Guest Blog: No SWF for Australia, superannuation instead?

Angela Cummine

In case you missed the escalating back and forth of the SWF debate down under these past few months, it reached a crescendo last week. On Wednesday, Australia had the dubious honour of becoming one of the few countries in the world to rule out establishing a SWF, at a time when more countries than ever have established or are considering the creation of these vehicles.  It is particularly surprising given Australia’s abundant seed capital for an SWF from unprecedented resource windfalls reaped during the most sustained mining boom in the country’s history. Mining industry revenue grew from $43 billion in 1999-2000 to an estimated $195bn last financial year. Australia’s terms of trade are 60 per cent above the average for the 20th century, seen by some experts as part of a ‘sustained shift’ rather than temporary appreciation in the exchange rate.

The announcement is not surprising given both the Prime Minister and Treasurer’s persistent rejection of a sovereign fund proposal.  But in recent months, the government has came under increasing pressure from Business Leaders, Economists and key opposition members to capture a share of the country’s historic resource profits.

What was surprising however, was the basis for the Prime Minister’s opposition to the idea.  After many months, the Australian public was finally given a formal explanation, at least an attempt at one, for the government’s SWF skepticism. Essentially, the Prime Minister believes Australia already has a sovereign wealth fund in the form of their AU$1.4 trillion superannuation industry.

Labour has hinted at this idea before. Treasurer Wayne Swan in particular has argued that mining boom proceeds should be used to increase everyone’s superannuation from 9 – 12%, rather than setting up an SWF, suggesting that this is tantamount to investing in millions of individual SWFs. Avid readers of this blog will recall Ashby’s compelling critique of the conflation between superannuation savings and a national-level savings vehicle for future generations.

But this was the first time the Prime Minister tried to elaborate how the private retirement savings of individual Australians could substitute for and alleviate the need for a sovereign fund.  Essentially, the Prime Minister’s argument boiled down to three ideas, each of which confirm the ongoing conceptual confusion about the fund management industry suffered by those at the helm of political power in Australia.

‘The biggest surprise of the talk was the claim that Australia does not need a collective savings fund since our superannuation savings already provide the country with a ‘trillion-dollar sovereign wealth fund’. This argument completely misconstrues the idea of superannuation, wrongly conflating it with the fundamentally different vehicle of a sovereign fund, a point on which Opposition member Malcolm Turnbull has previously attacked the government. Turnbull correctly pointed out the inability of superannuation savings to offer the stabilization or wealth creation role of an SWF, since private super savings tend to be offset by falls in other areas of private savings. In contrast, an SWF offers a means for turning temporary windfalls into permanent public savings allowing for smoothed consumption over time or future investment. Functionally, superannuation as private savings is totally distinct from public savings in an SWF.

In case some readers are unfamiliar with the term superannuation, it is just the Australian word for compulsory private pension savings funded by employers. While during our working lives these funds may be pooled with others retirement savings and invested collectively by fund managers, at no point is this capital anything other than the asset of the individual in whose name contributions are made.  The fiduciary must manage these assets solely for the benefit of that individual.  In other words, super is money that belongs to individuals, not Australia as a nation, as the Prime Minister implies.

The idea that the super industry could substitute for the government’s responsibility to save for the nation as a collective not only shifts the buck, literally, from government to individual, but far stranger, it echoes Margaret Thatcher’s infamous statement ‘there is no such thing as society, only individuals and families.’

The next argument was that Australia does not want a sovereign fund because it would be centrally managed ‘by a Canberra-appointed manager’.  Instead, we have superannuation ‘privately managed by thousands of trustees’.  But this argument strikes one as strange given the exemplary governance arrangements of Australia’s existing SWF, the Future Fund, a AU$70 billion pool of reserve pension assets managed by an independent Board of Guardians.  Yes, the Board is Canberra appointed, but the Fund is not centrally managed. On the contrary, the Future Fund has considerable autonomy from Canberra protected through a series of provisions that quarantine it from political influence: exclusion of government representatives on the Board, no restrictions in mandate, and the requirement that fund expenses come from the fund, not a Budget appropriation liable to politicization.

But Canberra still retains discretion over the purpose of the fund and has ultimate oversight of its activities – no bad thing if you believe that transparency and accountability in the management of public wealth empowers citizens, which the the Government, with its left-of-centre philosophy, should.

The final kicker was the Prime Minister’s economic logic.  The idea that Australia’s super industry provides an ‘anchor’ in ‘rocky international seas’, fostering ‘liquidity and stability’ is a stretch when we recall the recent perils of the US economy.  The US is the world’s largest fund management industry with US$36 trillion in assets under management, but that did not prevent the US losing its AAA credit rating status for the first time ever last month.  That’s because there is a difference between the people’s accounts and the government’s accounts. A flush funds management industry does not let the government off the hook in terms of its own fiscal management responsibilities.

In short, the idea of shifting risk to individuals and shirking government responsibility for long-term savings by substituting superannuation for a sovereign wealth fund is one massive missed opportunity for Australia and one scary indictment of the massive confusion regarding the funds management industry that exists at the top of the Australian Government.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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