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Call for further consolidation in Australia's super funds sector [updated]

An Australian politician has called for the creation of a single agency to oversee the investment of the country’s superannuation funds.

Former Australian treasurer Peter Costello, who is now chairman of Australia’s Future Fund, said so-called super funds – which manage more than AUD2.3trn (€1.52trn) – should be run by a central government agency.

Currently, the assets are managed by industry super funds, which are not-for-profit, as well as funds run by for-profit organisations – mostly large commercial banks. There is also a growing number of self-managed super funds.

Costello, speaking in a personal capacity at a conference of superannuation managers in Melbourne, urged the government to “show some interest in managing [super funds] in a cost-efficient way”.

He cited the Canada Pension Plan as a good model of how a government agency was able to drive the investment of national pension savings.

The national pension pool of Canada, a country that shares many similarities with Australia, is managed and invested by a government body, the Canadian Pension Plan Investment Board (CPPIB), he said. 

“CPPIB currently has C$300bn [€203bn] in investments. It has economies of scale. It is extremely active in Australia. It would be one of the most respected investors in the world,” Costello said.

CPPIB was an example of how a long-term sovereign fund investing defined contributions could get global reach and valuable diversification in asset class and geography, he added.

Costello’s comments coincide with discussions about consolidation of pension funds in several other countries, especially the UK – where public sector pensions are actively pooling investments – and the Netherlands.

According to Costello, such a body should be a not-for-profit agency, which could then either set up its own CPPIB-like investment board or contract out the management.

“A bigger pool with economies of scale and access to the best managers would likely drive down costs and drive up returns,” Costello said. “There would be huge economies of scale.”

Costello also criticised the efficiency of compulsory superannuation, a system established 25 years ago, which now requires 9.5% of workers’ earnings to be diverted into private accounts. The system was a direct influence in the UK when the government set up its auto-enrolment programme.

“This is not a system still in infancy. We are now starting to get people who have spent nearly their whole working lives in it,” said Costello. “On average (male and female) the balance is AUD137,144. That balance is worth less than the value of six years of age pension.”

Australia’s superannuation system “has certainly delivered benefits for those working in it – but it does not exist for them”, he continued. “It exists for those who are forfeiting wages month in and month out in the expectation that in 10, 20, 30, 40 years, they will get to enjoy the fruits of their labour.”

Note: This article has been updated to clarify that Costello’s remarks were in regard to a government agency running super funds’ assets, not full mergers between schemes; and to include not-for-profit funds in the description of the super funds industry.

 

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