Libs failed to tame our superannuation leviathan

If Labor wins May’s election, we’ll have well passed the tipping point where government is capable of governing in the public interest when it comes to superannuation.

The Coalition government’s inability to reform the structure of superannuation — from its failure to stop the legislated increase in the compulsory rate to 12 per cent, to tidying up the default system and requiring more independent directors on fund boards — shows how little can be achieved, even when the case for reform is overwhelming.

It’s worth pondering why, more than 25 years after superannuation became compulsory, the allocation of new members to super funds remains a dog’s breakfast for members and a Michelin-star feast for super funds, especially industry funds which benefit so richly from their $30 billion a year flow in default contributions.

Indeed, it beggars belief super remains an offshoot of the industrial relations system. It should have nothing to do with it.

The answer is the extraordinary and growing power of the industry funds, which collectively manage more than $630bn. That’s only a little more than bank-owned retail funds ($590bn), but the latter are without ideological roots and scrupulously donate to both sides of politics.

If the Labor Party was once the political wing of the union movement, it’s more apt today to describe it as the political wing of industry superannuation funds.

As the union movement shrivels, representing an ever smaller share of the workforce, it has inevitably become more beholden to industry funds for support. And it’s a nicer work environment than being an organiser and having to trudge around building sites and factories all day.

Crossbench senators last year were too scared to vote for even modest changes that would have required one third of super fund directors to be independent of employers and union, for fear the industry funds would lend their weight to campaigns against them.

It was hardly a radical idea, stemming from the Cooper review in 2010, commissioned when Bill Shorten was minister for financial services.

Imagine the cacophony if the government had moved to stop the increase in the compulsory rate, or “worse”, establish a no-frills government fund for (the bulk of) people who don’t want to choose their fund?

The Coalition’s so-called Protecting Your Super reforms, legislated last month, are notable for what they didn’t achieve. After all the huffing and puffing, it managed to cap annual fees at 3 per cent of assets per year, and only for low-balance accounts. Three per cent! Anything more than 2 per cent is unconscionable in the extreme, yet that’s apparently fine; and if you have more than $6000 (which is almost everyone), anything goes. Not much protection.

The government is right to be worried about the growth of industry fund power, but it’s too little too late. Treasurer Josh Frydenberg has written to the Australian Prudential Regulation Authority, asking whether it has sufficient powers to ensure trustees were acting in the best interests of their members. If a more powerful APRA is our saviour, we’ve no hope.

Reports that unions are demanding industry super funds use their leverage as shareholders in BHP to force the mining giant to keep 80 seafarers who were meant to lose their jobs are just the beginning of a tectonic shift in corporate behaviour.

The top industry funds are owning a larger and larger share of our major companies. In September last year, industry funds held $143bn of equity in Australian-listed companies, mostly in the biggest companies on the exchange.

The market capitalisation of the top 50 Australian companies yesterday was just more than $1.3 trillion, implying as much as 10 per cent of the biggest listed companies are owned by the top industry funds. That’s more than enough to exert significant sway over boards and company policy.

The recent push by corporate Australia to espouse trendy views on social and environmental ­issues doesn’t arise only from ­desire for sanctimonious posturing among massively overpaid executives, but from the demands of their ultimate owners.

One industry fund alone, Australian Super, the biggest, owns more than 2 per cent of each of the big four banks, plus BHP, CSL, Woolworths and more than 3 per cent of Wesfarmers, according to calculations by The Australian. That’s almost as much as BlackRock, one of the world’s biggest fund managers, which owns about 5 per cent of most Australian companies in the top 200.

This is unique. No comparable country has unleashed a system of large mutual funds with an avowed antipathy to one of the major political parties and a vested interest in keeping a national savings scheme attached to the industrial relations system.

There is nothing wrong, indeed everything right, with individual shareholders taking a moral stance on the behaviour of the company in which they have interest. But when decisions are being taken remotely on their behalf, in ways potentially contrary to their economic and political interest, it’s problematic.

Kenneth Hayne recommended superannuation funds be stapled to workers, so unwanted accounts don’t proliferate. Labor says it supports this recommendation but I’d be willing to wager it won’t happen if it wins government.

Such a change would turn off a lucrative tap. Australian Super, the biggest fund in the country by assets and with more than two million members, has announced it will increase administration fees 50 per cent next month to $2.25 a week, an additional $80 million a year to spend on advertising.

Industry funds aren’t evil. I’m in one myself. They have performed consistently better than bank-owned funds through much lower fees. Indeed, their collectivist ethos can be a refreshing antidote to the extreme corporate greed regularly tarted up as “free markets”, which is sapping respect for democratic institutions and business the world over.

Yet any vested interest that becomes too powerful should be kept in check. The Abbot-Turnbull-Morrison government’s failure to reform superannuation will make it ever more difficult for a ­Coalition government to be elected in the future.

As the pool of money in industry funds continues to grow faster than the stock market, the ­Coalition’s traditional supporters in business will increasingly be owned by entities opposed to them.