Tanner warns super funds on shares bias

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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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 the likes of Super System Review head Jeremy Cooper, former chairman of the Future Fund David Murray and former Treasury head Ken Henry that "our super fund system is over-exposed to equities".

While cautioning that he was not personally asserting 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 corporate governance company Ownership Matters, Mr Tanner said the super system was a "captive market, with a pool of money that is mandated", which benefited from tax and regulatory preferences.

"For people engaged in this debate, 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 always 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 added.

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

Mr Tanner said 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…

What warning did Lindsay Tanner give to superannuation funds about a shares bias?

Lindsay Tanner warned that the superannuation industry risks government intervention if its long-standing bias toward investing in shares sparks a public backlash. He said industry responses to concerns about equity exposure were troubling and urged the sector to take those warnings seriously.

Who else has raised concerns that super funds might be over-exposed to equities?

Tanner cited warnings from prominent reviewers and former officials, including Super System Review head Jeremy Cooper, former Future Fund chairman David Murray and former Treasury head Ken Henry, who have suggested the super system may be over-exposed to equities.

What does 'over-exposed to equities' mean for everyday investors and their retirement incomes?

Being 'over-exposed to equities' means a large share of retirement savings is invested in shares. That concentration can leave members vulnerable if equity markets fall, which could produce unhappy outcomes for retirees and create political pressure if many members suffer losses.

Why could government intervention be a real risk for super funds?

Tanner said government intervention is a serious risk because superannuation is a mandated, captive market. If large numbers of members are left unhappy after being on the wrong side of the equity cycle, political pressure could push governments to intervene in how super funds invest.

What did Tanner mean by calling the super system a 'captive market'?

He meant superannuation involves a pool of money that is mandated (through compulsory contributions) and benefits from tax and regulatory preferences. That concentration of mandated savings makes the system politically and economically significant.

How does Australia's thin corporate bond market relate to super funds' investment choices?

Tanner argued the thin corporate bond market is an important, linked issue: with corporate balance sheets lightly geared and a growing pool of super savings, more of those savings may need to provide corporate debt financing if the economy requires it, shifting some investment away from equities.

What impact could the superannuation guarantee rising to 12% have on investments?

As the superannuation guarantee rises to 12%, the proportion of national savings held in super funds will increase. Tanner suggested that, to meet the economy's needs, a larger share of those super savings may have to shoulder corporate debt financing rather than relying solely on equities.

What practical takeaway should everyday investors get from Tanner's comments about short-term returns?

Tanner warned against funds simply chasing the best short-term returns. Everyday investors should be aware that long-term retirement incomes matter more than short-term performance swings, and that concentration in equities can amplify risk across many members.