Upside Down Industry
Jeremy Cooper, the man who has the power to turn the super industry on its head, has given a strong indication that that’s exactly what he plans to do.
Advocating scale, focus and alignment, Cooper appears to be pro-consolidation and has keenly observed the potential power of super funds vis-à-vis two large Canadian pension funds – Ontario Teachers’ Pension Plan and Canada Pension Plan.
Cooper is in the midst of phase two (operations and efficiency) of a three-phase review of the governance, efficiency and structure and operation of Australia’s $1 trillion superannuation system.
Addressing delegates at the 2009 Association of Superannuation Funds Australia (ASFA) conference in Melbourne last week, he challenged the notion that the system ain’t broke.
Borrowing from the vocabulary of the Castle‘s Dennis Denuto, Cooper said the ‘vibe’ of submissions was that with a tweak here or there: she’ll be right, mate!
“I disagree,” he said. “This is the status quo. The Review is trying to find out whether we really think the current way we do superannuation in Australia is as good as it could be in serving the long-term interest of members. Will our current thinking last us another 20 years? This perspective puts a bit of a strain on the ain’t broke view of the world.”
Cooper questioned whether super was an upside down industry where the servants rule the roost. He put the onus on funds to stand up to the funds management industry, adding that the funds management tail was wagging the super fund dog.
Indicating that he’s open to widespread structural change, Cooper presented an alternate view of the superannuation landscape in 2025.
Under his hypothetical social welfare system scenario, there would be just 27 APRA-regulated funds: three $200 billion funds, four $100 billion funds and another 20 funds with an average size of $50 billion each.
Economies of scale are well documented, but the danger in this hypothetical landscape is the propensity for mean reversion.
While such a system could lead to lower fees for members, it could also rid the industry of the competitive advantages that come with having many and varied funds.
The Big Four banks are a good example. Mortgage market share changes which occurred during the financial crisis in Australia have seen the traditional Big Four banks become the Big Two.
Although the banks have slashed fees recently in a bid to attract new deposit customers, the ACCC appears to have overestimated the strength of Australian mortgage competition when announcing last year that it would not oppose the Westpac/St George and Commonwealth Bank/Bankwest mergers.
Cooper’s challenge is to create a super system that better aligns the interests of funds with their members, focuses on maximising long-term net investment returns, and gives funds the scale advantages they need to compete for assets at an international level.
He has expressed little appetite for more regulation, but a willingness to implement structural changes and reduce the regulatory burden through reorganisation.
As Cooper pointed out, super funds have the cheque book. It’s time they used that power to turn the industry on its head.
One Comment on “Upside Down Industry”
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Sceptic says:
Mr Cooper is allowing his theories to get well ahead of reality. Scale in many cases does not lead to efficiency, particularly where the field is as complex as superannuation and taxation. In fact, there is a case for smaller being better in this arena.
Secondly, the evidence shows that just being able to buy large assets does not necessarily improve performance. Performance is all about buying cheaply and selling expensively. Buying on transparent liquid markets aids the client in understanding the real performance. Buying railways may work for Mr Buffet, but he is the only Warren Buffet in the world. The Teachers Fund fortunately for them does not have the same reporting standards as the normal Australian Super Fund, so we will not know for many years whether they (or Mr Buffet) did a good deal or not.