As a general rule, financial advisors tell their clients to diversify their investments, as much in the interest of managing risk as for optimising returns. But there might be a new conversation relating to the issue of ownership concentration in Australia;s listed companies thanks to the inexorable rise of the nation’s superannuation funds.
Recent projections by industry analysts, Rainmaker Information* suggest that Australia’s superannuation funds, fuelled by mandatory contributions of 9.5% or more of the national payroll, could own more than half of the entire value of the Australian share market by 2030.
This projection is underscored by trend data showing that the proportion of the share market owned by super funds has risen over the past decade from $279 billion to $650 billion at the end of 2018.
Discussion of this level of ownership by super funds would be less interesting were it not for recent debate about what this might mean for shareholder activism. Far from being passive investors, the Australian superannuation is becoming more inclined to use its financial clout to influence corporate strategy and governance.
Australia’s profit-to-member industry funds have been most prominent in actively lobbying for change within the companies in which they invest, either in their own right, or through their lobby group and proxy service provider, the Australian Council of Superannuation Investors (ACSI) and/or their investment arm, Industry Funds Management (IFM).
The Australian Council of Trade Unions (ACTU) was reported recently as lobbying the industry funds movement, in which it is a major stakeholder and holds board seats, to use their shareholder influence on BHP and Bluescope to save jobs^. The Chair of the $150 billion Australian Super, Heather Ridout, responded by ruling out any moves to elbow into industrial relations matters and said the Australian Government was concerned about the growing influence of industry super funds.
The subtext of her remark was clearly that the government’s concern could translate into intervention to curb this influence, at a time when recommendations are before it from the Productivity Commission on the future model for default super funds in workplaces.
Default fund status continues to be the primary driver for growth in fund membership through employers and has been the river of gold upon which the Australian superannuation industry has evolved to be one of the most admired retirement savings schemes in the world. Industry funds have been the prime beneficiaries.
Hot button issues of recent times some funds, either collectively or in their own right, have included climate change risk, policies and practices, gender diversity on boards and executive, and activism relating to the treatment and management of refugees in Nauru. Modern slavery is an emerging agenda item.
The challenge for the local share market is not the scope or selection of issues, but the desirability of having a single sector, or prominent subset of it, dominating the priorities and corporate agenda of the companies in which they invest, while at the same time running the risk of politicising it.
In the highly concentrated make-up of the Australian share market, this includes the capacity to seek influence in the boardrooms of the nation’s four major banks, themselves competitors to the industry funds, both for corporate superannuation business and as political lobbyists and major economic influencers of government.
As we saw at the recent federal election, while Australians are concerned about some of these environmental and social issues, they are not at the top of the reform checklist for many, no matter what the intellectual justification for them. Cost of living, taxation, energy prices, access to affordable housing, health and education were the predominant community issues that swung the vote away from the Labor Party’s progressive agenda.
Thanks to the mandatory superannuation system to which all working Australians and many retirees belong, this same community will demand that their super funds prioritise their fiduciary responsibilities to deliver the best possible investment returns to promote financial security in retirement.
As respected and trusted custodians of retirement savings, keeping corporate Australia honest on these issues is a valid role for funds acting in the best interests of their members. But activism also walks a political tightrope in the world of superannuation and funds need to remain vigilant against the same overreach that killed off Labor’s chances to taking government in May this year.