The super future

Superannuation funds need to be better managed, and they also need to adapt to the economic consequences of climate change.

Superannuation has been topical in the last couple of weeks.

First, the Opposition has proposed that super tax concessions be reduced to raise some $14 billion to improve the budget bottom line over the next 10 years.

This has focused attention on the extent to which these concessions are heavily skewed in favour of the wealthy, and that they total almost as much as the age pension (around $40 billion per year), but are increasing faster.

It has also been noted that the compulsory super scheme isn’t really achieving its objectives of ensuring workers an independent, financially secure retirement, not needing the aged pension – indeed, longer-term projections suggest that roughly the same percentage of the aged will still be receiving a government funded pension by 2050 as they do now.

It has also highlighted that average workers are being further discriminated against as their compulsory super is calculated off their award wage, rather than their often, higher actual wage, producing a mounting gap between what they think they are getting, and what they will actually receive.

This is a very real issue for the unions, as are the rising concern about the poor governance and mis-management of union super funds.

Second, the Reserve Bank Governor, Glenn Stevens, warned that retirees are being pushed into increasingly risky investments to provide adequate income, in a world of low bank and bond interest rates.

Much of the strength of stock markets has been underwritten by a flood of liquidity keeping interest rates low. But a move back to higher rates, as being threatened in the US right now, could see significant corrections in stock and bond markets.

This situation for retirees is also compounded by evidence of rising financial misconduct, and sometimes, poor advice, where financial planners can push people into investments for their own rewards, against the best interests of their clients. This has also focused attention on excessive fees for such advice.

Finally, The Asset Owners Disclosure Project, which I chair, released its third Index of how the world’s top 500 superannuation, sovereign wealth and insurance funds manage climate risks, and highlights the extent to which these funds are still investing in climate exposed industries.

Australia’s Local Government Super came top of the worldwide Index, but it was one of just nine that received a AAA rating, that also included Australian Super, our biggest superannuation manager.

Other Australian funds, such as Telstra Super, the Retail Employees Super Trust, and our Future Fund, scored D or X ratings for lack of transparency or attention.

Overall, while there has been some improvement, these 500 funds are generally responding very poorly to the risk of a climate-induced financial crisis.

This crisis may occur due to climate events, or government policies in response to climate change, or rapid technological improvements, or some combination of these, that impacts negatively on the value of the funds’ investments, and related infrastructure, essentially stranding the value of their assets.

For example, coal prices have halved, and the value of the shares in coal companies has fallen by some 80-90 per cent over the last year.

These 500 funds, with assets in excess of US$40 trillion, invest some 55 per cent of those assets in climate-exposed industries, and less than two per cent in low carbon investments, such as renewables, energy efficiency and alternative technologies.

That is a 55-2 punt against a climate-induced Global Financial Crisis (GFC); a punt that dwarfs the risks taken in the sub-prime crisis that led to the recent GFC.

I am sure, as evidenced by recent surveys, most retirees and workers would be appalled to know that such risks were being taken with their superannuation.

Watch this space. Much is to change in relation to superannuation.