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Super funds and infrastructure; ideal bedfellows | by Mark Birrell
Super funds and infrastructure; ideal bedfellows
By Mark Birrell
The synergy between Australia’s $770 billion infrastructure investment task and national retirement savings has been well documented – yet structural changes to the superannuation industry are needed to cultivate sustainably higher levels of investment.
Super funds and infrastructure; ideal bedfellows
Infrastructure investment offers up the longterm, stable returns that superannuation funds are seeking, but policymakers and stakeholders are yet to reach a consensus on the structure and reforms needed to get the most out of the relationship.
Total investment in infrastructure assets by most super funds is quite low. The average Australian fund has allocated just five per cent of its portfolio to infrastructure, compared to around 29 per cent in Australian shares and 11 per cent in fixed interest products.
In aggregate, Australia’s $1300 billion superannuation industry has made overall infrastructure investments of less than $65 billion, according to 2009 research released by Rice Warner. And a substantial proportion of these investments have been made in offshore assets.
It is not surprising that this outcome has been the subject of spirited public debate and analysis. Especially when you consider that infrastructure expenditure has an established link to productivity, job creation and financial prosperity. Conservative estimates show that each dollar put into infrastructure boosts economic activity by around $1.40, which benefits the 60 per cent of Australians who directly contribute to superannuation.
Some leaders of the superannuation sector respond with the argument that these public policy
THIS PAge: Pacific Hydro’s Challicum Hills Wind Farm in Victoria. AustralianSuper, HESTA and other superannuation funds invest in renewable energy companies such as IFM-owned Pacific Hydro.
objectives overlook the core mission of the fund trustees and managers – which is to securely place members’ cash into profitable ventures. It is therefore asserted that while the objectives of investing in the nation’s rail system, airports, hospitals, ports and other critical infrastructure assets are laudable, they are not the main game.
It’s certainly true that the strict obligations on a super fund are to prudently invest for the sole benefit of its members. For this reason, the idea of mandating investments in any particular asset class would be wrong and could lead to perverse outcomes. Each investment should only be made on its merits. But the debate is broader than this.
There are now over 10 years’ experience of successful investments by a range of funds into infrastructure projects and companies. Indeed, the published results of expert managers like AMP Capital Investors, IFM, RREEF, UniSuper and Hastings prove that excellent returns have been gained from investments in social and economic infrastructure across the nation.
It is therefore possible in both theory and practice for funds to act in a manner that maximises the benefits to members, while also contributing fresh superannuation investment into the projects that will meet the nation’s long-term domestic economic objectives.
Australia should aim to exceed current projections that see the value of infrastructure investment by super funds increasing to about $120 billion by 2023. What if funds were to raise their infrastructure allocations to the commonly held upper limits of fund value – for instance to 15 per cent? If they did, a further $240 billion could be made available to the sector over the coming 13 years, amounting to $18 billion per annum that would be available for sound projects.
It seems clear that some measured changes to the structure and outlook of the superannuation industry are needed. Through targeted reforms, local and international superannuation, pension and sovereign wealth funds would likely be encouraged to invest in Australian infrastructure assets.
As many of the barriers faced by Australian super funds are common across the managed fund industry, it is likely that strategies to support greater investment by super funds could equally encourage a broader suite of potential investors into major projects.
Australia has the fourth largest pool of investment
Super funds and infrastructure; ideal bedfellows
funds generally, behind only the United States, Luxembourg and France. And it enjoys access to the fifth-largest pool of super funds, with Rice Warner estimating that the total pool of savings within the Australian superannuation market will reach $3.2 trillion by 2022. Allianz forecasts that Australia’s superannuation will remain the largest pension market in Asia for several years.
If Australia is to bridge the gap between current infrastructure investment and anticipated demand, super funds will need specific encouragement and opportunities to invest in the infrastructure sector.
Policy makers will assist with ‘big picture’ changes that allow the superannuation sector to better match its investment strategies to life cycles – by encouraging superannuation beneficiaries to focus on longevity risks. There is currently an almost exclusive publc focus on accumulation, with little emphasis on the post-retirement phase, when a conservative preservation strategy would be appropriate.
Encouraging a shift toward annuity products becomes a key objective. Funds that offer annuity products will naturally look for the long-term, stable investments that infrastructure can provide. A shift toward annuities would be positive for retirees, because it would help to manage longevity risk and would help match super and infrastructure in a way that Australia has not managed in the past. At present there are very few long-term or lifetime annuity products available for retirees.
Another area requiring focus is the sheer number of small superannuation funds. Experience suggests that some smaller funds have neither the investment flexibility nor scale to successfully undertake new infrastructure transactions; others lack the required skills in terms of specialist investment managers to properly broaden their investment allocations.
Rice Warner estimates that the number of large (non-APRA) funds has decreased from around 800 to 500 in the past three years, with the trend to continue to 2013. Continued consolidation will allow super funds to invest in larger projects, reduce fees and charges to superannuants, and facilitate diversified direct investment portfolios.
For infrastructure to be an active investment class for institutional investors, sufficient skills are required to understand how to align investment and revenue profiles. Superannuation funds need to make a firm commitment to the sector and invest in the in-house expertise needed to properly access the potential that already exists in infrastructure investments.
Of course, direct government support is also crucial. A recent report from the Royal Bank of Scotland estimated that infrastructure spending commitments from governments are ‘flatlining’, with figures showing they declined by around 17 per cent in 2010/11 compared to the previous year. While the fall can, in part, be explained by the planned cessation of stimulus measures in response to the global financial crisis, it’s critical that there is sustained investment.
The onus also falls on governments to deliver a long-term and transparent pipeline of investment opportunities in infrastructure projects. Super funds need to be able to see greenfield projects on the horizon if they are to commit to major projects. Likewise, the funds need to have an expectation of lower transaction costs, otherwise large projects (including PPPs) will be less keenly bid than they should be.
The flow-on effects of change could be significant. A greater investment by Australian super funds would likely spur international pension and sovereign wealth funds to also invest more in Australian infrastructure assets.
There is a sound investment case, but the low allocation shown by many Australian funds proves there is room for improvement.
Australia’s population is expected to reach around 37 million by 2050. The ageing population, coupled with the demands that arise from economic growth, will cause further strain on the country’s public transport, roads, freight and utilities.
New projects and services can be made available to meet these growth requirements, provided government and industry achieve targeted reforms that foster prudent levels of private investment – including from superannuation.
OPPOSITe: 1 Bligh Street in Sydney is one of superannuation company Cbus’ major property investments, and is due for completion in 2011.
Coping with an unCertain future
by peter fagan, Mwh
australia is facing a very real infrastructure challenge: urban development and heightened customer service expectations are requiring utilities and government to upgrade and augment critical infrastructure to satisfy demand. yet, many of those projects cannot be initiated without first dealing with the issue of how to fund about $700 billion for infrastructure programs over the next decade (excluding the current repair bills of another $15 billion nationally). add to that the uncertainty about how to cope with climate change and what some consider to be an associated increase in natural disasters, and the way forward becomes even more complex.
Looking forward, rather than backward
traditional planning and infrastructure standards rely heavily on a combination of historical records and forecast demand based on past experience. recent experiences in Queensland, new South wales, Victoria and northern western australia, however, highlight the need to think and plan more laterally for the future. the more recent earthquakes in Christchurch and north east Japan add further weight to the argument that we must have more resilience in our infrastructure and communities. according to the MWH Critical Infrastructure Report, seven out of 10 australians predict that australia will experience more natural disasters over coming years than the long-term average. 85% of australians believe that climate change is real and almost all advocates (92%) agree that human activity has at least some role. Most (58%) see a strong link between climate change and human activity. 75% of australians believe there is a link between climate change and the frequency and severity of natural disasters (25% a large impact, 50% a small impact).
Climate change demands an approach that allows infrastructure and communities to cope with and recover from natural disasters more quickly and effectively. while infrastructure and communities cannot be made invulnerable, they can be made much more resilient. building infrastructure that can better withstand significant events is important; however resilience and the ability to recover quickly and easily is perhaps even more so. resilience may mean the updating of australian Standards to mitigate future damage and allow ‘business as usual’ to be resumed more rapidly. an example would be requiring masonry construction for the ground floor of buildings in flood-prone areas. the MWH Critical Infrastructure Report identified that a staggering 98% of australians believe our government should be spending money to make our infrastructure better able to cope with natural disasters. 66% could see the benefit of decentralising our critical infrastructure so an entire system is not shut down when impacted by an event as was the case earlier this year in Christchurch when the city was without water and sanitation for days on end.
in rural and more remote areas where isolation can slow the flow of building materials or labour, distributed infrastructure makes these communities more able to deal with recovery issues locally. also critical is the need to build resilience into our communities. the development of volunteer service organisations and local disaster plans is an example and one that has been proved to be effective in bushfire prone parts of the country. beyond that, there is a case for the establishment of a national natural Disaster relief fund, as is the case for the new Zealand and Japan recovery efforts.
Some argue that the cost associated with building resilience into our infrastructure and communities is prohibitive, but when a whole-oflife assessment that considers the likely increase in size and frequency of weather events is conducted, it shows that such an approach is actually more economic in the long run. this is particularly the case if the cost of disruption and repair is factored in.
Funding the future
the current political landscape interferes with a rational debate of how to fund forward-thinking infrastructure initiatives. our tax base across australia is shrinking, hence the interest in taxes on mining and big business. these debates, like the infrastructure discussion, are issue-specific in that the cash that would be raised by one option or the other is quarantined to a particular outcome. Consequently, we are still left unable to fund infrastructure and the needs of the nation. in short, the debate that is needed is not being had. Currently, we debate ‘this project versus that project’, we debate what we can afford based on minority input into critical national decisions and we never really discuss how to fund the whole of what we require. we must begin to look at how to deliver value to each project, and to our communities, as opposed to just how to pay for things on a one-off basis. the nation must begin that debate now if we are to cope with the uncertainty of both population growth and climate change.
Peter Fagan is the Asia Pacific Practice Leader, Sustainability for MWH, a global engineering, construction, technology and consulting company. For more information, please contact him at Peter.Fagan@mwhglobal.com.
Peter Fagan
