Super funds are deviating from their original mission as “guardians of pension” and are starting to look and sound worryingly like asset managers, according to industry veteran and commentator Rob Prugue.
Prugue helmed asset manager Lazard as its chief executive in the Asia-Pacific for over a decade and was also formerly head of international equities at State Super. At the Fiduciary Investors Symposium in the NSW Blue Mountains earlier this month, he described himself as a fierce advocate for compulsory super but argued the sector has “changed culturally” since he started his investment career at the start of the super levy in the late 1980s.
“We became a financial service provider, as opposed to a guardian of superannuation or pension,” he told the symposium in a candid Ted Talk.
“As a financial service provider, some of our focus has begun to change – some of it was forced [by government opportunism] and some of those commercial.”
For example, Prugue, who now runs consulting firm Callidum Investment Research, said funds now need to consider asset capture with increasing member choices, and some have introduced independent membership to the board aside from employee and employee-nominated seats.
“As we embark into this expansion into financial services industry, does the board have sufficient gravitas to challenge management in the direction that they wish to go?”
He argued that as funds pursue strategies as global investment businesses, they need a greater diversity of professional skills on the board, so they can ask tough questions an interrogate the strategy set by management. Without it, management can easily go unchecked, he said.
“It’s not uncommon in financial services. We begin to believe our own marketing. We become… hubristic.”
‘Too big to fail’
With increasing consolidation, the nation’s two biggest funds AustralianSuper and Australian Retirement Trust are forecast to collectively control $1 trillion by 2030. But Prugue said it’s also alarming how funds have embraced ‘the bigger, the better’ narrative from regulators.
“Sadly, I’m not sure we all are aware of the moral hazard that we’ve now embraced, and what the consequences are with this ‘too big to fail’ moral hazard,” he said.
“Will the government allow a [mega-fund]… to go bust? I don’t think so.
“If that’s the case, what we ultimately have is a PAYG-like fund, only chocolate covered as DC [defined contribution]. We’re not truly a DC structure anymore.”
He outlined a scenario where the consequence of a systemic failure could lead to another attempt by the government to nationalise the superannuation system. And while he urged he is neither hoping nor forecasting such a systemic failure, not opening oneself to such risk is too risky.
“The consequence therein of that, if even half right, is that when there’s an implosion… and the government is forced to bail that fund out, ultimately the DC concept of the risk being held by individuals is a farce.
He questioned whether, given the taxpayer is the ultimate wearer of structural risk, the super system could be nationalised, as it is in much of Europe and elsewhere.
“I’m not advocating for that, let’s be perfectly clear. But if we don’t talk about these risks, then we’re beginning to believe our own marketing.”
