The CEO of the Association of Superannuation Funds of Australia (ASFA), Dr Martin Fahy told Nest Egg that while large corporate borrowers have a “financial interest” in receiving long-term finance at the cheapest possible interest rates, “this does not mean that super funds should necessarily be the source of cheap finance for corporations”. Mr Fahy’s comments come as the 55th ASFA conference begins in Sydney today.
Continuing, Mr Fahy argued that super funds “need to obtain the best investment returns possible for a given level of risk to maximise the retirement savings of Australians”, while drawing attention to the other issue of liquidity.
“Unless and until there is a relatively large and regularly traded market in Australian corporate bonds, there will be limitations on the extent to which super funds will be able to take up bonds issued in Australia by large corporations.”
Acknowledging that it’s “clearly” important for participants and members of the Australian financial system to discuss significant matters, Mr Fahy added that Australia’s “relatively underdeveloped” corporate bond market is a topic that has come up “a number of times in the past”, including the Murray inquiry into the Australian financial system.
An ASFA discussion paper released in 2012 on the Australian corporate bond market quoted QSuper’s chief investment officer, Brad Holzberger predicting that impetus for super funds to change their exposure to bonds would only happen “slowly and strategically”.
Mr Holzberger said at the time: “I don’t think we see a failure in the corporate bond market. Issuers issue where they see that yields are favourable to them. Super funds buy where we see yields are favourable to us. The single most important thing that will clear a market is yield.
“If we are looking to increase the activity in the corporate bond market, and we have to ask why we would want to do that, then superannuation funds will act if issuers start offering us a better deal.”
Continuing, Mr Holzberger argued that while funds “act through investment managers”, super funds are “very distant” parts of this “lever pulling”.
He explained: “More and more superannuation funds will issue a global debt mandate. Mandates should be written to manage the factor risks; inflation, credit and interest rates.
“The issue is that corporate bonds can fit all of those risk factors. I don’t think there are structural impediments that would preclude managers investing in corporate bonds. The only way to incentivise funds is to offer them a risk-adjusted return, which is in the context of their portfolio a superior investment. We shouldn’t be distorting markets.”
However, according to financial consultant Rice Warner, provided that the assets are appropriate for a fund’s investment strategy while paying a “reasonable” risk-adjusted return, “there is nothing intrinsically wrong with the suggestion” that super could support businesses.
The possibility of the superannuation industry’s growing pool of assets being used to “support other parts of the economy” made headlines last week following the Superfunds round table event in Sydney last week in which former Prime Minister Paul Keating said: "We need another chock in our financial system for the mid-sized companies.”
The Visy and The Australian Financial Review-facilitated event also saw ANZ CEO Shayne Elliott argue there’s a “mutual interest” for super funds to take on a bigger role in corporate financing.
According to Rice Warner’s Greta Cilia: “When mandatory superannuation was legislated 25 years ago it was necessary to set up very strict rules as to what would be allowable within a superannuation fund.
“All superannuation funds, including SMSFs, are subject to the sole purpose test. This simply means that a fund must meet one or more core purposes, namely they must provide retirement and/or death benefits. There are a few ancillary purposes too, such as release of benefits on a member’s hardship or disability.”
However, strict application of the sole purpose test can present difficulty to funds attempting to diversify their services, she said, pointing to the fact that funds are unable to provide banking products as this is outside of their core purpose.
“As the assets of the superannuation industry grow, there will be increased calls to use the assets for other purposes. Provided the investment strategy is not weakened, the funds will continue to broaden their asset classes in much the same way they have done over the last two decades – think of emerging markets, infrastructure and private equity.
“Yet, all superannuation funds want to provide a greater number of services to members, and this is costly. There is an argument to allow beneficial investment in some entities, even if they don’t always provide a full market return to members,” she continued.
“As the superannuation industry expands, these types of investments will grow and trustees will occasionally have the dilemma of non-superannuation businesses failing to provide a satisfactory investment return. If it is still delivering some important member benefits, it will be difficult to divest.”
She said that this was not foreshadowed when the sole purpose act was established and argued that “it is time to consider restructuring these investments”. She suggested that trustees be allowed to maintain reserves of fund assets which can be invested in strategic assets.
“This gives a transparent framework and avoids the conflict of putting capital into assets which might have a lower expected return than other private equity investments.”