06 Nov Insights into the Australian Superannuation System By Brett Himbury, IFM Investors
As South Korea looks to transition from a contract-based to an institutional-based retirement income system, IFM Investors Chief Executive Brett Himbury looks at the success of the Australian superannuation model and the lessons to be learned from its introduction nearly 30 years ago.
South Korea’s retirement system is on the brink of major reform. The Ministry of Employment and Labour’s proposal for a new trust-based retirement system would enable the creation of industry-wide pension funds. These institutions would be similar to those seen in some of the world’s most successful pension markets, such as Australia, Denmark and the Netherlands, which place an emphasis on trust-based, member-oriented operations and a long-term approach to investment.
Based on our experience in Australia, if employers and employees embrace these new institutions, the proposed reform in South Korea could significantly improve the retirement prospects for Koreans across the socio-economic spectrum, just as similar reforms in Australia have improved the prospects of Australians in retirement.
Australia’s current superannuation system was the result of a long and hard-fought compromise between worker representatives, employer associations, and government, which saw the introduction of the Superannuation Guarantee legislation in 1992. This mandated the payment of an annual percentage (currently 9.5%) of a worker’s salary into a retirement fund.
Investing in members’ best interests
Importantly, the leaders of the campaign in Australia did not want this growing pool of retirement savings to be managed for the benefit of shareholders or profit-driven financial institutions – but instead to be managed in the interests of the workers. This objective led to the establishment of industry superannuation funds.
With their trustee boards comprised of an equal number of employer and employee representatives, industry superannuation funds act exclusively in the best interests of members, with all profits from investing returned to members, and no dividends payable to shareholders.
Long-term investments to grow members’ retirement savings
Australian industry superannuation funds focus on maximising long term investment returns net of all fees and costs, because this is the key driver of the retirement living standards of their members. From the start, industry superannuation funds have invested in illiquid, unlisted asset classes, such as infrastructure and real estate. Members of industry superannuation funds have made substantial gains from the illiquidity premium of these assets.
Industry superannuation funds’ investments in infrastructure and other unlisted assets in the early 1990s led these funds to create IFM Investors, a fund manager that is uniquely aligned with its investors.
We were established to achieve superior net returns for industry superannuation funds and like-minded institutional investors. We prioritise members rather than shareholders; low fees; and responsible long-term ownership of crucial infrastructure assets.
Our founding chairman, Garry Weaven, had one wish for IFM Investors: to allow shop floor workers and tradespeople to invest as if they were millionaires. Our long-term client base, and the skill of a world-class investment team, have proven to be a formidable combination, improving the retirement prospects of workers across the world.