Monday, September 05, 2011

Belshaw's World - can we harness local super?

Note to readers: This post appeared as a column in the Armidale Express on 24 August 2011. I am repeating the columns here with a lag because the Express columns are not on line. You can see all the columns by clicking here for 2009, here for 2010, here for 2011.

Did you know, I didn’t, that the top ten global technology companies ranked by market size had no less than $US 290.89 billion in cash and cash equivalents? Of this group, Apple has the largest cash horde of no less than $US 76.2 billion!

To relative size of the cash pile can be simply illustrated.

Google’s purchase of Motorola plus Microsoft’s purchase of Skype cost roughly $US 21 billion, a big number but also only 7.2 per cent of those companies’ combined cash reserves.

I am indebted for these strange pieces of information to a story from Alex Wilhelm ( on the The Next Web.

What does all this mean? Well, I’m not sure, but I can make a few comments.

To begin with, what do companies do with all this cash?

Part of the answer for, say, IBM is the need to provide working capital and a buffer in uncertain times. However, beyond that, the presence of such large cash reserves simply reflects the absence of decent investment opportunities.

One of the issues about scale is that as you get bigger, then you need to find bigger investment opportunities. You can’t get sufficient return given costs through a multiplicity of small investment opportunities.

We actually have a good example of this at present in Australia, and that’s superannuation.

I actually support compulsory superannuation, but our present system comes at a cost.

One cost is the diversion of savings away from local investments in areas like New England. In the past, local savings were more available to fund local investment. That’s no longer true.

Our compulsory superannuation is aggregated into large lumps. The superannuation funds cannot afford all the assessment and management costs associated with small regional investments, so the funds leave.

A second cost is the way that our retirement incomes have become dependant upon performance by a relatively small range of investment classes.

In a way we are our own worst enemies here for we focus on short term returns as compared to longer term sustainability. Yet when an asset class goes down, the suffering is concentrated on those most dependent, those who actually need cash now.

A third cost lies in the way that superannuation collections now exceed the value of immediately available Australian investments.

If you like, Australia is now experiencing what New England experienced earlier. Cash has to leave the country. There simply isn’t the range of local investment opportunities of the required size.

This problem has been compounded by the decline in the relative size of the Government debt marketplace. There just isn’t the range of Government securities of all types that there once were.

I have been wondering for some time about the possibilities of increasing variety in the superannuation marketplace. Not variety in the way normally expressed such as low fees super. These are macro, big scale issues that do nothing to address the type of issue that I am talking about.

Rather, I have been wondering about possible ways of increasing the number and variety of superannuation providers so that we all had more choice, so that there were more options of marshalling local or regional funds for local or regional purposes, more options for keeping Australian funds in Australia.

I am not talking here about things like quotas to force super funds to invest in particular ways. I don’t support these.

Rather, I am looking for changes to our present regulatory approaches that will make it easier for smaller and more varied funds to survive and grow,

I am well aware of issues such as risk, transparency and probity. I just don’t think it right that those from Northern NSW should be prevented from investing a proportion of their funds in local assets. I think that we should be given more real choice.

To do the type of thing that I am talking about actually requires a fundamental change in the way that Government regulates the superannuation industry. We have to move away from a one size fits all big is beautiful approach.

I would like to think that this was possible.


Greg said...

Jim, you have touched a raw nerve here. The value of Australian super is now about $1 trillion. That money needs a home and many people have found out to their dismay just how volatile the share market can be. It is not necessarily the best place to park the majority of your retirement savings.

My own view is that it is worth reconsidering tax exemption for those superannuation funds which invest a certain proportion of their funds in Australian government & semi government securities. This harkens back to the tax treatment of funds before the changes of the Hawke/Keating era circa 1987 (remember the old 30/20 rule?).

Governments and local authorities could raise funds from super for infrastructure investment by issuing bonds. In return super funds would get income tax exemption. Regions and the nation would benefit from the flow of a large and growing source of new funds for local infrastructure and community projects. More money stays at home and we all benefit.

Jim Belshaw said...

Sorry for the delay in responding. It's worth looking at, Greg, although I know some of the arguments against.
But a system that totally diverts local savings is badly flawed, regardless of the general arguments.