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Australia’s ‘Super’ Pension Funds Can Power Global Democracy

Canberra should start flexing its financial muscle.

By , a Fulbright scholar in Australia-U.S. alliance studies.
A view of the Hambantota port in Sri Lanka on Nov. 15, 2018.
A view of the Hambantota port in Sri Lanka on Nov. 15, 2018. Paula Bronstein/Getty Images

After the United States transferred one of its most tightly held technologies, nuclear submarines, to Australia as part of the AUKUS deal, Australian Prime Minister Scott Morrison will be eager to avoid turning up empty-handed to U.S. President Joe Biden’s Summit for Democracy in December. Enter Australia’s superannuation sector—the country’s $2.5 trillion pension fund system.

At the G-7 meeting in June, Biden announced the Build Back Better World plan, a so far somewhat underbaked response to China’s Belt and Road Initiative (BRI). The need to counter Chinese economic power and influence is obvious. How to fund it is less so. Cash, as ever, will be king—and Australia has plenty via the retirement savings of its citizens.

Australia rarely thinks of itself as a significant power. When it comes to capital reserves, however, it is one. That power should now be strategically deployed.

After the United States transferred one of its most tightly held technologies, nuclear submarines, to Australia as part of the AUKUS deal, Australian Prime Minister Scott Morrison will be eager to avoid turning up empty-handed to U.S. President Joe Biden’s Summit for Democracy in December. Enter Australia’s superannuation sector—the country’s $2.5 trillion pension fund system.

At the G-7 meeting in June, Biden announced the Build Back Better World plan, a so far somewhat underbaked response to China’s Belt and Road Initiative (BRI). The need to counter Chinese economic power and influence is obvious. How to fund it is less so. Cash, as ever, will be king—and Australia has plenty via the retirement savings of its citizens.

Australia rarely thinks of itself as a significant power. When it comes to capital reserves, however, it is one. That power should now be strategically deployed.

Superannuation—or “super,” as Australians call it—can go beyond its traditional mission of building retirement wealth for working people. By using this strength, Australia can assist global efforts to counter authoritarianism by offsetting the allure of Chinese Communist Party (CCP) financing. Used correctly, the financial heft of superannuation can enhance regional security, improve the economic performance of the Indo-Pacific, boost Australia’s international reputation as a dependable ally and partner—and be a powerful potential model for the use of U.S. pension schemes in large states such as California, New York, and Florida.

Australia’s superannuation sector is the world’s fourth-largest pool of savings and is set to reach as much as $10 trillion by 2040. It has given average Australians the gift of secure retirement as well as the benefits of capital ownership.

It was set up in the mid-1980s by the Hawke-Keating Labor government in partnership with Australian trade unions to deal with the widespread problem of insecure retirement. Prior to the reforms, only 4 in 10 working Australians enjoyed the benefits of superannuation, while almost 8 in 10 women had no retirement savings at all. Now nearly every working Australian enjoys this benefit.

Australia’s scheme is unique in that it is both compulsory and universal. Australian employers are mandated to pay an additional 10 percent of an employee’s wages into a designated savings account. These accounts are then managed on employees’ behalf by collective fund managers known as superannuation funds. Super funds then invest these savings, giving average Australians the benefit of long-term compound interest and investment returns.

It’s time for Canberra to put this money to new uses. Democracies are right to worry about the CCP’s attempts to awash the world in cheap money. CCP loans—now surpassing 5 percent of global GDP and worth more than those of the World Bank or the International Monetary Fund—come with hidden strings attached. BRI projects are often “roads to nowhere,” with locals cut out as CCP contractors bring in their own products and Chinese labor to do the work. Taxpayers are left with a bill for things they don’t need, while political and business elites make off like bandits. More than a third of BRI projects have involved alleged corruption, labor abuse, or environmental breaches.

BRI projects often look like domestic white elephants—unless you’re an aspiring superpower looking to pick them up on the cheap. China acquiring Sri Lanka’s Hambantota port is the most notorious example. While there is mixed evidence about the effectiveness of the BRI as a tool of “debt-trap diplomacy,” Australia is right to worry about projects of little economic value appearing on its doorstep. The so-called fishing port that China plans to build on Papua New Guinea’s Daru island—a place with almost no fisheries—is exactly the type of investment that raises eyebrows.

What’s not in doubt is the BRI’s usefulness as a method for the CCP to seek market and preferential access for its businesses and state-owned enterprises, including Huawei. Allowing autocrats to set the standards of governance, market behavior, and sensitive areas such as technology without challenge would be a strategic own-goal that can easily be avoided with coordinated action.

As a frontier nation, Australia has traditionally imported capital from the world’s savers to fund its economic and industrial expansion. Growth was often throttled by shallow capital markets and overseas bond markets. But thanks to superannuation, Australia now has more money than it needs to fund its investments. With limited places to invest at home, Australian capital is set to join iron ore, natural gas, and Crocodile Dundee as a famous national export.

Australian super funds are already global in scale and growing quickly. AustralianSuper—the nation’s biggest single fund and ranked in the world’s top 20 by size—has roughly 1 in 10 working Australians contributing to its overall value of $170 billion.

With the superannuation contribution for each employee due to reach 12 percent in 2025 and with top performing funds returning nearly 10 percent annually, the sector is set to boom in size.

This will present an allocation challenge as the scale of funds starts to rapidly outsize Australia’s $2 trillion economy. Superannuation funds already hold nearly 40 percent of all publicly listed Australian shares. While 3 in 10 dollars are already invested in overseas equities, with a growing amount in hard infrastructure assets, this figure will only grow as the sector explodes. Though admittedly a high-quality problem, it is not without hurdles.

All investors have been challenged by record-low interest rates wiping out safe and predictable returns. This has caused asset price inflation as capital has bid up the price of existing assets in a search for yield. The Californian pension fund Calpers declared that it will seek to diversify into private and unlisted U.S. assets to secure returns for its members. It might be time for Calpers and others to follow Biden’s lead. Joining a coordinated democratic investment push overseas can help major U.S. funds, find those reliable returns, and hunt down some asset diamonds.

Australian funds enjoy one major advantage over their peer funds in the United States: They are more financially stable due to more predictable liabilities and payment obligations. Superannuation entitlements in Australia are determined by member contribution, not by a predetermined or defined benefit. That is, you can only get out what you put in.

This difference means Australian funds have avoided the solvency or liquidity problems seen in the United States. No Australian funds have required bailouts, unlike their U.S. counterparts. The added financial stability allows Australian super funds to be patient investors and reliable providers of capital. Lower liquidity pressures mean super funds can buy into illiquid hard assets with confidence and for the long term. Australian funds are already large owners of critical infrastructure at home, such as ports and electricity grids, and even own U.S. assets such the Indiana Toll Road.

As a global middle power but a capital superpower, Australia can do some heavy lifting in the Indo-Pacific to support both the economic vision of its friends and Australia’s national interests. Beyond offsetting CCP influence, Australian superannuation can unleash a wave of job-creating investment and enhance the country’s reputation as a trusted partner—all while providing strong returns for working Australians. A more prosperous neighborhood is not just safer and fairer; it will be more lucrative for Australian exports.

Beyond direct investments, the weight of money can be extremely effective in regulating corporate behavior and ensuring businesses support the national interest—or simply do the right thing—beyond their own bottom lines. Environmental, social, and governance (ESG) approaches to investment have been an effective weapon in bringing major carbon emitters such as ExxonMobil to heel. While activists have focused on the E of ESG, when it comes to dealing with autocratic China, the social and governance components of ethical investment are just as critical.

As Australia has found out via billions of dollars lost to Chinese trade coercion, China is not shy in weaponizing its market access. Though ordinary people in the West have become increasingly alarmed by CCP belligerence and human rights abuses, corporate elites—think Wall Street, German automakers, and Australian miners—are not particularly interested in the noncash dimensions of trade. Companies reliant on access often lean on politicians to ensure that so-called unpleasant matters—forced Uyghur labor, for one—are kept out of diplomatic discussions and policymaking. But as the global drive to net-zero carbon emissions has shown, nothing talks like investment dollars inside a boardroom. A python squeeze of investment decisions in areas such as modern slavery and supply chain integrity can ensure businesses deal with these realities of capitalism with Chinese characteristics.

Again, Australia has cut new ground in this space via its ethical superannuation sector. When the mining giant Rio Tinto outrageously destroyed Juukan Gorge—an ancient Indigenous Australian landmark—Australia’s superannuation industry funds quietly ensured the removal of the company’s CEO and his executive team. In the past, the company would likely have been able to ride out the negative press. This major power shift has seen other CEOs fall on their swords for ethical breaches such as harassment and predatory business practices. Super funds are helping Australia to clean its corporate house.

Unsurprisingly, international community support for Chinese loans has fallen as the true costs have emerged. More agreements are being reviewed or rescinded by the month. Trust and integrity must therefore be central to any alternative. Australian superannuation’s domestic and global record of ethical asset ownership and investment can help underscore this.

Such a program would require several things to succeed.

Investments would need to be properly safeguarded. Super funds, particularly those that are nonprofit, owe a fiduciary duty to their members. Government and global agency underwrites or a newly issued type of bond could help offset this risk.

Deal visibility would require government-to-government coordination, rigorous oversight, and transparency. Returns would need to be predictable. And it would need to start small and build out.

The Australian government has arguably just executed the world’s first Build Back Better World deal via its involvement in the $1.6 billion sale of the Pacific telecommunication giant Digicel. Digicel is the largest telecom company in the Pacific, with 80 percent penetration in Papua New Guinea alone. Beyond mobile and internet service, the company is the backbone of content provision in the region, giving it critical strategic relevance.

The deal struck is monumental in both the way it was structured and the competitive victory achieved by Australia over the charms of CCP money.

Australia and the United States were watching uneasily as the CCP circled the debt-laden company, with Chinese leaders clearly hoping to pick up a major piece of regional infrastructure and the associated influence that would bring.

Partnering with Australia’s biggest telecom company, Telstra, the Australian government structured an attractive deal that used the government’s capacity to borrow at close to zero along with the commercial know-how of its private sector. Government borrowing rates significantly de-risked the transaction for Telstra. By fusing together the best of its government and business sectors in pursuit of the national interest, Australia pulled a China on China.

It’s easy to see Australian superannuation partnering in a similar process for other Indo-Pacific assets and businesses, with government providing the debt financing underwriting. Pacific nations are crying out for reliable capital and represent natural places for Australian investment. India – a QUAD nation vital to US and Australian interests – needs investment and would appreciate Australian engagement beyond the three C’s of Curry, Cricket and Commonwealth. A bigger Indian market would also help Australia’s efforts to diversify from China.

Governments in the region unable to borrow at AAA rates may partner with Australian super funds and private operators to free up assets on their balance sheets, such as ports and airports, and reinvest the proceeds into expansion of their hard infrastructure assets. Businesses that get into trouble can find safe harbor with trusted partners.

Predictability will be critical. The superannuation sector is becoming increasingly politicized. Conservative governments have twice paused the legislated increases to the rate of employer contribution. The Morrison government is determined to break the sector’s links to trade unions, which take up 50 percent of board seats on nonprofit industry funds. An international mission of this nature may inspire Australian conservatives to sheath their swords.

It’s a big, ambitious idea for sure. But it’s one that would meet Australia’s commitment to its citizens with its increasing commitment to building a better world.

Misha Zelinsky is a Fulbright scholar in Australia-U.S. alliance studies, sponsored by the Australia-U.S. Ministerial Consultations, and is based at the Center for Strategic and Budgetary Assessments in Washington, D.C. He is a director of Cbus Super but writes in a personal capacity. His views do not reflect those of Cbus.

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