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Gareth Hutchens: Super future for union-dominated industry funds

Are we reaching that moment in history when the union movement can start achieving its dreams without union members?

Think about this.

Australian workers are forced by law to watch a sizeable chunk of their yearly wage — 9.5 per cent — go into compulsory superannuation. It is designed to help workers save for their retirement (by force).

Since the compulsory savings system was introduced in the early 1990s, the value of its assets has grown wildly — it’s now worth $2.7 trillion. And as that pool grows, so does the power of the super funds managing it.

But here’s where it gets interesting.

There are hundreds of superannuation funds whose job it is to expand the pool of savings by investing it in things like companies and infrastructure.

And there are two specific types of super funds that we need to know about.

One type is called an “industry” fund (originally set up to manage the savings of workers from specific industries). Industry funds have no shareholders. They are not-for-profit. Many are union-based. Any profits are returned to their members. There are 38 of them.

Another type of super fund is called a “retail” fund. Retail funds are managed by financial institutions, such as major banks and insurance companies, and the profits they generate are distributed to their shareholders. There are 116 of them.

In June last year, something remarkable happened.

For the first time in Australia’s history, the value of assets controlled by industry funds exceeded the value of assets held by retail funds: $632 billion to $622 billion.

And they’ve stayed in the lead since.

The switch occurred for a number of reasons, mostly due to the investing strategies used by industry funds.

But the banking royal commission also helped. Revelations of appalling behaviour by retail funds — like their habit of charging customers fees for services that never materialised — left the sector’s reputation in ruins.

By the time the commission’s final report was released last month, Australians had withdrawn almost $11 billion from retail funds and put them into industry super funds.

It was one of the ironies of the royal commission — the Turnbull government had insisted the terms of reference include superannuation, because it was confident industry funds would cop a drubbing, but the hearings ended up convincing Australians to pull billions of dollars out of retail funds and put them into industry funds, making industry funds more powerful.

Which takes us back to the beginning.

Are we witnessing the moment in history where the union movement can start achieving its ambitions without needing union members?

By that I mean, will there be any need for union members in future if industry funds, many of which have unionists on their boards, have the financial power to compel publicly listed companies to improve their working conditions, or divest from fossil fuels, or pursue business strategies that align with workers’ interests?

The short answer is: yes, of course the union movement will still need members, but its goals will be far easier to achieve if its interests happen to align with the interests of industry funds. It’s a phenomenon the conservative side of politics has long feared (the economist Peter Drucker was writing in the 1970s about the growing political power of pension funds in the US).

How does one define what the ‘best interest’ of a super fund member is?

So this week, with the Federal election barely two months away, Treasurer Josh Frydenberg fired a shot in the air.

He warned that industry funds are trying to advance the political objectives of militant unions, and he wants voters to know about it.

He asked the financial regulator if it had the “appropriate powers” to prevent super trustees pursuing the political goals of unions above members’ best interests.

“This is a dangerous development and could potentially undermine the integrity of our $2.7 trillion superannuation system,” Mr Frydenberg told The Australian newspaper.

“Superannuation is not a plaything for union bosses nor a platform for pushing their industrial relations agenda.”

But here’s where things get interesting. How does one define what the “best interest” of a super fund member is?

According to the theory of the “Universal Owner,” popularised by the economist James Hawley, with the rise of powerful super funds owning huge stakes in large corporations, the traditional idea of what constitutes a member’s “best interest” will have to change anyway.

If industry super funds get to the point where they’re so big, with such long-term investment strategies, with a portfolio so large and diversified that they can’t help investing in some badly performing companies across different parts of the economy, then they’ll have a duty to fix those badly performing companies from the inside, because it will be in the best interests of their beneficiaries.

Hawley called it “fiduciary capitalism”. He said super funds (pension funds in the US) with such big investments had a “quasi-public” interest in the long-term health and wellbeing of society at large.

As super funds continue to grow, it’s an issue that will have to be confronted.

Sam Sicilia, chief investment officer of Hostplus (one of the top performing industry super funds), has already been talking about it. Sicilia told the Australian Financial Review last year that the growth of industry funds was great for Australia’s economy, and it could see funds taking much bigger direct stakes in companies.

He then imagined a world where super funds and sovereign wealth funds eventually own most companies and assets.

“There will be a day, not necessarily in your lifetime or mine, but in our children or grandchildren’s lifetime that the combination of pension funds and sovereign wealth funds around the world will end up owning the planet,” he said.

Gareth Hutchens is The West’s Economics Editor

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