Australia’s superannuation - DNA and transparency

The ruckus over the government's budgetary plans for super showed that a lot of Australians now are engaged with their super. For the first time, question arose about the sustainability of the super system. Super has become a big deal, in terms of the money at stake, the numbers of people affected and the consequences of its failure. Super is also the result of a big deal, between the unions and the now wistfully-remembered former Prime Ministers, Bob Hawke and Paul Keating – in the so called Accord.

It is not easy to stand back and see what's really going on in our super. This is because the debate is charged with self-interest, and ranges from technical to literary licence. Sometimes it's all rolled into one – such as in the Labor politicians' mantra of "Superannuation is in our DNA". Minister for Superannuation, Bill Shorten, recently said in Parliament: "We invented compulsory universal superannuation…It is Labor DNA". What is it in the genes of Labor that created this quirky form of super imposed over twenty years ago? This is one of many riddles with which I have struggled, in trying to comprehend this nation's fabulously growing stockpile of capital. In what follows I propose an answer to the DNA riddle, which challenges the hitherto unquestioned belief that those responsible for deducting a compulsory super charge from employed Australians acted solely out of altruism - by demonstrating it was not a selfless policy but one which the unions grasped to avoid oblivion.

My inquiry has discovered that breakdown of Australia's super is inevitable, because it was shoddily implemented. Enormous risk has been designed into the system, which was unrecognised from the beginning. Australia's universal super, as it stands, is an error. Yet it's said to be the best in the world. Bill Kelty, who was a union leader for decades ending a decade ago and, it is said, without whom most Australians would never have heard of super, observed that " Every international report looks at Australia's superannuation system and they say it's one of the best in the world."

That was in May last year, at one of the best celebrations ever, of the man Kelty, by the best old Labor and union people, in the world's best city Melbourne. As a result Paul Howes, who is head of the Australian Worker's Union (AWU), tweeted: "Just quietly – I love Bill Kelty – the greatest Australian unionist that ever lived. If it wasn't inappropriate I'd dry hump Kelty right now." Humper Howes is also a director of the trustee board of AustralianSuper which many say is the best super fund. That board is entrusted with the largest single holding of Australians' forced savings (sixty billion dollars) belonging to around two million people, and accepts around five billion dollars of super charge yearly. Why was Howes so pleased to see Kelty? Merely in the Mae West sense or is there more, maybe much more, to this affection?

The veneration of Bill Kelty within the union movement is another riddle. Correlated with Kelty's pre-eminence has been an ugly fall in union membership. Official statistics show that union membership has declined, generally, since the emergence of universal super in 1992. From August 1992 to August 2011, the proportion of those who were trade union members in their main job has fallen from 43% to 18% for males, and 35% to 18% for females. Therefore union income from membership dues must be parlous.

Bill Kelty suggested last year that this decline resulted from Australia's economy behaving properly and growing too well, in unexpected directions:

But we sat there in 1986 and we said unless you can change and get into growth areas, then we are going to decline. And we got it more or less right, more or less right. Our essential failure was to have the economy work. Our essential failure was for employment to grow so rapidly, transform so dramatically, into so many areas where we weren't…

Deciphering Kelty is not always straightforward. Isn't he also saying that he knew unions needed to get into growth areas but they didn't, thereby admitting failure? As it happened the unions were deserted, now representing less than one in five workers. Thus, the means of union influence through organising the employed, has evaporated. Yet here they all are, the best of that period including a couple of former prime ministers, celebrating this annihilation, and acclaiming its overseer Kelty. Elizabeth Humphrys reports that Linda White, Assistant National Secretary for the Australian Services Union, said she "could hardly breathe" at her first meeting with Kelty, she was "so much in awe of him."

I will return to the role of Kelty. Let's get this claim of our super being the "best" into perspective. The reality is that Australia's super is badly deficient. The trustees of super funds exhibit all the symptoms complained of by American Nobel Laureate William Sharpe in 1998, around the time the US shifted from the old type of super where people could be confident about what they would get (ie the benefit was defined). The new American system had, like ours, been poorly researched. In an interview that year, Sharpe complained that people's needs were being brushed aside:

Ordinary human beings have to make decisions not unlike those facing very sophisticated plan sponsors (trustees)… Funds offer some tools to help. But some of those tools are not helpful. The retirement calculators that are on all the websites assume there is no risk: I doubt that it is legally fraud, but it's pretty bad stuff.

Australia's super remains locked in that state today. Australians are expected to plan their retirement with no insight into the risk of their forecast outcome. As Sharpe says this is "pretty bad", at odds with the self-satisfied spruiking that holds sway. Purporting to be the best, when what's on offer is badly flawed, is an ominous sign.

The question then arises: As funds have been unconcerned about basic responsibilities such their product and its risk, what have they been doing? It is little known that public funds' operating expenses, generally, grew every year since the Australian Prudential Regulatory Authority (APRA) began keeping records (1997), at a constant rate mirroring the growth in super charge collections (330% over that period). Expenses are always the same proportion of the employer super charge (around 11%),

Where are the economies of scale going? It's impossible to tell. Financial statements of funds are published by APRA. But, these "transparencies" enable no insight into who receives what, why and the results. A shroud is wrapped around the financial dealings of trustees. In this Obedian age it is only the unaware who would be happy to have the fate of their money so hidden. If merely one-fiftieth of 1% of the assets held by either the trustees of industry funds or retail funds is misallocated that amounts to a hundred million dollars annually, in each.

That trustees can be happy in this position, where their probity is left to speculation and innuendo, while daily we read of entrusted individuals having idiosyncratic ideas about what constitutes honesty, is itself sick. The trustees' stance against transparency is no accident. Nothing dopey is going on here. Trustees of public funds have rejected calls for greater transparency, and the government has stood by them. The "best" in funds' transparency has recently taken a leap forward with the exposure of (gulp) salaries of trustees and senior staff – a fraction of the story.

Keating A Dupe?

What, really, were Paul Keating and Bill Kelty working towards when stitching up compulsory super in the 1980s? Were they thinking in sympathy as is commonly assumed? A case can be made that Keating was duped by his mate Kelty, in the creation of Australia's super. Keating says that, in 1983:

I wanted unions to enjoy a structural or ongoing benefit in recognition of their years of wage responsibility. Bill Kelty and I were both of a mind to add the layer of private retirement incomes to the industrial agenda as part of an expanded social wage.

Therefore:

...as Treasurer I introduced the Occupational Superannuation Standards Act 1987,... The Act also included a requirement for:...greater member involvement in the control of superannuation funds

There it is. Keating felt obligated to Kelty for "wage responsibility" and Kelty extracted a monumental quid pro quo. Today, it is plain that this "greater member involvement" translated into union control of the trustee boards of super funds. The unions were thrown a solid gold lifeline. Kelty did not just stumble upon what has been the best growth area imaginable, creating and controlling a perennial steam of regular savings forced from Australians, with a veneer of accountability and transparency. Unions had experience with running super funds and were aware of the operations, and the possibilities. The Australian Council of Trade Unions (ACTU), in its December 1990 Bulletin, claimed: "by early next century the assets of superannuation funds will have grown to an amount approximately equal to the entire market capitalisation of the stock market." Kelty understood the scale of the money, its growth, and how access to capital empowers. It is logical that Kelty saw the super deal long-sightedly, as enabling a more refined avenue to influence, and an antidote to decline.

Equally it may be that Keating was not privy to this dimension. Keating, early on, showed no sense that a union-based finance industry, underwritten by working Australians, would be an important result of the cherished Accord initiative. But that could be too generous an assessment of Keating.

This is the genetic material of Australia's super; the stuff behind the Labor slogan "Super is in our DNA": a conjoining of two deficient chromosomes – one, the desperation of unions searching for a growth vehicle to avoid the last rites; the other, a government beholden to the unions sufficiently to accept blithely the unions' conditions on the design of this unique national venture.

The unions have purposefully built a new finance network around universal super. Industry super funds contract services, increasingly supplied by entities of their own creation, which they have capitalised, and are linked, more or less visibly, with unions – funds management, administration, asset consulting and, more recently, banking. Cross holdings can be identified, but the money flows are obscure even at the primary equity level.

What goes on at the next layer down, where service companies owned by funds also require services? Of course, entertaining anything but the highest probity is pure speculation, but it needn't be. Australians who pay the super charge have a right to sniff the air down there. And to be satisfied they know the extent to which the union movement benefits through equity, services, or whatever, in super. It is valid to require transparency on funds' service subsidiaries because at stake is money forced from individuals by government, and because trustees have sandbagged on transparency.

Now we can hazard a guess at why, on that gala night in Melbourne last year, everybody within the best of union and Labor circles celebrated Kelty; Paul Howes, especially. It is reported that the number of non-financial members in the AWU has increased four-fold under Howe's leadership. As Kelty noted, the unions prospects were dour over twenty five years ago. It has been all downhill since, with ever fewer paying unionists. Yet their leaders are partying. It looks like paid-up union members are now redundant. Unions no longer need much membership in order to prosper. Money has to be coming from somewhere else. It enables power to be applied from the top, to the issues which those at the top, like Howes, are interested in. Members even get in the way – wild-eyed, they threaten to take their super billions elsewhere, as in the Grocon dispute.

None of this is to say illegalities are afoot, but equally Australians in public super funds could be suffering damage systemically, and none the wiser.