The next phase of Australia's superannuation system is upon us. Until now, superannuation funds, as well as policy, have concentrated on the accumulation phase: mandating 9 per cent or more of employee wages into retirement capital nest eggs. But as more Baby Boomers retire and the generation-old system matures, more savers will be interested in maximising the stream of income their nest eggs can provide.
That may require different investments with different risk profiles. In their accumulation phase, Australian superannuation funds have been heavily weighted to the familiar asset class of Australian shares. That needs to be reviewed as superannuation fund assets head toward $3 trillion of Australian savings. At the same time, Australia's banks are being lumbered with post-GFC requirements to hold much more capital against their lending in order to protect depositors. That's making it less profitable for them to lend to business borrowers for fixed terms of more than five years or more. The risk capital rules make it much more profitable for the banks to lend to property.
So it might be, as former Labor prime minister Paul Keating said last week, that Australia needs "another chock" in its financial system, both to provide stable debt capital to mid-sized corporates and to align more with the retirement phase of superannuation. That would come from Australian super funds getting more into corporate debt finance. The discussion was sparked at a Superfunds Round Table last week hosted by Visy executive chairman Anthony Pratt and The Australian Financial Review at the paper manufacturing and recycling tycoon's Sydney apartment. Mr Pratt has built a string of paper mills in the US, financed by such borrowing in the American private placement market through giant insurance companies such as AIG and Metlife. This American industrial expansion has been financed by 25-year Pratt Industries' bonds. Earlier this year, Mr Pratt did something similar in Australia for his Visy Industries by raising $150 million over 10 years from the nation's biggest superannuation fund, AustralianSuper, and IFM Investors.
Finance sector leaders such as Macquarie chief executive Nicholas Moore and JPMorgan Australian chairman Rod Eddington suggested at the round table that such a corporate debt market would enhance Australia's status as a financial centre while making the corporate sector more resilient to shocks. The discussion ruffled only a few feathers between the big banks and the super funds. ANZ's chief executive welcomed the idea as did Westpac Institutional Bank head Lyn Cobley, who helped put together the Visy-AustralianSuper deal. There is plenty of advisory and other work for the banks to do in this space, even if the long-term debt money comes from the super funds' retirement pool.
Treasury secretary and former investment banker John Fraser suggested there were no policy hurdles getting in the way, though Mr Keating pointed to the "stodginess" of the industry super funds he helped create. Others pointed to a chicken and egg challenge of developing a big enough pool of capital here when some corporates can tap the much deeper American corporate debt markets. Super funds would need to develop more expertise in credit analysis before committing to multi-decade loans – perhaps less easy in an era of disruption. While no one called for the explicit tax break given some such debt in the US, the Australian tax system preferences capital into Australian equities (through dividend imputation) and residential property. And super funds must always focus on their over-riding mandate of maximising the retirement income of their members – not so easy in this ultra-low yield world. This may change as interest rates rise. And there are signs of natural change in this direction, albeit from a low base, such as with investment banker John Wylie's new business lending fund that draws from super funds and institutional investors to fill a void left by the banks. Overall, this is something worth encouraging, as Mr Pratt is doing.
The Australian Financial Review
28 November 2017