Originally published in The Monthly on April 1, 2020

How the secretive trillionaire superannuation funds are using your money to reshape capitalism

Everyone knows that money talks, but most Australians have no idea who talks on behalf of their money. Superannuation is, for most of us, our biggest or second biggest investment. But while few of us would let strangers make all of the decisions about our house, our car or our bank accounts, the average Australian has no idea who the trustees of their superannuation fund are, no idea which companies their life savings are invested in, and no idea how their trustees are wielding the enormous power that comes with casting votes on their behalf at company meetings.

With the advent of the COVID-19 pandemic, most Australians have seen their retirement savings fall by up to 20 per cent, but few have any idea how the trustees of our superannuation funds prepared for the economic and financial carnage associated with the spread of the virus. Did your trustees sell out of airline shares in January when the virus first migrated out of Wuhan? Did your trustees talk to companies and governments about the need to do everything possible to slow its spread to and within Australia? How do your trustees plan to respond to the crisis? You’re unlikely to know, because the behaviour of most of our funds is as opaque as it is important.

For nearly 30 years, Australia’s system of compulsory superannuation has required nearly all workers to contribute a portion of their income to an investment fund they cannot touch until they legally retire. That amount is currently 9.5 per cent of your income, but this will increase gradually to 12 per cent by 2025.

As a result of this compulsory investment, Australians have collectively amassed more than $2 trillion in our superannuation funds. That’s enough to buy all of the shares in all of the companies listed on the Australian Securities Exchange. Next year our funds have been projected to grow by a further $200 billion – albeit a pre-pandemic estimate – which is enough to buy all of the shares in the companies listed in the New Zealand share market as well. And on long-term trends, some analysis predicts Australian super funds will hold more than $10 trillion of our money by 2038.

Everyone has heard of billionaires such as Rupert Murdoch, Bill Gates and Gina Rinehart, and everyone knows that with billions invested in a company they wield enormous influence over its culture and strategy. But despite Australia’s largest super fund managing more money than the richest man in the world, and despite each of the biggest 20 super funds controlling more wealth than Rinehart, almost all of us have absolutely no idea how our trustees wield power on our behalf.

Do the trustees of your super fund think that the companies you invest in should donate your money to political parties? Do they care if the companies you are invested in have plans to reduce their greenhouse-gas emissions? Do they care if the boards of these companies have 50 per cent women on them?

It’s the role of shareholders to vote on the appointment of a company’s directors, to vote on resolutions about the multimillion-dollar pay packets of its chief executives, and to have a loud voice about the company’s strategy and governance. But that role has been taken from those of us who invest in shares via our superannuation funds. While Australia’s compulsory super has made us all “shareholders” in one sense, our trustees treat us like children when it comes to our voice and vote: to be seen on the balance sheet but not heard in the boardroom.

But maybe it’s worse than that. Despite being major investors in all of Australia’s major companies, maybe your trustees aren’t casting any votes for board positions, executive pay or bans on political donations.

It’s not your fault that you don’t know – with some rare exceptions (such as Future Super), Australian superannuation funds won’t even tell their members which companies they own shares in, let alone tell their members how (if at all) they voted with those shares. Oh, and if you asked them, they probably wouldn’t tell you.

Americans fought a war of independence over the principle that there should never be taxation without representation, yet 12 million Australians hand over nearly a tenth of their pay packet to a super fund and get absolutely no say over who the trustees of that fund are, or what their priorities should be. We don’t need to fight a war about this, but we can make it a lot better.

This essay explores much more than the dry details of superannuation fees and investment returns. It’s not about percentages, but politics. It’s not about compounding interest, it’s about how modern capitalism works and how, contrary to everything you’ve been told, we really can rein in the power of big companies, for a simple reason: we own them. This is an essay about how important it is to not just put your money where your mouth is, but to put your mouth where your money is. It’s even an essay about why a progressive economist who has raged against the greed of the finance sector for decades has gone into funds management. But don’t skip ahead, or that decision will make no sense at all.

In November last year it was revealed that Westpac had breached its obligations under Australia’s anti money-laundering laws more than 23 million times. At least one Westpac customer who avoided scrutiny of their transactions was a known paedophile who had used Westpac to transfer small amounts of money to the Philippines on multiple occasions.

When the news broke, the then chair, Lindsay Maxsted, stood by his chief executive, Brian Hartzer, who for years had overseen a fundamental failure to comply with a law that comes with a fine of up to $21 million per breach. “Given that we have no direct evidence of failure by the CEO,” Maxsted said, “and given we think he does a very, very good job, and given that we think stability is really important at all times but particularly through a crisis like this, it is far and away in the best interests of the company for Mr Hartzer to stay.”

He went on to say: “But we also know, on the other hand, that if our investors and the community and everyone that’s interested in this says, ‘Well, the mere fact of his staying is more destabilising’, then we’re in a different world. We’re not there yet – we don’t think that’s right.”

The trustees of our super funds are not simply technocrats making boring decisions about portfolio allocation. When it comes to our shares, they are our representatives, making fundamental decisions about ethics, morality, governance and accountability. And while they make those decisions on our behalf, they make them without any input from, or accountability to, us.

Hartzer’s departure as chief executive was announced days after Maxsted had told us he should stay. When the Westpac chair initially announced his support for Hartzer he made reference to the views of “our investors” and, in the days that followed, it was reported that “the people who ultimately brought the guillotine down on Hartzer’s time as chief executive were far from Canberra. The input of a handful of powerful investors proved decisive.” The “investors” mentioned in the story included employees of super funds including UniSuper, HESTA, Cbus and LUCRF Super.

But employees of our superannuation funds are not  “powerful investors”. They might be smart and experienced in making investment decisions, and the delegates of our super funds who met with Maxsted and told him that both he and Hartzer must go have been given an incredible amount of discretionary power. But that doesn’t make them powerful investors – it makes them powerful delegates.

In a democracy we often delegate our power to others. In Australia we delegate to elected members of parliament the power to set the taxes we pay, determine the budget for the health system and even to declare war on our behalf. We have a voice and also a vote, which we can use against those MPs who won’t listen to us.

But the delegates of ours who decided to push for the resignation of the chief executive and chair of ­Westpac are neither appointed by, nor are answerable to, us. While I agreed with their judgement call, I resent that one of my super funds makes absolutely no effort to sound out its members’ opinions on either specific moral questions or general principles that might inform such decisions.

When compulsory superannuation was introduced in 1992 (a policy I strongly support), the super funds were very small compared with today. Each of them held a tiny fraction of the shares in our major companies and, in turn, their opinions about the governance, strategy and personnel of those companies were largely irrelevant. But after decades of compulsory contributions, those little funds are now the biggest investors in our largest companies. The biggest super funds today are not-for-profit funds, often called industry funds, whose trustees are generally appointed by unions and employer groups. The for-profit funds are often owned by the banks. Some of the for-profit funds copped a pasting at the royal commission into financial services for sharp practices, high fees and poor governance. Unfortunately, the royal commission didn’t look into the issue of how super trustees use the voting power they wield on behalf of their members. Put simply, the enormous growth of our super funds over the past three decades has not been matched by any changes to the underlying governance structures, and it’s time we looked at reforming them.

Representative democracy is far from perfect, but when people change their votes, they change the parliament, the culture and the laws of the land. When it comes to your super, you have no such opportunity to influence policy or practice.

Winston Churchill once quipped that democracy was the worst form of government except for all of the alternatives. Giving superannuation fund members a voice by letting them vote for some of their trustees wouldn’t be perfect, but wouldn’t giving members some voice be better than giving them none at all?

Most Australians don’t read the materials that their superannuation fund sends them, and if you are in the bewildered majority don’t blame yourself. Blame the trustees of your super fund, who spend tens of millions of dollars per year on advertising, marketing and ­posting you a “member statement” that is as boring to most people as it is incomprehensible.

It’s not an accident that the materials they send are so boring. The last thing the trustees of your fund want is for you to pay close attention to what they’re doing. If they wanted you to care they might do simple things like put a list of the companies they are invested in on their website. If they really wanted you to care they might send you letters like this:

Dear Investor,

Your superannuation balance is currently $212,456. This time last year it was $195,345 meaning it grew by $17,111 over the past 12 months. Of the increase, $10,872 came from the 9.5 per cent of your income that the law requires you to invest with us and $9256 came from the dividends and interest on the investments we have made on your behalf. Together, your new contributions and the returns on your investments add up to $20,128, but your balance only grew by $17,111 because we charged you $3017 in fees.

It’s possible you could save on fees without sacrificing any return if you chose to shop around for a different super fund. While switching might seem complicated, the super fund you want to switch to can help make it pretty easy.

But superannuation isn’t just about fees and returns; it’s also about ethics, governance and accountability. As trustees acting in your interests, this year we will be making a lot of decisions about which you might be interested, such as:

  • Whether to invest your money in industries that produce fossil fuels, tobacco products or landmines, or that are engaged in the live­animal export trade.
  • Whether to encourage the companies in which you are invested to reduce their greenhouse-gas emissions, stop donating to political parties and stop funding campaigns against ­climate action.
  • Whether to insist on more diverse appointments to the boards of the companies in which you are invested, as well as better corporate reporting on environmental, social and governance (ESG) performance, and greater transparency on gender pay gaps.

As your trustees we are keen to hear your thoughts about these issues. If you go to the website you can provide us with as much or as little information as you would like on your priorities, preferences and concerns. You can also see a list of all the companies in which we have invested your money, and we have listed how we voted, on your behalf, for all shareholders’ resolutions and board appointments.

Of course, we have to make decisions in the best interests of all of our members so we can’t promise to consult with you on every decision. But we can promise to listen to your feedback, recommend products that best suit your priorities and, if necessary, help you to move your superannuation to another fund whose approach to investment is better aligned with yours.

After all, it’s your money. Here at Democratically Accountable Super, we are simply your delegates and our one job is to serve your interests.

It’s hard to overstate the amount of power we have given to the trustees of our superannuation investments. Every month our largest super fund, AustralianSuper, receives an additional $650 million of our dollars to “deploy”. Last year, Australian super funds received $40 billion more in new contributions from workers than they paid out to those who have already retired. To put that into perspective, last year the Victorian government spent less than $40 billion on health and education combined.

As the federal sports rorts affair made clear, there is no doubt that government ministers have significant influence, and discretion, over where taxpayers’ money gets spent. But as the sports rorts affair also made clear, ministers are subject to a high degree of scrutiny and transparency. After Liberal candidate Georgina Downer started waving a novelty cheque around, Labor asked the auditor-general to look into the process by which sports grants were awarded. The auditor-general, who has access to all relevant documents, subsequently issued a damning indictment on the process.

The issue was then pursued via questions in parliament, freedom of information requests and a Senate inquiry. The information extracted by all of these means allowed parliamentarians, journalists, academics, non-government organisations and engaged citizens to delve deeper and ask further questions. Senator Bridget McKenzie stepped down from cabinet, the prime minister lost some credibility and, ultimately, voters will get to decide on the appropriateness, or otherwise, of the government’s approach to governance and accountability at the next election.

But who scrutinises the decisions of the trustees of your superannuation fund?

Any citizen can request documents from the government under the Freedom of Information Act, but no superannuation member is entitled to the documents relating to a decision of their fund. Funds aren’t obliged to tell you where your funds are invested, let alone how and why they came to invest in particular companies, vote for particular resolutions, and appoint particular people to company boards.

Australian super funds are now so big that not only do they stretch our understanding of democracy, they also fundamentally challenge our understanding of capitalism itself.

If capitalism is “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state”, what should we call our new economic system, in which trade and industry are controlled by the unelected trustees of enormous superannuation funds?

No matter how much power we have given them, our trustees are not capitalists, they are simply our delegates. And we’re not supposed to call those who manage our money “bureaucrats”. Acceptable terminology includes bankers, analysts, finance types, or, better still, “institutional investors”. But they aren’t the investor, you are. And institutions don’t make moral judgements about whether chief executives should be sacked or whether it’s okay to invest in landmines or coalmines or companies with no women on their boards. These are discretionary decisions made by individuals.

Bureaucrats perform important roles in both the public and private sector. At the Australian Competition and Consumer Commission they have to decide which companies to investigate, and at the Health Department they have to decide which drugs to subsidise. The bureaucrats at AustralianSuper have to decide where to invest the extra $650 million that flows in every month. But while most of the 50,000 “banking and finance” jobs in the superannuation industry have job descriptions that are indistinguishable from those of people who work at Centrelink, Treasury or the Department of Finance, we don’t ever say public servants work in “finance”, and we never call private-sector workers bureaucrats.

While our economics textbooks and public debate are filled with the clear distinction between the private and public sectors, these categories are increasingly meaningless when it comes to describing how capital is allocated in the Australian economy.

The textbook version of capitalism is based on the idea that individuals are best placed to decide how to spend and invest their own money. Fans of socialism argue that it’s more efficient to pool resources and make decisions via committee. So how would you explain to first-year economics students that a group of trustees is different to a socialist planning committee?

In the version of capitalism I learnt about at university, companies with good ideas developed a ­prospectus and tried to talk capitalists into buying shares in the future profits that the company would make. But these days capitalists like you and me are obliged to invest the same amount of our capital (i.e., 9.5 per cent of our income) and the bureaucrats who work for us decide where to put it. Even if there were no good ideas to invest in next week, we will all still invest the same amount. And those deciding where to put our money get paid a salary regardless of how good their decisions were.

Australia has gradually, quietly and patiently introduced a system with all of the inequality of capitalism but none of the discipline of the market. The old categories of “market” and “state” simply don’t work anymore. Take the privatisation of the Commonwealth Bank, for example. When the bank was publicly owned, the only big decision politicians had to make on our behalf was who to appoint to its board. The board then guided strategy and appointed a chief executive. But back in the 1990s the economic rationalism of the times dictated that private shareholders would be much better at choosing a board than the federal cabinet.

Today, most of the private owners of the Commonwealth Bank (like you and me) have no say in the appointment of the directors of the bank. The trustees of our super funds, who between them are thought to own more than a fifth of the Commonwealth Bank (they won’t confirm this), make those decisions on our behalf, and, as with all their decisions, make them without consulting us or informing us how they voted. Why do we think super trustees are better at appointing the board of a bank than the cabinet of an elected ­government?

Of the $2 trillion currently held in Australia’s (non-self-managed) super funds, about a fifth is currently invested in Australian companies via the sharemarket, the Australian Securities Exchange. To put that into context, the total value of all the companies listed on the Australian sharemarket is about $2 trillion, which means that currently super investors own about a fifth of all shares in Australian companies and, if our trustees felt like it, they could buy all of the $2 trillion worth of shares in all Australian listed companies.

The thought of buying up whole companies has definitely crossed the minds of our trustees. AustralianSuper recently teamed with a private investment firm to buy all $2.1 billion worth of shares in an education provider called Navitas, having previously failed to buy out the private hospital company Healthscope for $4.1 billion. As the former chief executive of the Future Fund (Australia’s publicly owned $150 billion sovereign wealth fund), David Neal, said: “There is support for [super funds buying whole companies]. When we are down to five or six massive industry funds in this country, if they wanted to, they could buy corporate Australia. They could take it all private. Slightly extreme, but their scale is such that you could imagine them doing that if they believe that it is a better model.”

Let’s think that through. If a million people are required to put 9.5 per cent of their income into a super fund, and then the trustees of that fund bought a chain of “private” hospitals, would the hospitals still be “private”? Would they be public? Or would they be best described as a being owned by an undemocratic co-op?

And if HESTA, the super fund that represents health workers, bought all of the shares in a chain of private hospitals, would that be a workers’ buyout? And if the health workers’ super fund appointed the board of the private hospitals, and the private hospital then had a dispute with its health workers over wages, whose side would HESTA be on?

It gets weirder. What if the Future Fund, headed up by former Liberal treasurer Peter Costello, bought the private hospitals? Would that be a “nationalisation” of a private company? Or, better still, what if in a few years’ time the Future Fund, or one of the big super funds, bought all of the shares in the Commonwealth Bank? Remember, the bank was privatised because we thought individual shareholders would do a better job of appointing the board than our elected government. But it’s not impossible that the government-owned Future Fund will end up appointing some or all of the board directors for any of our largest companies.

Australia’s superannuation system is so big that it has broken the categories of public and private ownership and, in turn, we are currently running an enormous experiment in a new form of capitalism without capitalists. And the public debate about how to regulate it is broken too.

No one doubts that Rupert Murdoch, whose family trust owns only about 39 per cent of News Corp, has enormous influence over the culture and direction of the company. But very few believe that if 10 million workers between them own 51 per cent of a company that they have, or should have, any say at all in its culture or direction.

Unlike those who allocate the resources of our councils or state and federal governments, our super trustees are unelected, unaccountable to members and seemingly uninterested in reforming the system. This doesn’t mean they are doing a bad job of managing our money, but by any objective criteria they are doing a terrible job of representing the broad interests of their members.

In recent years some super funds have voluntarily made a virtue of revealing the companies and industries they would or wouldn’t invest in. Future Super, for example, was Australia’s first “fossil-fuel free super fund”, an attribute that has helped it rapidly build a billion-dollar fund. But while members of Future Super are better informed than most investors, they still have no say in the selection of their trustees.

Last year, the bureaucrats who run AustralianSuper, acting on behalf of their 2 million members, voted against 11 shareholder resolutions designed to improve the climate performance of the companies they hold shares in. This included voting against a proposal to mandate Rio Tinto’s disclosure of its transition plan from coal, and another proposal to stop BHP funding lobbying campaigns that were inconsistent with the goals of the Paris Agreement. UniSuper voted against all climate motions put forward in Australia. They don’t have to tell us why.

So what is to be done? In a case with global implications for superannuation management, Mark McVeigh, a 24-year-old in Brisbane, is suing his $57 billion super fund for failing to properly mitigate the risks to his investments posed by climate change.

But outside of the courts, one strategy is for individuals and organisations to divest from funds, companies and institutions that invest in activities they oppose or that refuse to provide information about their investments. It’s your money, after all. You are the capitalist, and the bureaucrats in your super fund are supposed to be making decisions in your best interests. If they won’t listen to you, how can they know what those interests are?

Historically, divestment campaigns against South Africa during the apartheid ­era and the tobacco industry have been highly successful, and there is no doubt that the divestment of trillions of dollars from the fossil-fuel industry around the world has had significant impacts on corporate and political action. Likewise, the billions that are now flowing into sustainable and ethically screened funds like Future Super. Not only does switching to such funds send a powerful signal to all investment funds and politicians, it increases the supply, and lowers the price, of funds for new renewable investments.

Divestment isn’t the only option. Some fund managers, such as the chief executive of industry super fund Hostplus, David Elia, argue that “ownership of shares in these [fossil-fuel] companies gives us the ability to engage and influence. Selling our holdings would deprive us of this important right.” Hostplus’s chief investment officer, Sam Sicilia, goes further, arguing that divesting from coal companies is “weak” and achieves nothing.

But while these funds clearly refuse to sell out of their shares in coalmines, it’s not at all obvious how strong their voice is behind closed doors – to “engage and influence”. As delegates for more than 1 million Hostplus members, the chief executive and chief investment officer could provide regular reports for members about the pressure they’re putting on fossil-fuel companies to stop lobbying against climate policies or to reveal their corporate plans to adjust their business to fit in with Paris climate targets. Unfortunately, but not unsurprisingly, the bureaucrats at Hostplus seem to spend more time publicly criticising climate activists than they do criticising the coalmining companies and lobby groups (such as the Minerals Council of Australia) that Hostplus members’ money helps to fund.

Which brings me to why I recently started to moonlight in a funds management business. How can we be sure that delegates like Hostplus’s executives are really putting their mouths where our values are? How can we be sure that those who rose to the top of our super industry, in an era where super was all about portfolio allocation, are hard-working and skilful in pursuing the new opportunities that come with representing hundreds of billions of dollars of other people’s money?

One way to keep an eye on what’s said behind closed doors is to go behind those doors yourself. The new (very small) funds management business I’m involved in is called the Infrastructure Access Fund. Rather than a super fund, it is a managed investment scheme for what’s known as “sophisticated investors”. As the name suggests, it is designed to give investors access not just to a slice of the big infrastructure assets such as ports, airports, electricity transmission and water supply, but also a voice in conversations about how those assets are managed. For example, despite the fact that airlines are some of the most fossil-fuel-intensive industries in the world, Qantas has announced that it will be carbon neutral by 2050. Yet none of our biggest airports, most of which are largely owned by the super funds, has made such a commitment. Why not? Our fund, because it owns a slice of those assets, will be able to ask such awkward questions behind closed doors and speak on behalf of our investors.

All shareholders, no matter how small, have a right to ask questions, make suggestions and talk to their fellow shareholders.

But while divestment and vocal investment have and will make a difference, the enormous size of the superannuation funds means that they too must be part of the transformation. The most obvious solution to the current distance between our money and the mouths that speak for it is for all large superannuation funds, be they industry funds or for-profit funds, to have at least one third of trustees elected by their members. The legal obligation of a trustee board is to act in the members’ interests, so what better way to ensure that is the case than for members to elect some of those trustees?

The federal government has already announced that it wants one third of the directors of the large not-for-profit industry funds to be “independent”, by which it means not appointed by the unions and employer groups that currently appoint most fund trustees. But why stop at the industry funds? And why get caught in an argument about what makes someone independent when we could simply let the members choose? Surely the unions and the Labor Party would prefer democratic representation over random selection from an elite club of “experienced trustees”. And surely the Liberals and business groups believe that individuals are best placed to choose independent trustees who represent their values and priorities.

No doubt those funds that have grown accustomed to using our money to validate their decisions will rage against such a proposal. Once upon a time, only men who owned property got a vote. And later it was just men. When the push for women to get the vote began, many opponents argued it wouldn’t make any difference because women would end up voting the way their husbands told them to anyway.

Maybe the 12 million investors in Australian super funds are comfortable with multimillion-dollar executive salaries, performance bonuses that get paid regardless of performance, the domination of men on company boards and the determination of listed companies to spend shareholder money supporting lobby groups that oppose urgent action on climate change.

Maybe. But I think the real reason that those who currently speak on behalf of our money will fight to prevent the threat of democracy in our funds is that they suspect their members might be a lot more interested in the behaviour of the companies they invest in than they are in the turgid “member statements” that get thrown straight in the bin.

Anyone who says there is nothing we can do to change the way big business operates doesn’t understand how big our superannuation funds have become. Our funds own big business and our funds are supposed to work for us. We just have to find a way to put our voice where our money is.

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