Rich Nuzum

Rich Nuzum, the global chief investment strategist at Mercer, says superannuation funds must resist pressure from governments to finance national and social infrastructure.

The New York-based adviser to some of the world’s largest pension and sovereign wealth funds says it was “common” globally for policymakers to view defined benefit or contribution retirement savings pool as an attractive tool to pursue their agendas without deploying the public purse.

“It’s easy in my experience for politicians to target [pension] funds because they’re not very sympathetic,” Nuzum tells Investment Magazine on the sidelines of the Mercer Global Investment Forum in Sydney last month. “But the moment that voters realise ‘Hey, that’s my money’, it becomes very bad politics.”

The comments come as the Australian government has repeatedly encouraged funds to invest in “big national priorities”, especially social housing and the energy transition. Treasurer Jim Chalmers told a Conexus Financial Political Series breakfast in February that “productivity enhancing” investments in green technology and housing supply were consistent with the purpose of super, which it is currently in the process of enshrining in legislation.

Chalmers doubled down at the opening of Australian Retirement Trust’s Sydney office last month, saying it was appropriate for funds to pursue social impact alongside financial returns to members.

Nuzum, who advised the Chicago Teachers’ Pension Fund on local community real estate investments three decades ago, says social and affordable housing can be a legitimate investment.

“This is not a new asset class or idea,” he says. “From the investor perspective, you can make that kind of investment for risk return purposes if it’s attractive enough; you can make it to have an impact, if that’s part of your mission; you can make it to reflect the value of your stakeholders, or any mix of those three.”

Art to indemnity

But he warns funds entering any such projects, especially where a government entity is a co-investor or patron, involves implicit risk, such as the possibility of subsequent governments unwinding or reneging on the agreements.

In Australia, the federal opposition has been a critic of super funds investing in national or environmental infrastructure, with former financial services spokesman Stuart Robert deriding ESG investments as “woke capital”.

As a result, Nuzum says it is essential that funds take steps to indemnify themselves against any losses emanating from changes in government policy.

“I think investors in any kind of infrastructure project, particularly economically targeted investments, they worry about that risk of a change in the rules,” Nuzum says.

“Then they try hard to securitise the lease terms to protect themselves from that and there’s an art to that. You can’t stop the subsequent government from changing the rules [but] you can make sure that when that happens, you still get paid.”

Nuzum points to UK legislation known as the Mansion House Compact, under which signatory pensions (including Mercer) agreed to increase their allocations to British private equity and start-ups. While he says many funds would be happy to increase their allocation to these asset classes, he adds that they arguably conflict with separate insurance regulations, offering an example of where asset owners need to think carefully before acting on political encouragement.

Eggs in one basket

Aside from the risk from shifts in policy due to change of government in democracies, Nuzum says there is also a significant risk in “nation-building” from the perspective of being overweight in domestic assets.

“We’re not often very popular with politicians when we get invited to opine on this kind of thing, because we’re going to point out that the return to social housing is going to be driven partly by Australian GDP growth, which drives the return of all the other Australian asset classes and the fiscal balance of the government and the ability of the government to stimulate and local employment,” he says.

“Investing in economically targeted investment in your own country is kind of loading all your eggs in one basket. Whether it’s social housing whether it’s an infrastructure project or national development… you want the world ex-your country.”

At the same time, Nuzum says heated political and media discourse around ESG investing, especially in the US, has unlikely benefits for fiduciary investors.

“This is a contrarian view … [but] I think it’s a very constructive dialogue,” he says. “It is forcing fiduciaries to think deeply about what they want to do and why.”

This article was amended on August 18 to include additional information supplied by Mercer about the challenges UK funds may face in increasing their allocations to private equity assets.

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