The bullish speculations by Mark Carnegie (see below) about industry super funds clawing back their share of the superannuation market from the banks, and potentially capturing a quarter of Australia’s mortgage and business lending, certainly got attention. It is worth some closer examination, including his claim that it would mean Australia’s financial system might more resemble German-style participatory capitalism, whereby “workers take part in the ownership and supervision of the companies that employ them.”

Carnegie has made a number of predictions that are being merged into one picture. He is implying that ‘good’ industry funds are about to take on ‘bad’ banks in a way that will move Australia towards a less rapacious form of capitalism.

To get a sense of how realistic this all is, some historical context will help. First, the power of institutions to accumulate massive worker savings has been evident for a long time. The management writer Peter Drucker popularised the term ‘pension fund socialism’ in the 1980s to describe how these institutions were coming to dominate the investment markets, meaning that the workers collectively ‘own’ the means of production. That is, the lines between socialism and capitalism were being blurred.

In Australia, this has become very much the case. This writer produced an ‘Alternative Rich List’ for BRW about 15 years ago that listed the top 20 biggest pools of money, whether institutional or individual. The only person on the list was Gina Rinehart, who came in at 20. All the rest were institutions, mostly super.

The super pool has since grown larger – it is now over $2 trillion, and bigger than the stock market’s capitalisation – and it is unlikely that any individual in Australia would be in the top 50. We do live, in a legal sense, in a partially socialist structure: the workers do own the means of production.

Yet that ownership has not translated into being faithful to the interests of the workers, especially in America, where workers have seen their real wages declining for decades. That is partly because the managers of the funds use an exclusively ‘capitalist’ style of investing. That is, shareholders always come first and workers a distant last. Legally that is the requirement placed on managers of industry funds in Australia, as well. Although only intermediaries, these managers of workers’ savings have mostly acted in the same way as the most rapacious of capitalists.

Another important factor working against workers’ interests, especially in America, was the explosion of derivatives that led to the global financial crisis. The extraordinary volume of these ‘meta’ funds (at one stage over $US700 trillion) swamped conventional investment markets and disastrously distorted the entire financial system. When it nearly collapsed, the big banks received the ultimate free lunch of low, or no interest money (Quantitative Easing). They lent that cheap money out at high interest rates and raked in the profits. The system has yet to recover and it has put privately owned banks in an obscenely strong position.

Australia was caught in the backwash of that financial debauch and survived economically because of some exceptional judgement by then PM Kevin Rudd and Treasury head Ken Henry. Their 2008 ‘cash splash’ meant that Australia avoided recession when most other developed countries. More crucially, the country avoided a property price collapse, which would have crippled the banking system. But it, too, left the local banks in an obscenely strong position.

Thus, just when a kind of ‘socialism’ was in sight, a very nasty hyper-financialisation took over. Governments, which had taken a back seat, implementing the policy of ‘deregulation’, allowed the financiers to instigate a massive transfer of wealth to the upper class in the US, impoverishing the middle class.

In Australia, the impact of the financialisation was a little different. It has effectively split the country in two: those who own property and those who don’t. The economy is now skewed. It has become a property casino (or rather land casino, which is inherently unproductive) with a hollowed out industry base. And the regulators, caught in their own analytic circularities, cannot even conclude it is a bubble.

So, what does this mean for Carnegie’s predictions? Let’s look at them individually.

Industry funds will claw back a larger share of the superannuation market. This is looks highly probable. There are two rules in investment that are usually reliable. One is that diversification of asset classes produces stronger returns over time. The industry funds have better access to a wider range of assets, especially private equity and infrastructure. This is one reason why they have outperformed. The other rule is that the more the fund manager charges, the lower the returns will be, because almost no fund manager outperforms the market over time. They have no special knowledge. Industry funds charge less, so they outperform. Industry funds will start to capture substantial mortgage lending. Maybe; they certainly have large enough capital bases to diversify and there has been some movement in that direction. But it would do little to change the bias towards property. The test is would any such new entrants charge such a spectacular range of the ‘fees and charges’ on their customers that constitute such an excessive part of the major banks’ profitability (one bank employee told this writer it was as much as half of the profits). Industry funds will start doing a lot of business lending. This could be very beneficial, especially if they reintroduced what used to be called merchant banking. Despite occasional PR campaigns from the banks that they will lend against cash flows, more than four fifths of business lending is secured against property, which only exacerbates the bias toward property in the financial system. If industry funds started to do different kinds of lending, this could be very beneficial. But don’t hold your breath. It will lead to German-style participatory capitalism. Extremely unlikely. The German system is embedded in their industrial fabric, including complex worker training systems and sophisticated, state assisted methods of penetrating international markets. Australia has very little of this. Moreover, the governance systems in Australia – whereby boards have a fiduciary duty to put shareholders first and there is no mechanism for workforce involvement in governing, still less unions – are legally prescribed. The industry funds may be run by former union officials, but for the most part they behave like any other private sector fund managers because they have to.

Carnegie has identified the ticking clock of ‘pension fund socialism’, which in Australia has become the biggest pool of capital – indeed, it is getting so large it is starting to become too big for the local market. But previous experience suggests that just because such a structural change has occurred in the investment markets does not mean a better life is in prospect for ordinary workers and savers – especially when organised labour has been greatly weakened.

David James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare’s ghost. Despite his name, he is more like a Bruce than a James.

BEN POTTER. Industry funds will eat banks’ lunch, says Mark Carnegie (Australian Financial Review)

Industry super funds could capture a quarter of business and mortgage lending in Australia as the banks reel from the royal commission’s revelations of serious misconduct and a regulatory backlash that’s already begun, investor Mark Carnegie said.

Mr Carnegie said the royal commission would be a “tide changer” ushering in up to two decades in which the industry super funds would claw back the banks’ gains in superannuation and take a huge share of the banks’ bread-and-butter lending business for themselves.

He said these changes would bring a style of capitalism to Australia that had more in common with Germany’s participatory capitalism – in which workers take part in the ownership and supervision of the companies that employ them – than traditional Anglo-Saxon capitalism.

Speaking after presenting at the Australian Institute of Superannuation Trustees conference in Cairns, Mr Carnegie said he had suggested that ME Bank – the industry super fund owned bank – raise $1 billion in new capital to make itself a bigger entity to compete with the commercial banks.

Mark Carnegie says the royal commission will be a “tide changer” ushering in up to two decades in which the industry super funds will claw back the banks’ gains in superannuation and take a huge share of the banks’ bread-and-butter lending business for themselves.

“You have never seen a market opportunity like it. They were cutting your lunch for years [in super] and that’s not going to happen anymore.

‘Absolute tide changer’

“If you think about the last 15 years the banks have eaten huge amounts of the super industry. Now what’s happened is over the next 15 or 20 years the super funds are going to end up with a huge share of the banking industry as well as taking their own industry back.

“I have said that the royal commission is going to be an absolute tide changer.”

He said the change would not be welcomed by people in Australian business and politics who consider the German style of capitalism “inferior” to the Anglo-Saxon capitalism where profit is paramount and “can’t stand the idea that the broader base of people are going to be capitalists”.

“For people who don’t like industry funds having a role in governance it’s going to be bad,” he said, citing small business minister Kelly O’Dwyer who as financial services minister famously couldn’t bring herself to admit that industry super funds outperform bank-owned super funds even though data showed this to be the case.

But he said “the Germans seem to be doing just fine” and “for me who thinks German-style capitalism is good it’s a positive”.

AusPost could be a retail bank

Mr Carnegie said the royal commission would accelerate the shift to technology platforms in financial services and suggested that Australia Post had “the capacity to be a retail bank tomorrow” with its BillPay payments platform and could be a “tough competitor” for the banks.

“Exactly what the outcomes are from the royal commission I don’t know. But it’s going to mean that the tech platforms for delivering financial services are going to catch a tailwind,” he said, comparing the potential for change to that brought about in retailing by Amazon.

“Ten years ago you’d have said no way. But it’s where the next big change is going to come from.”

Mr Carnegie said industry funds would be able to pick up business and mortgage lending business because “the banks are walking away from it” in response to tougher regulation triggered by the royal commission and APRA’s earlier crackdown on loose lending in housing.

“Somebody has got to fill the gap,” he said. “Because interest rates are so incredibly low there’s an opportunity for the industry funds to come together and fill that gap.”

He agreed with IFM Investors chair Garry Weaven who told the AIST conference that industry funds could also use their growing clout to invest in social infrastructure – such as educational facilities and retirement living – where demand is huge but governments are reluctant to invest.

“There’s a whole of society investment opportunity – everyone agrees society will benefit massively,” Mr Carnegie said.

“It’s clear that there’s a profit opportunity. You have got to find some way that the person who is putting the capital in gets an adequate return.”

AFR 6 September 2018

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