Time to inject new life into the corporate bond market
We are hugely exposed to the highest-risk investments available, but it doesn't have to be that way, writes Ian Verrender.
We are hugely exposed to the highest-risk investments available, but it doesn't have to be that way, writes Ian Verrender. PENSION funds in almost every other country look to invest in a much higher proportion of safer investments, particularly in fixed-interest securities. And that is where the argument becomes interesting.On top of investing in the local sharemarket, our superannuation funds each year send tens of billions of dollars offshore into wholesale debt markets, to capture some low-risk returns.And guess where our very own banks go to borrow trillions of dollars? That's right, those same overseas debt markets. They then lend that money to Australian consumers and companies, creating a foreign debt problem.Does that make sense? In essence, our retirement money is being sent overseas, borrowed by our banks, and then repatriated and lent here. Fees are raked off at every opportunity and currency hedging, or insurance costs, add to the financial burden.You have to wonder. Why not just cut out the middleman and have a mechanism in which Australian superannuation savings can be lent to Australians? It may be a little cumbersome with consumers. But when it comes to our companies, surely it couldn't be too difficult.One of the great difficulties is that we no longer have a corporate bond market. If companies want to borrow money, they either have to go to a bank or head offshore to a foreign debt market where they just may be borrowing Australian funds.With all the hoo-ha about debt and debt crises in recent times, there are a few fundamental principles that most people forget. The first is that debt is safer than equity. When a company goes under, creditors stand before shareholders. And that's why debt pays a fixed return. It is far more secure. And the risk is lower.If you get your head around that, you'll understand the madness at the heart of the Australian superannuation industry. We are all hugely exposed to the highest-risk investments with which you could possibly be associated.So how do we change it? With great difficulty is the obvious answer. But next week, some of our brightest minds will gather together to try to nut out a solution.Led by David Livingstone and Mark Burrows, investment bank Credit Suisse on Tuesday will host a seminar aimed at shifting the behaviour of our superannuation guardians that, if successful, could rank as one of the greatest revolutions in our national savings plan. Given the uncertainty on global markets, the timing couldn't be better.Treasurer Wayne Swan and a coterie of Treasury officials were quick to sign up. They want to see the evolution of a corporate debt market, where Australian companies can raise funds directly from Australians, where savings are invested directly into the debt of local companies.There is no logical reason why it shouldn't happen. In the 1980s, Australian corporations could raise cash from local lenders by issuing corporate bonds. For some reason, in the intervening decades, the market has all but dried up. Maybe it was the growth of our banks, or the liberalisation of global credit markets.Reviving the market here again is more difficult than it seems. While there is almost universal agreement in principle, convincing the participants the companies, the banks, the superannuation funds to alter their behaviour is far from simple.Government regulation would be one option, but it would be far from ideal. A better solution, perhaps, is whether the newly defined superannuation default funds, where the bulk of Australians have their cash parked, should include a benchmark portfolio.In this way, a certain percentage of funds could be allocated to a local corporate bond market. That could be enough to resuscitate this once-active market.Given the massive infrastructure requirements of our rundown cities and regional centres, a benchmark portfolio for default super funds could make billions of dollars available for infrastructure investment. That would be a low-risk, long-term investment ideal for those approaching retirement.
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