Australia's pension fund perversion


Gunns pulp millThe demise of Gunns, Tasmania's biggest paper and pulp mill, has been greeted as a triumph of environmentalists over business. The saga encompasses much more than that. It poses some deep questions about ownership and accountability in Australia's financial system which are yet to be answered persuasively.

One of the intriguing aspects of the campaign against Gunns is that it was not just waged against the managers of the company and the board. Pressure was also brought to bear on the fund managers who were investing superannuants' money to fund the company. The tactic is unusual. There have been some instances when lobbyists have targeted the funds industry — the failed campaign to stop Campbell Soup from taking over Arnotts in 1997 was one instance — but for the most part it is rare.

This is surprising, because when managers and directors of public companies say they are 'answerable to shareholders' they usually mean they are answerable to the fund managers who invest on superannuants' behalf. Australia's superannuation savings are about $1.4 trillion, more than the value of the Australian stock market. This means that the largest blocks of capital are in the hands of those who administer the superannuation funds.

Speaking on ABC Radio, Alec Marr, general manager of Triabunna Investments, which owns Tasmania's largest pulp mill, and former executive director of the Wilderness Society, was scathing of the investment community.

The bulk of this money came from people's superannuation funds handed over by imbeciles in the investment community. I say that calculatedly because I and others sat down in front of the CEOs and argued with their fund managers that they should not pour hundreds of millions of dollars of other people's money into this company, and they did it anyway. And despite repeated massive losses they just kept pouring money in. It was just crazy.

The fund managers to which Marr refers could no doubt defend their decisions by saying that it is impossible to predict the future with total certainty. They would have a point — it is easy to highlight failure after the fact. But Marr is drawing attention to a vexed issue in Australia's financial structures. The workers literally own much of Australia's industry base. Trouble is, they have next to no say in how that ownership is applied.

A glance at figures from the Australian Prudential Regulatory Authority exemplifies the point. Australia's richest person, and for a time the world's richest woman, Gina Rinehart, is the only individual whose personal wealth can compete with the superannuation funds. Rinehart's wealth is somewhere between $20–30 billion, depending on the iron ore price. The top three superannuation funds control well over $100 billion. The other billionaires in Australia, whose individual net wealth is less than half Rinehart's, are minnows by comparison.

Management writer Peter Drucker described this phenomenon as 'pension fund socialism', and it does have a slightly Marxist flavour: the workers owning the means of production, as it were. Australia is well down this quasi-socialist path; it has the third largest pool of superannuation capital in the world.

According to the research firm International Financial Services, pension funds globally manage more than $US25 trillion, which puts Australia's superannuation fund pool at about 5 per cent of the global total. Australia's superannuation is about one third of the size of the world's sovereign wealth funds.

The problem, as Marr implied, is that the true owners — the workers who contribute a portion of their wages each week into superannuation — have little power over what happens to their money. Unless, that is, they establish their own self managed super fund.

The result is often perverse. Ownership, and therefore wealth, may be distributed widely, but it has tended to lead to the creation of an unaccountable elite: senior managers and boards of public companies and fund managers in superannuation funds, whose activities remain largely hidden. This, too, has a slightly Marxist flavour, an elite that professes to be accountable to a community of owners, yet which acts mostly for itself.

The conundrum is known in management circles as the agency problem. How can structures be created to make the agents (managers) accountable to the owners (shareholders)? Adam Smith famously described it in The Wealth of Nations:

The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own ... Negligence and profusion ... must always prevail, more or less, in the management of the affairs of such a company.

Smith was gloriously incorrect about the joint stock company; it became the cornerstone of capitalism. But his observation that those who watch over other people's money tend to be less vigilant than they are with their own money remains perspicacious.

It is an intractable problem that cannot be solved with financial trickery, such as giving executives bonuses (which are designed to make them owners as well as agents). The recklessness of senior management in the lead up to the global financial crisis was clear enough evidence that such innovation with incentives easily creates the exact opposite result to that intended.

In the final analysis it is a question of character. How much consideration do those who administer money or companies that they do not own, have for those who entrust them (wittingly or unwittingly) with their money?

No amount of tampering with executive reward systems can substitute for simple prudence and responsibility. Not least because incentive trickery (bonuses and the like) makes the gloomy assumption that managers and directors will only ever act in their own selfish interest, so it is necessary to exploit such selfishness to get a good result for the owners.

In 2008, an ashen faced Alan Greenspan, former head of the US Federal Reserve, acknowledged to Congress that the GFC demonstrated that the 'self-interest-as-greater-good' model was hopelessly flawed. All it produced was, well, selfishness. Something better is required, especially when it involves other people's money.

As the Gunns saga has demonstrated, finding better ways to hold financiers to account is an imperative in the Australian financial system.

David JamesDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University. 

Topic tags: David James, Gunns, superannuation



submit a comment

Existing comments

I am just about to retrieve my meagre super from an industry fund that has managed to reduce my overall wealth over the last three or so years in a manner that I could never have even dreamed of doing, were I allowed to control my own investments. In fact, having put my budgie sized nest egg into cash deposits last year, lest it vanished altogether, my cash has exceeded all the dreams of the 'balanced' funds. In fact, so poor are our super fund managers that I suspect I would have done better than them by pushing all my pennies through the pokies. And that is what this super scam is really, isn't it? A massive gambling effort that appears to pay off only when house prices are rising so fast few can afford to buy a house or move from one to another. As for fund mangers and greed, at one stage, for what reason I cannot recall, I dumped my super pittance in with AMP, during the era when some nitwit from the USA was running it. AMP ended up paying him some $40m to go away, while my fund 'investment' earned a staggering $7.00 that year. Let's face it - super is just another tax on workers wages that carries no guarantees of any returns whatsoever. Rather like the pokies, dogs, horses, bingo.
Andy Fitzharry | 03 October 2012

This article is bit of a con. The Gunns` pulp mill should have been good investment . It was supported by an elected government. The company and the future of the mill was destroyed by quite a lot of bad luck ( GFC, high dollar etc) , by rather arrogant attitudes by company and government, but especially by the greenie/environmentalist "movement", of which Alec Marr has been a part. For them now to blame others for the destruction of shareholder and superannuant value is rather "rich", to say the least . They put huge pressure on banks, investors and end-users to withdraw support. And who are these people...a small minority who represent no-one but themselves, are unelected, and have power and influence way beyond their numbers or support-base. But they are very good at "mobilsing" , manipulation, obstructionism and closing things down! They have destroyed the Tasmanian economy and any ability to develop anything of lasting economic value. There is an anti-humanist, neo-pagan quasi-religious belief in an existential value to trees especially and "nature" in general , way beyond common sense or balanced community good. They really do not like "people".
Eugene | 03 October 2012

"We wuz robbed" says Eugene in his commentary on the super-duper investment, 'backed by a state government', no less, before declaring 'bad luck'
was the main undoer of good fortune.

Hardly, I would have thought. I think I recall very loud cries of 'pork barrel' and 'corruption!' whenever the phrase 'Tasmanian state government' and 'Gunns' were thrown together in a single thought bubble/sentence.

Are the 'nature loving Pagan tree dwelling antihumanist' evil gnomes really such a minority? Could it be that the Bogan tree cutters and truckers who happily savaged Tasmania's reserves of trees, animals, water and so on, in return for a very uncertain and probably low paid job were, in fact, the minority?

As for the idea of a 'balanced community good', ho ho ho, sounds like something from the CIS or IPA, both well known and deeply respected for their 'balanced' views hahaha.

Of course there is absolutely no value whatsoever in anything from 'nature', particularly blessed TREES!

Cut them all down, I say, so Tasmanian men can continue to wear bad tartan shirts and play banjos in their rocking chairs while shooting the last of the Tasmanian Devils, why not?
janice wallace | 03 October 2012

To make a comment to the comment of Eugene: I rather think that the belief into FUNDS has become pagan
Alexia | 03 October 2012

I think Eugene makes some excellent points. Yet I commend David James also for his quote from Adam Smith. If it applies to anyone, it applies supremely to government and its bureaucracy and their handling of taxpayers' money, as anyone who spends even a short time in the Public Service discovers. I still recall with amazement in my two years as a junior clerk in Defence, how, when the end of the financial year was approaching, there was sounded a clarion call to spend all the money allocated for the year, on anything, anything! just so that when the next year's targets were being settled, we could argue for a bigger allocation. And apparently (I heard later) my boss would go out to the supplies store every year with a fork lift and pallet to pick up Christmas presents for his family. To say nothing of subtler strategies of self-aggrandisement. Appalling routine fleece of the taxpayer, and governments of either stripe can't (or won't) do anything to stem the tide. The root of the specific problem here, though, is: the state-imposed compulsory nature of superannuation. Many people (such as Andy Fitzharry?) would run a mile from compulsory super, given the choice, and rightly so. It's the coerced co-option of funds that attracts rent-seekers, like moths to a flame. We might recast Adam Smith's other famous line thus: People of trade and statecraft seldom meet together, even for merriment and diversion, but their planning ends in a conspiracy to fleece the genuine creators of wealth. P.S. Greenspan's fingering of "self-interest" is a patent boomerang: it was his easy-money policies, which gained him the adulation of fawning ignoramus reporters and court commentators at the time, which were largely responsible for the GFC in its US intantiation.
hh | 03 October 2012

Too right HH. If I had invested my occ super (which is all I had) into my 17% house mortgage I would have returned myself a massive investment by saving many thousands of dollars in bank interest. But no, a life of penury, devoted to paying off the 17% mortgage, while my super fund managers earned bugger all, took fees, earned salaries and contributed not much of value to the community at all. The design was faulty from the start, and designed to fill the pockets of the fund managers and staff above those of the contributors. I suspect the ATO could have run a single fund and lost just as much money as all the private and industry funds have, for less cost, leaving us all better off.
Andy Fitzharry | 04 October 2012

AF, we probably disagree about a lot of theoretical economic points, but the treatment of you and like-minded super holders is either outright corruption or criminal neglect. I can't begin to express my outrage and my desire to bring the relevant culprits to justice, both for yourself, and for future generations. Cheers.
HH | 05 October 2012


Subscribe for more stories like this.

Free sign-up