Industry super funds an elemental threat to Liberal Party

The Liberal Party’s view of Australian capitalism — the model it has known all its days — is facing a death sentence.

Garry Weaven, regarded as the ‘godfather’ of superannuation, has warned the Liberal Party must change its view of the super industry.

The Liberal Party’s view of Australian capitalism — the model it has known all its days — is facing a death sentence as the industry super funds emerge as winners in the market and in politics and are flexing their investment muscles in the cause of a more progressive capitalism.

In an exclusive interview with The Weekend Australian, the recently retired chairman of global funds manager IFM Investors, Garry Weaven, often called the “godfather” of the system, says if the Liberal Party continues its political battle against the funds, it is “on a hiding to nothing given the track record”.

With the industry funds stronger than ever and outmuscling the retail or bank funds in Australia’s $2.7 trillion super system, the message from Weaven is that fund trustees will “take into account” the social, governance and environmental stances of companies in their investment decisions and that this is completely consistent with their legal obligations to fund members.

This is the foundation stone for the nation’s new capitalism. It will drive the Liberal Party either into the margins or force the re-creation of its outlook towards finance, corporates and super.

“Today knowledge is global and is disseminated more quickly than ever before,” Weaven says. Investment decisions will increasingly be shaped by global markets and “world events, science and knowledge”, which means domestic groups locked into the old “right-wing reaction mode” will get caught when people and investors “just desert them”.

The Liberals, in short, are losing the battle in their corporate heartland. This process is driven by the industry super funds, whose origins lie in the 1980s industrial relations system. Weaven defends the ongoing nexus between the industry funds and the industrial relations system — the link the Productivity Commission recommended be broken — but this has become a battle the Morrison government will not fight because it would lose. Weaven says the Liberals need to “accept the reality” that the industry super funds model is entrenched and here to stay.

While not backing divestment as a preferred approach Weaven, asked how far away are superannuation fund decisions to divest from coal, replies: “I don’t think it’s too far.”

He adds: “If the Liberals or Nationals or anyone else ties themselves to the coal or other environmentally questionable lobby groups they are going to be very sorry.”

The industry funds have emerged stronger from the Hayne royal commission and the six-year period of Coalition government, which brought some reforms of the super system but failed utterly in any dismantling of the industry fund model. The Liberals have been trapped — hostile towards a system they see as serving trade union power yet unable to devise any alternative. Now it is too late. They have been strategically outsmarted on a massive scale.

“The criteria for trustees should be long-term returns on members’ money; that is, what goes into members’ superannuation accounts in the long term,” Weaven says. “But trustees would be very foolish to use the blinkered view of traditional analysis and the incredibly short-term focus they apply. Trustees should certainly consider the social and governance issues of companies and the environmental issues. They should most certainly take those into account.”

Taking the example of climate change investment strategies, he says: “I keep saying about the renewable energy debate, it’s all right to say we’ve got this problem, that if we move too early we’ll underperform by being too negative, but when these markets move they can go to panic very quickly and you can lose everything.

“So I can’t predict the day. If I could, everyone would be paying me hundreds of millions of dollars for advice. But companies need to build in contingency plans.”

Referring to coal giant Glencore’s recent decision to cap coal production in the teeth of strong investor lobbying pressure, Weaven says: “If you look at the forecasts for how much more fossil fuel can be burnt without absolute disaster, what you find is all of these companies whose assets are still in the ground have got a real revaluation coming — downwards.

“And then you start to say, ‘Hang on, you’ve got these in current today price values … some of those assets are not going to be worth anything because you’re never going to be able to mine them’. So these issues need to be discussed with the companies and company boards.

“And if the boards have got smart people then they think through the issue and take an appropriate position. I think that’s good. Dialogue and engagement is not a bad thing, ever.

“I think divestment is usually less successful.”

Here is the model in action explained. Some companies will need dialogue; others are ­already moving towards the economic, social and governance requirements that industry funds believe is essential in the long-term financial interests of their members. It is akin to a modern social democratic view of capitalism. Weaven does not rule out ­divestment decisions being taken by the funds but says this should be reserved to “where you’re trying to get a big public policy point across”.

Weaven’s role has been fundamental in the story of the industry funds. Working for the ACTU in the 1980s he ran the initial “on the ground” campaign for 3 per cent super under the authority of ACTU secretary Bill Kelty, a campaign hated by the Liberals. He was instrumental in designing the early funds and was pivotal in bringing the employers into the system as equal representatives with the unions. Ever since, Weaven has played a critical role in the growth of the funds.

He debunks the popular notion that industry super funds will be used to advance trade union industrial goals against employers. Weaven says this misses the point entirely. He says the “representative trustee model” with equal ­directors from the unions and employers is the core reason the ­industry funds have outperformed the retail or bank funds.

“The Liberals need to accept reality here,” Weaven says. “If they have differences with unions then have those differences outside the superannuation arena. Because if they keep attacking a system that is actually successful then, sooner or later, even the employers in the system are going to say, ‘We’ve had enough of this’. Every time the Liberals attack the system they insult the major employer organisations, all of them.”

The beauty of the industry funds’ position is that the law of the land specifies the current 9.5 per cent contribution rate will rise incrementally and automatically to 12 per cent by 2025 and the legacy of the Coalition’s royal commission has been to weaken the retail funds. The framework is set on a retirement policy for workers and an investment policy for corporates.

Quizzed about the recent push by ACTU president Michele O’Neil, an alternative director of AustralianSuper, to get industry funds to intervene in an industrial dispute with BHP and take investment decisions on industrial ­issues, Weaven offers a dual response: there was “no evidence whatsoever” that boards would get involved “in a specific day-to-day industrial issue” but this was separate from the need for trustees to take broader social and ­labour issues into account in their investment decisions.

Weaven seeks to hose down an explosive situation while defending the ACTU. He endorses O’Neil’s remarks that moneys in industry superannuation funds are workers’ money. “I don’t know whose else it is,” Weaven says. “It belongs to the fund members, be they current workers or retirees. It belongs to them under trustee law. But the question is: how are their interests being preserved?”

Weaven attacks Treasurer Josh Frydenberg, who referred to regulator, the Australian Prudential Regulation Authority, O’Neil’s letter to 30 industry funds seeking their “active support” to pressure BHP to save the jobs of local seafarers after the expiry of a contract. He defends O’Neil, saying: “She’s got certain constituent unions who say, ‘We’ve got this issue — and we want to use every means we can’. And good luck to them. But that’s with the union hat on. When they come into the trustee board, they wear a trustee hat and are covered by trustee law.”

The trouble is the walls of separation are thin. AustralianSuper chair Health Ridout went public saying O’Neil “can do a lot of stuff as president of the ACTU” but could not raise the issue as a trustee of the fund. Ridout said the fund was alert to conflicts of interest. The message from Weaven and Ridout highlights their determination to honour trustee obligations to act only in member interests.

Yet Frydenberg’s alarm was justified. It is one thing to talk about separate hats for unionists but when the head of the ACTU launches a campaign appealing to industry funds to intervene, the crucial question becomes: exactly how broad is the interpretation of member financial interests?

Weaven says funds are entitled to address issues including labour relations such as worker exploitation and industrial relations law and should be cognisant that “modern slavery is an issue around the world”. He says companies that breach IR laws “might find their value falls off a cliff”, hence the relevance of labour issues to investment returns and member financial interests. This is a door on which the ACTU will continue to push.

The Abbott-Turnbull-Morrison government will be seen historically as the final lost chance for the Coalition to restructure the super system. The message from any incoming Shorten government is already clear — it will clean up the underperforming funds but repudiate the main thrust of the recent Productivity Commission report to tackle core structural changes.

Weaven’s thesis for the superior performance of the industry over retail funds is the former “were not serving two masters” — members and profits. His task at the inception of the system was “to ultimately persuade the employer groups to come on board”.

“What has been proven over time is the industry funds model,” Weaven says, referring to equal union and employer directors. “The people who got on board at the start were deeply conscious of the need to do well — to get good performance for members at low cost. Remember to that time occupational super was company-based, corporate-based and very inefficient.”

He says there is “a two-thirds voting rule on trusts’ boards ­almost universally” — another safeguard. “I believe I invented the two-thirds rule,” Weaven says. “I invented it as a direct response to a series of negotiations with building industry employers. They were petrified, not without some cause, that the funds might be used in an industrial context to put pressure on employers over individual issues.

“That was never what we had in mind. Even the militant unions never had that in mind. They wanted to get a savings nest egg; that was the objective. So we made that concession. Some people said it would cause lots of problems but in fact it’s been a hallmark of success. It has forced people into a consensual position.”

Weaven is scathing of reformers seeking sweeping changes to the system, from the Productivity Commission to Liberals such as Kelly O’Dwyer and Peter Costello. He rejects the floated Costello model for a monopoly government-controlled fund to manage the default sector (for the two-thirds of workers who decline to choose a fund). “Who would really support that?” he asks, knowing the Morrison government will not. Contrary to critics, Weaven sees the tie between the super and IR systems as pivotal to the success of the industry funds model. He asks: “Why disrupt what is regarded by independent authorities as one of the leading systems in the world?”

Quizzed about the Productivity Commission report, he concedes reforms are necessary — chronically underperforming funds must “either amalgamate or go away”. But he says default sector arrangement can be managed by Fair Work Australia, the option rejected by the Productivity Commission. “People keep overlooking the importance of the motivation of the trustees,” he says. “It is difficult to measure but I have no doubt it is the underlying issue. To move away from the representative trustee model (unions and employers) is almost throwing out the baby with the bath­water. The question is: where’s the evidence that, if you drew on the big four accounting firms for your trustee base, that this would be a good or better result? Or if you drew upon the Institute of Company Directors?

“There is no evidence that any of these bodies would be a better source of directors than our current mixture of union and employer representatives and other experts as required.”

Weaven repudiates the ACTU demand for retail funds to be driven from the superannuation industry. He backs competition. He says the union demand is unnecessary because the “sole criteria” for a licence should be member performance. Provided this is policed, there is no need to outlaw the retail funds.

He also repudiates the lethal claim lodged by a number of Liberals — that the industry super funds are channelling moneys to the union movement and are instrumental in their rising financial power. “This fear is not justified,” he says. “I mean, the recent royal commission had reams and reams of material about all of the costs of the funds. They have and still have all the material relating to marketing costs, administrative costs, right down to the fine details and expense accounts. They had it all — yet they found nothing they really wanted to comment about.”

If Weaven’s analysis is vindicated, the operation of capital markets will be turned against Liberal Party values or those values will need to change with vast consequences for the conservative wing of the Coalition. The irony is that the employers, supposedly the foundation of Liberal support, are tied to the unions in a system that originates with Paul Keating and Kelty. Asked about the future of the trade union movement, Weaven says its numbers will keep declining. The new model, in effect, was devised by Greg Combet when running the ACTU — that of a public policy advocacy voice now followed by Sally McManus in a more strident way.

But Weaven says the unions need to innovate: “I can’t help but think there could be a need for a much more basic union service for a much lower fee.” The service would be rudimentary: ensuring you got paid the right amount, worked the right hours and had the law enforced in redundancy. “I think I might have a crack at that if I was in the current leadership.”

Would the CFMEU be a threat to Bill Shorten as PM? “Potentially they can be a problem for Shorten because they still have substantial organising capacity and substantial militancy,” Weaven says.