Bias on shares risks backlash, warns Tanner

THE former finance minister Lindsay Tanner has warned the superannuation industry that it risks government intervention if its long-standing bias towards investing in shares sparks a public backlash.

By InvestSMART · 4 Apr 2012

By InvestSMART ·
4 Apr 2012

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THE former finance minister Lindsay Tanner has warned the superannuation industry that it risks government intervention if its long-standing bias towards investing in shares sparks a public backlash.

Mr Tanner, who left Parliament in 2010, said the industry needed to take seriously warnings from such people as the head of the Super System Review, Jeremy Cooper, the former chairman of the Future Fund, David Murray, and the former Treasury head Ken Henry that "our super fund system is over-exposed to equities".

While cautioning that he was not personally asserting that super funds were too exposed to shares, he said he was "troubled" by the responses from some in the industry to what he said were "legitimate" issues raised by Mr Cooper, Mr Murray and others.

Speaking at a conference in Melbourne yesterday, sponsored by the corporate governance firm Ownership Matters, Mr Tanner said the super system was a "captive market, with a pool of money that is mandated", that benefited from tax and regulatory preferences.

"Even though I'm not advocating it per se, I warn you to be wary that we are dealing with a very big and serious issue - people's retirement incomes, and it is not good enough just to say we are out there just chasing the best short-term returns and on average, over the millions of people involved, it all ends happily ever after," he said.

"That risk of government intervention is serious."

Mr Tanner said while in government he had advocated against any government mandating of the structure of super. "But ... if governments in the future of either side are faced with extremely unhappy super fund members because they have been on the wrong side of the equity cycle ... that will generate enormous political pressure."

He called for more debate around what he said was a separate but "undeniably linked" issue - Australia's thin corporate bond market.

Mr Tanner said that with corporate balance sheets "already as lightly geared as we can ever expect them to be", and with the proportion of savings in super set to rise as the superannuation guarantee rose to 12 per cent, "if we are to meet the needs of our economy then more of our savings in our super funds is going to have to do the heavy lifting on corporate debt".

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Frequently Asked Questions about this Article…

Why did former finance minister Lindsay Tanner warn about a bias towards shares in superannuation funds?

Lindsay Tanner warned that the superannuation industry’s long-standing bias to investing in shares could spark a public backlash and risk government intervention. He said the issue is serious because it concerns people’s retirement incomes and was worried by industry responses to legitimate concerns raised about over-exposure to equities.

What do experts like Jeremy Cooper, David Murray and Ken Henry say about super funds being over-exposed to equities?

According to the article, Jeremy Cooper, David Murray and Ken Henry have warned that Australia’s superannuation system is “over‑exposed to equities.” Tanner said those warnings should be taken seriously by the industry rather than dismissed.

Could government intervention happen if super funds stay heavily invested in shares?

Tanner said the risk of government intervention is real. While he hadn’t advocated mandating super structures while in government, he warned that if large numbers of members are left unhappy after being on the wrong side of an equity cycle, political pressure could push future governments to intervene.

What does it mean that the super system is a “captive market” with mandated money?

The article explains Tanner’s view that super is a captive market because contributions are mandated by law (superannuation guarantee) and the system benefits from tax and regulatory preferences. That scale and compulsory nature mean decisions by funds have broad public impact.

How can a focus on short-term returns in shares hurt everyday investors in super?

Tanner cautioned that simply chasing the best short‑term returns in shares isn’t good enough when people’s retirement incomes are at stake. Short‑term, equity‑cycle losses can leave large numbers of members worse off, which is why he urged more careful consideration of long‑term retirement outcomes.

Why did Tanner call for debate about Australia’s corporate bond market and its link to superannuation?

Tanner said Australia’s corporate bond market is thin and deserves more discussion because, with corporate balance sheets lightly geared and the superannuation guarantee set to rise, more savings in super may need to take on the role of supporting corporate debt. He sees this as a linked issue to equity exposure.

What does the rise of the superannuation guarantee to 12% mean for where savings are invested?

The article notes that as the superannuation guarantee rises to 12%, the proportion of savings held in super will increase. Tanner suggested that, to meet the economy’s needs, more of those rising super savings may have to play a larger role in corporate debt markets—not just equities.

What should everyday investors look for in their super fund given these concerns about equity exposure?

Based on the article’s points, everyday investors should pay attention to how their fund addresses exposure to equities, whether it considers long‑term retirement outcomes over short‑term returns, and how transparent it is about diversification and options beyond shares (for example, exposure to corporate debt as the market evolves).