its position in society. Social licence may be a fuzzy concept but it is real. We are entering an era of change where everything is up for grabs. When respected commentators say superannuation is failing we shouldn’t ignore them but take a good hard look at what we are doing to ensure that we retain our social licence in coming decades.

Why Australia Needs a Foreign Corrupt Practices Act

Senator Sam Dastyari’s speech in the Senate on 5th March has exposed what we have known for too long. Australian investors are exposed to bribery and corruption risks and it is time something is done about it.

In November 2012, I authored a paper for the Association of Superannuation Funds of Australia on the development of Australia’s capital markets. The discussion paper stated:

ASFA believes that the superannuation system has a role to encourage the development of the ASX in a way that facilitates future investment as part of its role to deliver to the public good.

A recent focus of the ASX has been to target listings in the resources sector. An example of this is that the ASX now has 15 listed companies from Mongolia principally due to the on-the-ground engagement of the ASX in Mongolia. ASFA notes there are a significant number of ASX-listed resource companies that are active globally, with 186 companies actively exploring or producing in Africa alone.

The fact that Australian companies are active on a global basis provides investors with an ability to gain exposure to the global economy. However it also introduces risks that must be managed. The superannuation sector understands the importance that environmental, social and governance (ESG) factors can play in delivering long-term investment returns. Over the last five years a significant number of APRA-regulated superannuation funds have signed up to the United Nations Principles for Responsible Investment.

A great deal of work is being done by these funds to build their capacity to understand and manage ESG risks across their portfolios. ASFA is concerned that small and medium cap companies are particularly exposed to human rights risks when operating in developing and under-developed countries. In the US the Securities and Exchange Commission (SEC) has been required to issue new rules around disclosure practices for resources companies that operate in conflict zones. There is an international body of work around this focused on the Extractive Industries Transparency Initiative that requires countries to disclose revenues from resources in order to stop bribery and corruption in developing countries. The SEC move, which came from a Congress directive, will in the end set a new standard for disclosure of resources companies. Given the dominance of resources companies in the ASX, the SEC model could be considered in the Australian context.

ASFA is concerned that there has been insufficient attention paid at both a market, regulatory and policy level on the implications of encouraging a diversified capital market. The long-term impact of concentration risk is that in order to achieve portfolio diversification, superannuation funds will allocate new funds outside of the ASX. To the extent that concentration risk increases, this has the potential to have a long-term impact on the allocation by the superannuation sector to Australia’s capital market.

The challenge that Australia has is that ASX is a listed company in its own right, and is subject to competition pressures in its businesses including trading, clearing and settlement means that it seeks new listings to earn revenue. The reality over the last decade has been that mining listings have been a major area of opportunity. The ASX must compete with other listed markets, particularly Toronto, for new listings. The recruitment of Mongolian mining companies for instance is no accident but the result of targeted activities of the ASX.

My argument in the past is that Australia’s superannuation sector and the ASX have had aligned interests. The growth of the superannuation has supported the growth of the ASX. In the coming decades it is likely that superannuation will out-grow the ASX and super funds will increasingly seek investments offshore. This is a reality and in terms of investment diversification can be a good thing, but even if this does happen, we still need to ensure that the ASX is able to present a pipeline of future investment opportunities. I have been critical of the ASX in terms of its focus on mining listings because it doesn’t align with superannuation fund needs for a diversified market.

But the focus on securing new mining listings also brings risk into the ASX, which super funds as asset owners ultimately bear.

The main risk from bribery and corruption is not at the top of the ASX where our leading miners in the main have good practices in place to manage risks. It is at the bottom of the ASX, amongst the small cap miners.

An argument amongst investors has been that this end of the market doesn’t matter as super funds don’t invest a great deal in small cap miners.

This misses the point. The importation of bribery and corruption risk in the bottom of the market is a reputation risk for the whole of the market. Whether we invest in a small cap miner in Mongolia or not, it is in the interest of all investors to ensure that they operate according to global best practice.

The problem that we have is that unlike the US, we don’t have an active cop on the beat that actively prosecutes. In the case of the US SEC there were 8 prosecutions in 2013, 5 in 2014 and already 2 in 2015.

In his speech Senator Sam Dastyari identified the key problem which is that ASIC does not take responsibility for foreign corrupt practices but leaves it to the Australian Federal Police, whose investigations are not subject to public accountability.

My recommendation is that the Federal Government provide funding for ASIC to establish a dedicated Foreign Corrupt Practices division. This should be part of legislation that gives ASIC responsibility for investigation and prosecution, in cooperation with the AFP, of bribery and corruption.

Congratulations to Senator Sam Dastyari for blowing the whistle on this issue. The upcoming Senate Economics Committee inquiry will provide an opportunity for investors to stand up and demonstrate that bribery and corruption is a material issue.


SEC Enforcement on Foreign Corrupt Practices Act

Association of Superannuation Funds of Australia
Development of Australia’s Capital Markets