Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Standing Committee on Economics
21/11/2019
Australia's four major banks and other financial institutions: superannuation sector

SILK, Mr Ian, Chief Executive, AustralianSuper

Committee met at 09:18

CHAIR ( Mr Tim Wilson ): Hear ye, hear ye! I declare open this hearing of the House of Representatives Standing Committee on Economics for the review of the four major banks and other financial institutions. Today's and tomorrow's hearings will be focusing on the superannuation sector. Given the widespread misconduct across the financial services sector identified by the Hayne royal commission, it is important that financial institutions are held publicly accountable to ensure that they make the crucial improvements needed to restore trust in our financial institutions. Treasurer Frydenberg has released a royal commission implementation road map which outlines how the Morrison government will move on all Hayne commission recommendations, including legislation by the end of 2020, with one-third planned to be finalised this year and then, of course, matters to be dealt with throughout next year in a legislative sense and an implementation sense. These hearings provide an important mechanism to examine the superannuation sector's progress in implementing relevant Hayne commission recommendations and the issues that surround it.

Today the committee will hear from AustralianSuper, IOOF, QSuper, NULIS Nominees Australia, REST and Hostplus. At Friday's hearings, representatives from Industry Super Australia, IFM Investors, Association of Superannuation Funds of Australia and AMP will appear.

I would like to outline a number of matters related to the conduct of today's hearings. I refer members and witnesses to the House resolution related to procedures for dealing with witnesses at page 127, paragraph (9) of the House of Representatives standing orders. The resolution provides that should a witness refuse to answer a question they should be asked to state the grounds on which they object. The committee may either accept that objection or, alternatively, deliberate at a future private meeting on whether or not to insist upon an answer. If the committee does consider the matter in private, it may write to the witness with the outcome of its discussion. During the course of the hearing, witnesses may be asked to provide documents at a later stage. As the witness and others are aware, we have done that preparatorily and may potentially do so subsequently—and I'm pretty sure it is going to be subsequently. If a witness subsequently refuses to provide documents, the committee may meet in private to consider the matter. Under standing order 236 of the House of Representatives, the committee has the power to compel witnesses to produce documents where the committee has made a decision that the circumstances warrant such an order. For clarity, because there seems to be some ambiguity, this committee has made a formal resolution that any receipt of documents will be published online on the committee's website, an effectively public document, essentially straightaway. They will be published on the website within 24 hours.

I'm also mindful that today we have a parliamentary hearing on an important matter and subject that draws strong emotions. One of the most important principles of having a parliamentary hearing is to make sure it's held with decorum and respect between the witnesses and, of course, the parliamentary members. As this is a public hearing—there seems to be a small crowd at the back, and we welcome them—the public is most welcome to attend. I also recognise a need to conduct these hearings in a civilised and respectful fashion and that questions and answers are between the witnesses and the parliamentary members. We would appreciate if witnesses are heard in silence so that they can fully deliberate on what is said and that we can have as free-flowing a discussion as possible within the time constraints.

We have a representative from AustralianSuper present for today's hearing. I remind you that, although the committee does not require you to give evidence under oath, this hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I now invite you to make an opening statement.

Mr Silk : I have prepared a brief opening statement, which I'm happy to read if you wish. Alternatively, I'm happy to table it and slip straight into the questions.

CHAIR: I'd appreciate that. We will incorporate that in the Hansard:

The document read as follows—

I am pleased to address to the Standing Committee on Economics and thank you for this opportunity.

AustralianSuper is the nation's largest superannuation fund with 2.1 million members and manages more than $180bn of members' assets. The Fund's job is to act with members to help them achieve their best possible retirement outcome. We work with skill, diligence and care on behalf of all beneficiaries of the Fund.

Members of the fund come from all parts of Australia and every walk of life. In all our meetings surveys and contacts with members, they consistently tell us they want:

1. Strong long-term performance

2. Low costs

3. Good products & services

4. Trustworthy governance and a reputable brand

Our model is to deploy the size and scale of the Fund, along with the skills of our people to meet each of these objectives, in the most cost-effective way to build member balances so they can spend their savings in retirement.

Super is about both saving and spending.

1. The Performance/Growth Benefit to Members

The Fund's performance has historically been and continues to be, strong. We have achieved top decile performance across all horizons, ranking 4th (over one year), 1st (three years), 1st (five years) and 1st (seven years), 2nd (ten years), 1st (fifteen years) and 3rd (twenty years). What this means is that a member who had $100,000 invested with the Fund in 1999 would be worth $454,000 today.

To support performance, we actively pursue member growth. Scale creates value for members in two ways. It allows us to pursue absolute and relative investment performance and to reduce costs per member.

2. The Low Cost/Members' First Benefit to Members

AustralianSuper charges an administration fee of $2.25 per week per member.

Meanwhile, the Fund's investment fees have declined materially over time. A key driver of the cost reduction in recent years has been the insourcing of part of the investment function, which would not have been possible without scale.

Last year, member assets rose by 19% while investment costs grew by only 2%.

For most of the Fund's 'Pre-Mixed' options, investment costs have dropped by more than 20% over the last 10 years to FY2017. Investment costs for the Fund's default 'Balanced' option have fallen by 21% over the decade.

Most of this decline is due to the 29% reduction in total base fees paid to external investment managers across the whole Fund.

3. The Products & Services/Benefit to Members

The quality of the Fund's products and services is evidenced through consistent industry recognition. The Fund's superannuation and pension products were rated 5 Stars for 'Outstanding Value' by Canstar earlier this year.

Since 2007, we have held 55 AGM like face to face member briefings in each capital city with over 20,000 members attending in person and 13 webcasts seen by an additional 5,000 members. AustralianSuper's app have been downloaded by more than 550,000 members. In 2018, we introduced a dedicated Aboriginal and Torres Strait Islander telephone inquiry line, through which we have helped more than 50,000 Indigenous members. Further, we have made efforts to reach members in the most remote parts of the country via a 'Super Made Easy' radio program which was produced Pitjantjantara and Aranda. The radio program was syndicated across the country and is estimated to have reached 300,000 Aboriginal and Torres Strait Islander members.

4. Trustworthy Governance and a reputable Brand

The Hayne Royal Commission unearthed examples of some players in the financial services sector engaging in either illegal conduct, or conduct falling below community standards. It noted three safeguards in place for protecting Australia's superannuation assets: consumer oversight, regulators, and the compliance of registrable superannuation entities (RSEs) with the law. In examining AustralianSuper's policies, behaviours, governance, decisions, performance and most importantly - member outcomes - over the last decade, the Royal Commission found no incidents of misconduct and no incidents of behaviours falling below community standards.

The report made a series of 76 recommendations and provided a series of important insights and guiding norms of behaviour for the industry.

AustralianSuper has reflected deeply on each and has taken a number of steps to improve our practice, despite no adverse findings being made against the Fund.

Pleasingly, AustralianSuper has been named Australia's most trusted super brand for the 7th year running (2013 — 2019) according to the Reader's Digest Most Trusted Brand Survey.

A History of Bipartisan Improvements

During the year, the Productivity Commission's (PC) report in to the efficiency and competitiveness of Australia's superannuation system found that whilst most members are well served by the system, several structural problems in the system nonetheless exist and need to be addressed - including multiple accounts, excessive insurance and underperforming funds

We commend the Federal Government's enactment of a series of legislative responses that will help address a number of those concerns. The 'Protecting Your Super' reforms that took effect from 1 July 2019 will protect super balances from being eroded by unnecessary fees and costs and the 'Member Outcomes Package' introduced in September 2019 will strengthen the prudential framework to deliver a more transparent and accountable retirement savings system. We have moved quickly to give effect to both packages of legislation.

Members want more policy stability from government

The Committee should be cognizant that changes have been made to superannuation in almost every Federal budget since the system was first introduced and there have been 26 reviews in ten years - not counting the federal Treasurer's retirement income review announced this year. Constant tinkering has meant that members perceive the system as very complicated and is a source of concern.

Members want to be free to enjoy their retirements. They want us, as superannuation funds, to make them as much money as possible risk adjusted after all costs and taxes.

What they want from government is to stop tinkering so they can plan their retirements with confidence.

Recent research from Coredata reveals that than one-in-four Australians over 50 see 'government legislative change changing the goal posts' as the number 1 risk to their financial security in retirement. Two thirds of Australians over 50 years ranked it within the top 3 risks to their financial security.

Members want the rules governing superannuation to be stable so that they can plan with certainty for their retirement. Indeed, AustralianSuper looks forward to working with the government to improve member outcomes and stabilize the system for the benefit of all Australians.

I welcome questions from the Committee.

Regards

Ian Silk

Chief Executive

CHAIR: In response to the questions on notice you provided to the committee, I congratulate you on AustralianSuper's engagement with members and how often you've held briefings for members, which has not been consistent across some other funds. I'm curious: considering the large number of hearings you've had, how many people have you had attend these hearings?

Mr Silk : We've been holding these hearings for around 15 years. The numbers have increased every year. This year we held what we call member briefings in every state capital city and in Canberra and Darwin. We had between 4,000 and 4½ thousand members in aggregate attend those sessions.

CHAIR: I note in the answers to questions on notice as well that there has been a shift in the types of asset classes that AustralianSuper has taken, particularly between listed and unlisted. It has gone from 58 to 54 as a share of income, if I'm not mistaken—sorry, that's of total assets for listed investments and 28 to 23, which in five years is quite a significant shift. It also informs your income profile. Has there been a strategic decision around why that has been done?

Mr Silk : We're starting to adopt what's commonly referred to as a dynamic asset allocation approach. That's to be contrasted with the other competing view about asset allocation, which is to establish fixed asset class assignments—X per cent in Australian equities, Y per cent in international equities and so on—and then to rebalance to those weightings when markets move. That's one approach. AustralianSuper has a different approach, which is to make conscious decisions on a tactical basis to allocate depending on our views of likely movements in different asset classes—

CHAIR: Tactical?

Mr Silk : Yes.

CHAIR: When you say tactical, do you mean in response to market conditions?

Mr Silk : In response to our view of likely market movements in the future.

CHAIR: Sorry, I interrupted you.

Mr Silk : That's fine. The proportion of listed versus unlisted will vary depending on the investment team's view and the investment committee's view of the likely movement in the asset classes that make up those two broad headings, listed and unlisted.

CHAIR: Is this trend likely to continue or is it just going to be tactical, based on how you feel the market's moving?

Mr Silk : Perhaps if I back up a bit. Every June, the investment committee has a day devoted to the forward market outlook and determines what we call a strategic asset allocation for the next 12 months. We assign a percentage figure that we're assuming, as of that June meeting, will be the figure that we're aiming towards in 12 months time. We might have a view, for example, that Australian equities are likely to increase in value over that time and, therefore, we might have a strategic asset allocation to Australian equities greater than it is at the June meeting. Twelve months hence, we expect to have more in Australian equities, because our view is that Australian equities will increase in that period. However, the tactical dimension that I spoke of was that, as events unfold and as the year unfolds, that view might seem to be flawed, one way or the other—that is, Australian equities might be seen to have a greater run than we'd anticipated, or performed more poorly, and we wouldn't be held to our strategic asset allocation; we could move away from that through the course of the year.

CHAIR: What reforms have you taken as a result of the royal commission? How are you preparing yourself for further reforms to be legislated by the government?

Mr Silk : The royal commission was a searing exercise for the whole financial services industry, including superannuation. I think all of us were shocked at what the royal commission revealed, and I know from AustralianSuper's own experience it was an extraordinarily thorough, searching inquiry. We'd not been involved in a royal commission before. We produced 67,000 pages, 1,900 documents, a dozen or so witness statements to witnesses and so on, and so we know from firsthand experience how thorough the process was. In terms of the lessons we've learned from it, the issues that we've gone to school on, there were several. Firstly, the old adage that customers' interests reign supreme must be the watchword for all organisations in financial services. That's a terrific reinforcement out of the royal commission on something as fundamental as that. The fact that Commissioner Hayne listed six behavioural norms in his final report and the first one was 'Obey the law' really speaks to the conduct that was unveiled. In fact, in the member briefings that we've conducted over the last couple of months, we've given a report on the royal commission and mentioned Commissioner Hayne's exhortation to the industry to 'obey the law' and that has prompted derisory laughter, frankly, on every occasion, and people are appalled at what they've read and heard about it.

The second issue that was really reinforced to us was this notion of community expectations. I think the government introduced this when the terms of reference for the royal commission were initially drafted, because that was a term in those terms of reference, and Commissioner Hayne relied on that to a significant extent, and his and counsel assisting's questioning of the 'could you, should you?' variety was: 'You established legally that you could undertake a particular course of action, but did anybody step back and ask whether you should you do that? Is that consistent with community expectations?' I think, to all of us, that was a terrific reminder that there's more than just a legal framework that sets the basis for interaction between a financial services organisation and consumers.

The third issue I'd say that was particularly reinforced to us—and I say this in the context of AustralianSuper being a relatively strong performer, if I might use that expression, of recent times—was the dangers of complacency and hubris. A number of the organisations that were most savagely excoriated through the royal commission process have, until recent times, been amongst Australia's most venerated and respected financial institutions. Sadly for those organisations, that's probably not the case today. They may reassume that mantle, but, as I said, as an organisation that emerged relatively well from the royal commission—I don't want to overstate that—it's a lesson that's been reinforced to us: the need to continue to focus and improve, to deliver what we're all about, which is delivering optimum retirement outcomes for our members.

CHAIR: I appreciate that, but my question was a bit more specific. What steps, if any, have practically been taken, or is it just that you think you've got nothing to change?

Mr Silk : No, I would never say that. The government has introduced a range of legislative measures, many of them associated with the royal commission—protecting your super and the member outcomes provisions. AustralianSuper has complied with those, as you would expect, but in many cases has pre-empted the legally required date for operation. I think in particular of the multiple accounts issue. AustralianSuper some months ago transferred 246,000 accounts representing about $506 million in members assets to an eligible rollover fund prior to it being passed through to the Australian Taxation Office. That's not required to occur until October, for example. We've heeded the lessons from the royal commission and have acted promptly, ahead of required time to comply with it.

CHAIR: Can we just go to the point about the eligible rollover fund. In IFM Investors' answers to questions on notice and their annual report it states: the fund they control—AUSfund—has received 500,000 low balance inactive accounts in the last financial year that have been transferred. What number of those have been from AustralianSuper?

Mr Silk : Thirty-odd thousand in May and 246,000 a couple of months later, so 270,000 in that time period. I can take on notice the number that were provided over the previous 12 months.

CHAIR: So there were some transferred before the last financial year and some in this financial year.

Mr Silk : Yes. We've made transfers to AUSfund for a number of years.

CHAIR: If you look at their answer to a question on notice—I'm not expecting you to have a copy of it—in every financial year there's essentially about half a billion dollars in AUSfund. In 2019 it jumps to $1.362 billion—sorry, half a billion dollars to $1.362 billion within a 12-month time frame, which is a pretty substantial shift, you'd have to accept, in one financial year. The intention of the protecting your super scheme was essentially to transfer low-balance inactive accounts through the Australian Taxation Office. You've moved them in advance, before, which reactivates those accounts, doesn't it?

Mr Silk : With respect, I think the purpose of the legislation was in part to send them to the tax office, but that was a halfway house. The ultimate purpose is of course to reunite it with an active account.

CHAIR: Correct.

Mr Silk : The reason that AustralianSuper and, I gather, other funds use AUSfund is that it has the most active and proactive mechanism for reuniting inactive accounts with active accounts in the industry, one objective assessment of that being, I think, for 10 of the last 11 years or so it's won the award for the best eligible rollover fund, principally on the back of its work in reuniting inactive accounts with active accounts.

CHAIR: In practice, doesn't rolling it over mean that they go into AUSfund and are effectively reactivated as accounts, which means that they don't need to be distributed to the ATO?

Mr Silk : I've spoken with some people at AUSfund about this. They're in discussions with the ATO with a view to confirming with them whether AUSfund can exercise its ability to reunite the inactive accounts with active accounts and for those that it's unable to do that to transfer them directly to the ATO. That's the objective of AUSfund at the moment. They don't want to hold on to them, because they'll be transferred to the ATO at some point, once they've exhausted their efforts, which, frankly, are more developed and more successful than the ATO's have been to date. They want to pass them to the ATO, and AUSfund will be closed down.

CHAIR: But, in the meantime, will they be able to be charged fees, for instance, versus going straight to the ATO?

Mr Silk : They'll be charged fees and earn income.

Mr FALINSKI: I understand what end state you are trying to get to, but, at the moment, what is happening? That has reactivated the accounts, is that right?

Mr Silk : I understand that's right.

CHAIR: That raises a series of issues then about what happens with those funds while they're in AUSfund, and the fees that are charged that are associated with it?

Mr Silk : This issue was discussed, certainly by AustralianSuper with AUSfund, because, apart from the reality, we didn't want the perception to be that we're seeking to establish a device to reactivate accounts. That's the point I think you might be getting to. We spoke to AUSfund about that, and they said to us: 'The writing's on the wall for eligible rollover funds. We don't want to extend the life of this fund by an additional 12 or 18 months beyond what is useful, so we'll seek to reunite inactive accounts with active accounts, and, subsequent to that, we'll seek to have the ATO agree they can been transferred to the ATO.' Those discussions are already underway. They are not about to commence; they have commenced.

CHAIR: We might have to get AUSfund in to have a chat about that. I've looked through your auditors over the past five years, in response to the questions on notice, and it seems that your internal auditors and your external auditors seem to jump around, but they're the same people. Can you give some clarification about why that is the case? Sean Hill is the internal auditor from 30 June 2017 to 2019 and is the external auditor from 2015 to 2016. The same thing is basically happening with Mr Jim Power. In 2016 he is the internal auditor, and then he jumps over to be the external auditor signing partner in 2017 and 2019. How does that ensure that there are proper auditing processes when they're the same people?

Mr Silk : First of all, this document was accurate at the time it was written and in relation to the years that the questions were asked of, but both Jim Power and Sean Hill have subsequently been replaced as the lead audit partners for internal audit and external audit.

CHAIR: Why?

Mr Silk : In the case of Tim Power, he's retired. In the case of Sean Hill, he's resigned from KPMG. We have had nominated to us and agreed on the individuals who are going to replace them as lead audit partners.

CHAIR: Who are they?

Mr Silk : Chris Wooden at KPMG.

Mr FALINSKI: Is he your internal or external auditor?

Mr Silk : KPMG is the internal auditor. I'm embarrassed to say I can't recall the name of the PwC gentleman. I do know him, but I can't recall his name.

Mr FALINSKI: That's going to be a bit awkward!

CHAIR: I'll leave you to sort out that problem! But can you understand that some people might look at that situation—where you've got internal and external auditors jumping between roles—and raise an eyebrow and wonder whether there are proper auditing practices?

Mr Silk : That's occurred through this five-year period that the questions were asked about, but that's not a common approach. AustralianSuper is a large institution. We have a practice—not a policy, but a practice—of appointing the big four firms as internal auditors and external auditors. That's not locked in stone, but that's what we've had to date. It's a pretty limited field in Australia, as you well understand. They are both very well regarded and, frankly, more importantly from AustralianSuper's point of view, have delivered excellent service, we would say, to the fund and the fund's members. We review these assignments every year and we make an appointment on a three-yearly basis, subject to that annual review. When the last review was undertaken, it was considered that, having regard to the particular expertise of the individuals and the fund's requirements, to appoint KPMG as an internal auditor, whereas it had previously been the external auditor, and PwC as the reverse was the best thing to do.

Mr FALINSKI: Do you think that a three-year appointment may be problematic, in the sense that the firm that you're appointing will need to invest a lot of resources up-front to understand, as you quite rightly say, a large and complex organisation, and they may be reluctant if it's a three-year appointment to dedicate too many resources, given they've only got a three-year period in which to recoup that initial investment? Perhaps a longer appointment period of five to 10 years may be justified, especially for an organisation of your size and complexity? And maybe by the end of you're answer you'll remember who your external auditor is—I'm kidding!

CHAIR: I think you've just been passed a note!

Mr Silk : I'm disappointed, because I had written the name down. It occurred to me myself! It's Craig Cummins, from the Sydney office of PwC.

Mr FALINSKI: Mr Cummins is a very good auditor!

Mr Silk : If he's watching, I wrote the name down! We sometimes do make five-year appointments. The appointment time of three years, five years or 10 years, in a sense, is not a critical issue, because we do review them on an annual basis. We don't sign a contract for three years or five years or 10 years that has a significant financial penalty attached to it if we don't see out that duration.

Mr FALINSKI: Sorry to interrupt you. I'm not going to delve greatly; I just want to put it out there: would it be worth, in an organisation of your size and complexity, actually saying to an audit firm, both internal and external: 'We're going to you a five-year contract—unless you break the law or whatever the case may be—so you can actually invest in systems and people to make sure that we're getting the full suite of your services and expertise in this matter'?

Mr Silk : I think that's a good idea, frankly, including because we want people who know the organisation well and can really challenge us. So if the individuals doing the audit—leaving aside the firm—change every 12 months or so, then they won't be able to say, 'Hold on, two years ago you did this and now you're saying something else.' For that reason, giving an indication—not a security of tenure, but an indication—that it will be a medium-term duration, I think, is a good idea.

CHAIR: Unlike most other funds, you provide at least some information around your portfolio of unlisted assets. I know this is publically available. Obviously you've listed different assets and their valuation range. I think a $300 million to $1.5 billion range is probably a bit too large for a range to give you any real indication, in comparison, for example, to something between $10 million and $20 million. But that's an observation which, I've no doubt, we will have time to delve into further. Have you ever downgraded the value of an unlisted asset?

Mr Silk : Yes, we have.

CHAIR: Is it a common feature?

Mr Silk : No, it's not a common feature. I would hope it wouldn't be a common feature, because—

CHAIR: I hope so too.

Mr Silk : It would also speak to the capacity of our team in purchasing assets, of course, if it were a common feature. But it has occurred

CHAIR: Thank you.

Dr LEIGH: I thought I'd start off with the issue that's of most concern to AustralianSuper fund holders—the returns that you produce. The Productivity Commission found that not-for-profit funds, including industry funds, generally outperform retail funds like those owned by the banks. Over the five years to June 2018, the average retail fund delivers returns of seven per cent. What are your five-year returns?

Mr Silk : I don't have that figure with me. I think it's in the order of 9.6 per cent.

Dr LEIGH: Is it also true that you significantly outperformed the average retail fund over the last 10 years?

Mr Silk : It is. The 'superannuation wars', as they've sometimes been characterised—industry funds versus retail funds—is of some interest to those of us in the industry but is of not great moment for most members of superannuation funds. They're interested in a fund that maximises returns. As you say, the Productivity Commission review—which was the most authoritative and comprehensive review of the superannuation industry in Australia that's ever been undertaken and ran over three years—found that the average industry fund outperformed the average retail fund by nearly two per cent per annum. When you consider that a one per cent per annum differential equates to around $100,000 difference at retirement, we're talking very serious money here. That's not to say that every industry fund outperforms every retail fund. That's not the case, but the Productivity Commission data is pretty clear on that issue.

So performance of the sector—I'm talking about the superannuation sector here—is of critical importance for public confidence and ultimately for the retirement standard of living that all Australians enjoy. So we would say the most important issue in this industry is performance and, in particular, underperforming funds. The Productivity Commission report said that the industry is doing a good job. It said that default super is the most important superannuation because it's the product that people usually don't choose and are defaulted into. Nine point six million accounts, or 86 per cent of default funds, outperform their benchmark, and 1.6 million, or 14 per cent, underperformed. They're very compelling figures, but there are still 1.4 million accounts that are persistently underperforming. The challenge for the industry and for policymakers and regulators is to ensure that persistently underperforming funds are removed from the industry, particularly default funds, because, as I say, they're usually funds people don't choose to go into; they're defaulted into them by their employer. In a compulsory universal system, you shouldn't be able to be defaulted into—or, I would say, even choose—a persistently underperforming fund.

Dr LEIGH: I absolutely agree. Let's go to some of the factors that are driving that two per cent gap between the industry and retail funds. There's been some work done by various academics that has tried to unpack some of those factors. Can you talk about what you see as being the key factors—questions like representative governance and asset allocation?

Mr Silk : This is a really interesting issue, and the Productivity Commission spent a lot of time on this matter. I think the reasons for that performance differential are quite numerous. They include a very obvious point: retail funds are run by commercial organisations. They are naturally profit-making organisations, so there's a profit margin that goes into a retail super fund that doesn't exist in an industry or profit-for-member fund. So that's a pretty clear arithmetic benefit, if you like, or advantage. So in a sense, for that reason alone, if industry funds can't outperform retail funds you've got to ask yourself why. That's the first point.

The second point is that industry funds have a different model to most retail funds. I'm speaking on average and particularising AustralianSuper's situation here. Most industry funds, including AustralianSuper—I had this discussion with the chair earlier—have dynamic asset allocation. Retail funds, more typically, have strategic asset allocation which is fixed, and there's a rebalancing to that. That's only an advantage if you've got the skill to make good decisions. You could be making bad decisions. To date, that has worked well for members of AustralianSuper.

Asset allocation is another point. For a variety of reasons, retail funds have a low allocation to unlisted assets—unlisted infrastructure and unlisted property in particular. They have been strongly performing asset classes for those investors that have invested in them, and members of AustralianSuper have benefited from that.

The final point I would make is that the other significant distinction between retail funds and industry funds is their governance structure. The governance structure at AustralianSuper certainly, and in most industry funds as I understand it, is wholly focused on optimising the retirement outcomes of members. They don't have competing considerations. They're not seeking to balance, for example, the interest of shareholders and fund members. They're focused solely on the task at hand. It's difficult to attribute the contribution to the performance differential of all of those, but the latter, to my mind, is a significant contributor.

Dr LEIGH: The choice to invest in unlisted assets has, on paper, served you well. The critique we'll often hear of industry funds is that it's a paper return only and this is all because you've mispriced your unlisted assets. Why is it that organisations such as Industry Super and the Future Fund don't publish the valuations of unlisted assets?

Mr Silk : AustralianSuper has published, on our website, details of virtually all the assets in the portfolio—there are around 6,000 securities—and, for almost all of them, has published the dollar value or, in the case of some, a dollar range. The reason we've published a dollar range—and they're only for unlisted assets; listed assets obviously have a public market—is very similar to if a member of the committee were selling their house and had a reserve of a million dollars. You don't put that out into the market, because a buyer might come along and offer to pay $1.1 million, but, if they know the reserve is a million, they're going to be reluctant to do that; they might come along and offer $950,000, for example. That's the reason. We don't want potential buyers having a market advantage that would see them act in a way that would be to the detriment of the fund's members. We're all about maximising the investment return of the fund for the benefit of the two million Australians that are members of AustralianSuper and, if we were to publicly divulge the valuation that we hold an asset at, we think that's going to be the detriment of the fund's members.

Dr LEIGH: Your members would effectively end up poorer in retirement if those figures were published.

Mr Silk : Ultimately, yes; that's right.

Dr LEIGH: What's the value to you, in a risk-return sense, of investing in unlisted assets? How do they fit into your asset allocation schema?

Mr Silk : Mark Delaney is the fund's chief investment officer. He refers to unlisted assets like property and infrastructure as 'the ballast in the boat'. On a risk-return spectrum you have equities at one end, bonds at the other, and unlisted assets are the type we describe as mid-risk assets. They have return characteristics that are not the same as but not dissimilar to equities, and risk and volatility characteristics that are closer to bonds, so they perform a very important moderating, stabilising role in generating long-run returns for members of the fund. We typically transact on these mid-risk assets with a view to holding them for the long term. Many of them provide strong, stable, long-term income streams—for example, long-term leases with the Commonwealth government in a large CBD property, or an infrastructure asset where government has committed to pay a regular income stream over an extended period of time. They might not generate the strong outperformance of equities but, in the context of a balanced, diversified portfolio aimed to generate strong long-term returns, they're a terrific contributor.

Dr LEIGH: The Productivity Commission also found that the investment management costs for unlisted assets were lower than for listed assets. Is that your experience?

Mr Silk : No, not typically. We've found that it depends on the mode of investing. AustralianSuper's internal equity costs—we have an investment team in house that invests in the Australian equity market and global markets. They operate at a lower cost than our external managers. But property and infrastructure assets usually come at a higher cost to manage, because they're more of a hands-on investment than direct equities.

Mr FALINSKI: Andrew, can I ask one question? Sorry if I'm getting in your way.

Dr LEIGH: If it is on the same line of questioning.

Mr FALINSKI: It's just a point of clarification. Can your members choose if they want a balanced portfolio—if you're younger, you get into higher risk assets, because they're long-term—or do you allocate the same for all?

Mr Silk : We used to have 19 investment options—which, compared to some, is a pretty modest tally—but we've pared that back to 11—five different configurations, high growth down to very conservative, and the others are single asset classes. You can configure your own portfolio and have X per cent in Australian equities, Y per cent in fixed interest and various other asset classes, or we've constructed a number where you can choose where you want to fit on the risk-return spectrum. There are options for members. Most of our members are in the balanced fund. All defaulting members are in the balanced fund, and a very large number of active choice members have specifically chosen to remain in the balanced fund.

Dr LEIGH: The portion of the Productivity Commission report I was referring to does say 'Australian investment costs are typically higher for listed assets and lower for unlisted assets' but then the comparison seems to be unlisted having a lower management cost than private equity, rather than comparing to—

Mr Silk : That's certainly our experience as well—private equity being the most expensive asset class.

Dr LEIGH: I will have words to the Productivity Commission about their headlines!

Mr FALINSKI: What is private equity?

Mr Silk : Private equity we describe as equity—so an ownership stake—purchased in typically an operating company but not listed on an exchange like the ASX.

Mr FALINSKI: That's why it's more expensive.

Dr LEIGH: What's the benefit to Australia of having domestic superannuation funds invest in infrastructure?

Mr Silk : There are many perspectives to that question. State governments are delighted at the prospect of the nation's superannuation savings being devoted to purchasing some of their assets and, in the case of the New South Wales government, recycled into other assets—the New South Wales government having achieved a lot of international acclaim for that asset-recycling program that I think commenced under Premier Baird.

Mr FALINSKI: Premier O'Farrell will be very upset!

Mr Silk : That's one issue. I think the other issue goes to the fact that trustees of superannuation funds are focused on the members—in our case, two million members—and on optimising their retirement outcomes. But we're also conscious that there is nearly $3 trillion in the nation's superannuation pool. Wouldn't it be a terrific outcome if we could optimise retirement savings for individuals and at the same time do something good for the nation? There is a lot of talk about nation building and so on. I know in AustralianSuper's case our objective is not to contribute to nation building and then see what falls out of that by way of member outcomes; it's the reverse. But we're conscious of the fact that we're custodians of a large amount of money on behalf of two million Australians. If that can be contributed into the economy to increase the productivity of the economy, generate wealth in the nation and generate more employment in the nation then you do have a virtuous circle—all directed to the best interests of the members of the fund but able to generate a series of additional or ancillary benefits for the nation. That's something we see as a real positive of our infrastructure program.

Dr LEIGH: Which is, conversely, jeopardised by any policies that would seek to push you out of unlisted assets.

Mr Silk : Yes. I'm not familiar with policies that are directed to that. Questions are asked about our unlisted asset allocation, and it's an open book as far as I'm concerned. Our assets are there for all to see. We've disclosed all of them. Our valuation policy is consistent with APRA's valuation standards and consistent with accounting standards. It's a detailed document. It has been provided to the committee. All the valuations that are commissioned by AustralianSuper in relation to directly-held assets or those commissioned by our fund managers that are provided to AustralianSuper are all conducted independently, consistent with the criteria mentioned in the valuation policy, such that, of the assets that I've just described, 82 per cent are valued quarterly, two per cent are valued annually and 14 per cent are valued six-monthly. We have a very robust, very transparent approach to valuations, and we're very proud of it, frankly.

Dr LEIGH: Since the tail end of the royal commission, September 2018, we've seen a steady flow of money out of retail funds, something in the order of $3 billion a quarter, and an inflow into industry funds in the order of $4 billion a quarter. To what extent do you think that has to do with the fallout from the royal commission for a number of problematic retail funds?

Mr Silk : We understand they're not unrelated. I think the royal commission reset a lot of the community's views about financial services, including superannuation. This issue of trust, which is a topic that's much discussed in the community and in the corporate world, was elevated in peoples' minds. We've spoken to a lot of the members who've joined AustralianSuper in the last 12 months. A large number of the ones you referred to have joined our fund. There's a push-pull factor at play. Many people have decided to move from their current super fund. That's the first action. The second action is to choose the fund they're going to move to. A lot of the feedback we had was not so much about performance, the issue we spoke about, which might have been a reason itself, but people were disappointed that organisations they'd expected to behave with appropriate fiduciary standards had fallen short of that mark, and were looking for an organisation they can trust. Happily for AustralianSuper, many have come to AustralianSuper. I say 'happily' not because new members are the be-all and end-all for us but because the be-all and end-all of our business model is scale. We're a large fund. We're seeking to be a larger and growing fund so we can capture the economies of scale that come with that size and pass that through to members. When new members are joining the fund, that's not a cause for celebration at AustralianSuper per se but it is a cause for celebration in the sense that that's another person or dollar we can seek to wring some economies-of-scale benefits from and pass that through the totality of the fund's membership.

Dr LEIGH: How do you feel about the release of APRA's heat maps next month?

Mr Silk : We haven't seen the detail of the heat maps yet, but conceptually I think it's a very good idea. As you're aware, they're proposing a heat-map-cum-traffic-light system but without green, so the regulator won't be, implicitly at least, endorsing particular funds. Funds that essentially pass their test will just remain white, and then there'll be, as I gather, a range from light amber through to deep red. If that works as well as APRA are hoping it will, it will have the critical effect of driving poor-performing funds out of the industry. As I said before, I think that's the biggest issue in the industry at the moment, and the heat maps are hopefully going to be an important mechanism to achieve that end.

Dr LEIGH: There are more investment options in Australia for superannuation investors than there are products in a typical supermarket. How do you think it would be good for the industry to move in terms of mergers of funds and the reduction in the number of different investment options?

Mr Silk : There are two separate issues there, as you identify. One is the number of funds in the industry and the other is the number of investment options within any one fund. The industry is clearly on a path to consolidation. Consolidation in and of itself is not important. To reduce from the current number to a lesser number is only positive if the quality of the remaining funds is superior to the quality of the funds that exist now. If consolidation works as it should, it should achieve that end. So it won't be successful to reduce from 200 funds to 100 funds if the 100 funds contain a lot of funds that are poor performing. The objective must be to raise the average quality of funds and ensure there are no poor-performing funds. So I support consolidation in the industry with that important caveat.

Investment options are a different story. I'm reminded of the scene in the film The Hurt Locker when the soldier returns from the Middle East and is confronted with this huge range of jams in the supermarket aisle and he's freaked out. That is how a superannuation consumer must feel when they see the range of investment options in some super funds. The trustees of those funds may say, 'Our members have told us they want a great range of options,' but it defies belief that many of these—they have thousands of options—are really catering to a need. They have become, in many instances, a marketing ploy—'My fund's better than yours because I've got 3,000 investment options versus your fund that only has 1,200.'

Again, this is an issue where the needs of the members have to triumph, not marketing spin. As I said, in our case we had 19—and we were growing. Then we said: 'Let's pause here. Let's ask members what they want.' Some members said they wanted a choice, but they wanted a very limited choice. There may be some funds whose membership warrants or demands a greater number of investment options than 11. I'm not denying that. But some of the range of options is frankly ridiculous.

CHAIR: Thanks for that. I want to touch on some of those issues, following on from what Andrew discussed. Does AustralianSuper provide any incentive schemes to encourage new people to join as part of its marketing plan?

Mr Silk : The only thing that might fall into that category is that we've recently established a partnership with Qantas whereby certain members who join and are utilising this particular endeavour receive some Qantas frequent flyer points.

CHAIR: Twenty thousand or thereabouts?

Mr Silk : Correct.

CHAIR: That seems to be more consistent with behaviour for people taking up new credit cards than superannuation options. When you come down to the decision around superannuation, there are significant life choices around your long-term future and obviously retirement security. You're now engaging in credit card incentive schemes, effectively, to try and get people to move across.

Mr Silk : As you might expect, this was a matter of considerable discussion in the fund.

CHAIR: I'd hope so.

Mr Silk : It was also the subject of two sets of legal advice. The legal advice and the management position settled on the basis that, with all due respect to the Qantas frequent flyer program, the allocation of 20,000 frequent flyer points was not a sufficiently material incentive for people to choose a super fund on that basis alone but that the offer of points would attract people's attention and give them cause to consider the offer and then make a decision on the merits.

CHAIR: Do you think that's responsible? I would have thought the objective for superannuation funds should be to increase the literacy of the public and to encourage them to make informed decisions. These are significant decisions, I'm sure you would agree—perhaps not necessarily at the point at which people are making them but in the long-term consequences. To put little bits of sugar on the table where people are going to respond to frequent flyer points, as you said, isn't necessarily material; it's just glitzy.

Mr Silk : I'd make a couple of points. The first is that we do seek to improve the financial literacy of our members but, having served on the Australian Government Financial Literacy Board for a number of years, I know we're a long way from achieving that objective. So we try, but we're not relying on that. So the trustee has a significant responsibility. That's why the default settings in the fund are so important. I might say—without overstating this point—that AustralianSuper's investment performance means that you might say the individuals who've come into the fund, possibly influenced by the frequent flyer program, have made a good decision, as judged on the objective scoreboard of the fund's investment performance. The fund has been a top-decile performer over every period—one, three, five, seven, 10 and 20 years. So, if we can alert people to the opportunity to be in a better fund than the fund they are in now, we're keen to bring that to their attention.

CHAIR: I note your point about scale and the benefits of scale. I presume one of the benefits of scale is also that you hope you can decrease your costs, including administration costs, overall.

Mr Silk : Yes.

CHAIR: AusSuper's admin fees increased by about 50 per cent, from $1.50 to $2.25 per week or by $39 per year, from $78 to $117, on 30 March of this calendar year. With 2.2 million members, this increase represents about $85 million. Is that a fair assessment?

Mr Silk : That arithmetic calculation?

CHAIR: Yes.

Mr Silk : Yes.

CHAIR: Is it accurate to assume that the administration revenue has increased from approximately $171 million to $257 million as a result of this fee increase?

Mr Silk : Approximately.

CHAIR: Is it accurate, then, to assume that the administration expenses have also increased from approximately $171 million to $257 million in line with the fee increase?

Mr Silk : Can I make a few points about this. The first is that you correctly identified that the fund did increase the administration fee from $1.50 to $2.25. It was set at $1.50 in 2009, so it remained at that level for 10 years. Over that period, the range and quality of the fund services have materially increased, as you would expect. So this is not something that happens frequently; it happened over a decade. After that decision was made and the fees were increased, AustralianSuper's fees are still in the lowest decile in the industry. So we say that scale is working—demonstrably so.

There are two sets of fees in superannuation, typically: administration fees, which basically cover all non-investment costs, and investment costs. Naturally, investment costs are the larger of the two. Where we've been able to deploy scale for the benefit of members is in the investment program. In 2009, the investment costs, measured on an MER basis, were 60 basis points. This year they were 49 basis points, a 22½ per cent cut in the investment costs. What does that mean for a real person? It means that, for somebody who's got an account of $50,000, that's a saving in fees of $131 per annum. For someone who's got $500,000 in the fund, it's $1,661 per annum saved in costs. Frankly, if this was not happening, you'd have to put a big question mark over the business model of AustralianSuper. But it is happening. As I said, that's step 1. Step 2 is the important part: can we use that scale to benefit members? Demonstrably, our investment costs and therefore the aggregate costs of the fund are coming down at the same time as we're delivering top decile performance for members.

CHAIR: I imagine that some people would see that as an opaque answer around the extent to which there has been any shift in terms of increased costs and whether that essentially relates to the back-end services provided by AustralianSuper. Has there been any concern raised by your members in the member forums about the changes in back-end fees?

Mr Silk : I don't recall any questions being raised in the member briefings. We did have some contact with the contact centre, where questions were raised about it. I can provide the committee with the precise number, but it was a very small number. With respect, I wouldn't say that what I answered a moment ago was opaque. These are real cuts in fund costs and, by extension, real benefits to members of the fund. This is not some academic exercise. For example, the funds internal investment program saved members $160 million in investment costs last year, relative to the situation where the whole of the fund's portfolio was outsourced. That's $160 million. It's effectively a wealth transfer from the funds management industry to the accounts of two million AustralianSuper members. That's how we're using scale to achieve real benefits for members.

CHAIR: How does AustralianSuper deal with refundable franking credits associated with the fund?

Mr Silk : What do you mean?

CHAIR: In terms of claiming them, how are they distributed?

Mr Silk : They're distributed across the membership.

CHAIR: Regardless of where they're generated?

Mr Silk : Correct.

CHAIR: So it's just money in, money out, and they're distributed across the board?

Mr Silk : That's right.

CHAIR: There's no delineation between different units of who owns what et cetera? It just affects the whole structure of the fund?

Mr Silk : Correct.

CHAIR: In relation to one of the issues that's come out of the royal commission and the government response in the context of super, is AustralianSuper fully compliant with the insurance in super code?

Mr Silk : No, we're not fully compliant. We are very largely compliant. We're compliant with all the material areas. I'll take on notice, if I might, where we're not compliant, but I can assure you and the committee that the fund is largely compliant. We have a program to become fully compliant.

CHAIR: Over what time frame?

Mr Silk : I'll let you know.

CHAIR: You'll take it on notice?

Mr Silk : Yes.

CHAIR: Does the fund offer insurance reinstatement on the same terms, if requested by the customer, within 60 days of having their coverage cancelled?

Mr Silk : I'll take that on notice.

CHAIR: Thank you. Are you familiar with the ACTU's superannuation partnership program?

Mr Silk : AustralianSuper's—

CHAIR: The ACTU's superannuation partnership program.

Mr Silk : I might be, but I don't know something by that name.

CHAIR: Or the ACTU Member Connect program?

Mr Silk : I'm familiar with ACTU Member Connect program, yes.

CHAIR: Has AustralianSuper ever made contributions towards either the ACTU superannuation partnership program or the ACTU Member Connect program?

Mr Silk : As I said, I'm not sure what the partnership program is, so I can't answer that.

CHAIR: It came up in answer to a question asked of another super fund, and it stood out because I had never heard of it before. When we made inquiries, nobody seemed to know what it was.

Mr Silk : It might be a name adopted by the fund to describe some relationship that they had with—

CHAIR: We'll look forward to asking that question tomorrow.

Mr Silk : No, we haven't made any contribution to the Member Connect program.

CHAIR: Could you take on notice about the superannuation partnership program just in case?

Mr Silk : Yes.

CHAIR: Before I hand over, Adam Creighton wrote an article in The Australian 'Tax-ignorant super funds ''losing billions of dollars''', essentially arguing that decisions were being made around investment decisions on a post-tax rather than a pre-tax basis. Are you familiar with this article?

Mr Silk : I am familiar with that article.

CHAIR: What's your response to that and AustralianSuper's position in light of the issues that it raises and the research that's made the claim that they're missing out on returns of up to $7.5 billion, or 0.6 per cent, a year because of decisions that are being made?

Mr Silk : I don't know where that material originated from, but it doesn't speak to how AustralianSuper manages our tax. I should also say that, when AustralianSuper discloses investment performance in any forum, in any documentation, it's always post tax, post fees. We're putting into the public realm only net investment performance.

Mr CRAIG KELLY: Just a couple of quick questions: have you made any calculations—if there was a change from the compulsory superannuation rate at 12 per cent, how many extra dollars annually would flow into AustralianSuper?

Mr Silk : No, we have not done that.

Mr CRAIG KELLY: Could you perhaps take that question on notice?

Mr Silk : Sure.

Mr CRAIG KELLY: Could you perhaps also take on notice: how would that affect the fee structure from AustralianSuper? Obviously, there would be some additional fees, but would that reduce the overall percentage of fees? Would there be some economies of scale, or would it just be a straight percentage take that additional—

Mr Silk : I'll take the first question on notice and, likewise, the second. In relation to the second, it's important to remember that we're a profit-for-member fund. So the trustee that runs the fund doesn't make any money, doesn't generate any profit and doesn't pay dividends to any shareholders. If—well, I think when; the legislation is already in train, obviously—and when we get to 12 per cent, that 2½ per cent of contributions will go into the fund. It won't mean any more members join the fund, obviously, and therefore, when I was talking about admin fees, AustralianSuper charges admin fees purely on a per dollar basis—$2.25 per member. It will have no impact on administration fees. On the investment side it may well because there'll be more money in the fund and more scale. For example, the last financial year, the financial year ending at 30 June 2019, AustralianSuper's assets increased by 19 per cent. The assets managed on behalf of members increased by 19 per cent. Investment costs increased by two per cent. That's the scale that we're seeking to generate and to pass those benefits through to members. There'll be a dimension of that, but I'll quantify that for you in a written response.

CHAIR: Before I throw back to the deputy chair, I will ask one other question. There was an article—I can find the actual copy of it—by everybody's favourite chair of Industry Super Australia: 'Greg Combet promises fight over 12pc super'. In it he's basically said that for anybody who argues against an increase in the compulsory superannuation contribution—I've got a copy of it here, if you want—there will be a vigorous campaign by Industry Super Australia run against them as individuals and also, I presume, although I'm making this assumption, against the government. Has there been any discussion amongst industry super funds that you're aware of along those lines?

Mr Silk : I'm on the board of Industry Super Australia, and Mr Combet is on that board and is the chair of the board. As you would know, of course, there have been murmurings about changing the legislation to see the 12 per cent not delivered.

CHAIR: The question is: are you aware of any discussions at an ISA level or across the funds about a campaign being run against either parliamentarians or a government for having a difference of opinion on the 12 per cent increase?

Mr Silk : The key words here are 'campaign' and 'MPs'. I'm not aware of discussions around a campaign. What I am aware of is a broad view held and publicly stated by the Prime Minister, the Treasurer, the finance minister and the assistant minister for super that the 12 per cent will see the light of day—that is, the existing legislation will remain unchanged. When there are discussions or when issues are raised to the effect that the 12 per cent legislation should be changed, then, as you would expect, you see some discussion in the industry about that and what might be done in the interests of fund members to see that not occur.

CHAIR: Sure, but let's get to the point. If I go off the Joanna Mather article, it starts:

The behemoth industry superannuation lobby has threatened a public campaign if the government tries to walk away from a commitment to lifting the compulsory contribution rate to 12 per cent.

Is there a scoping works discussion around the framing or the design of a campaign on that issue?

Mr Silk : Not that I'm aware of.

CHAIR: Not that you're aware?

Mr Silk : No, but I want to be very plain: not a campaign in terms of an advertising campaign or some such that I'm aware of. What I am aware of, and AustralianSuper is doing this of their own volition, is emphasising to members the benefits of the current legislation—the benefits to them of superannuation going to 12 per cent. I might say that when we've had the member briefings—I see a lot of members at these briefings, obviously—the two most commonly raised issues with me are, firstly, 'I'm not sure I've got enough super; what can I do about that?' It's pretty plain. Secondly, 'How can we stop the government'—not this government, but any government—'tinkering with super?' It's not surprising. We don't have members turn up to those briefings and say 'We don't want any more super.' The reverse is the case. It might not be a representative group of two million people who turn up to these sessions, but I can assure you that they are very hot to trot on the issue.

They're also conscious that the super system is still an immature system. A 65-year-old today has only had nine per cent super since they were 48. They've only had three per cent SG since they were 38. So the system is working its way through. I thought the Treasurer made a terrific point on Tuesday when he talked about the dependency ratio. You'll recall the article in the Financial Review where he talked about 7.4 Australians aged between 15 and 65 in 1975, and that it's going to be 2.7 in 2035. So there is the individual dimension that we spoke of before, and then there's the national dimension. Our responsibility, and my responsibility as the chief executive of AustralianSuper, is to represent the interests of the two million AustralianSuper members. They're telling me, in loud and clear terms, that they want 12 per cent super.

CHAIR: Sorry, Mr Kelly, do you have a follow-up question?

Mr CRAIG KELLY: In those circumstances where you're having those discussions, what would you say to someone that came along and said: 'I'd rather the extra three per cent or 2½ per cent go directly into my pay. That will help me buy a house or help me put my kids through school and education. I think that's how I'd prefer to invest my money, rather than being forced to put it into compulsory superannuation.' What do you say when someone says something like that?

Mr Silk : First of all, I understand that—because who amongst us would prefer future consumption over current consumption? That's particularly if you're a modest-income earner and wages growth is pretty modest. But I'd say this: that's the sort of argument that was run in 1992 when the SG was introduced, and the view taken by policymakers in the parliament then was that it was important to take a longer term view of things.

Mr CRAIG KELLY: But, on that, someone could be saying: 'Hey, hang on a minute. At the moment it's prohibiting me from getting a deposit for a house. I want to take a long-term view. I want to make the decision to use that extra cash. Rather than it being put in superannuation, I'd rather use that money, with a long-term view of my future, to put into the purchase of a house or, for my family's future, into my kids' education.' Can't they be taking a long-term view?

Mr Silk : They can be taking a long-term view—

Mr CRAIG KELLY: This is obviously different to saying, 'I will take that money down the pub on Friday night and blow it all.' That's obviously a significant difference. That's your consumption argument. Isn't there also an argument that people can be worse off, or not necessarily better off, in the long term if that extra money that they could put towards a house today they are forced to put into superannuation and then they can take it out when they retire and put it into a house?

Mr Silk : They couldn't take it out when they retire because they'd have forsaken that 2.5 per cent—

Mr CRAIG KELLY: All I'm saying is that, if someone doesn't purchase a house during their life, there is nothing to stop them from using their superannuation money when they get it to then go and purchase a house.

Mr Silk : Yes, that's right. I take your point that there are different perspectives on this issue. But we don't have to hypothesise about what a voluntary system looks like. We had a voluntary system. Until compulsory super came along, we had a voluntary system. In that voluntary system, only 40 per cent of the Australian workforce had super. Many of those Australians weren't voluntarily in super; they were required to be in super. They were public sector workers and management in the private sector in the main. Forty per cent had super. Sixty per cent had zero super. If you are talking about a woman, 30 per cent had super. Seventy per cent of women had zero super in the optional, voluntary era. So we know what it looks like. People don't save preserved savings unless they're required to. The Treasurer has made this point himself, I think. The percentage of Australia's GDP that's devoted to pension payments is around 2.7 per cent. The OECD average is 10 per cent. The demographic issues that have been described in the Treasurer's speech as 'an economic time bomb' are going to explode in this nation unless we take reasonable steps to ensure that the superannuation guarantee can work in tandem with the pension system to provide people with a reasonable standard of living in retirement.

Dr LEIGH: You are not only the custodian of two million Australians' retirement savings but also a significant investor in many Australian firms. What are the principles that guide your attempts to improve corporate governance and the way in which you vote on contentious resolutions?

Mr Silk : We've got an active team in our investment department called the environmental, social and governance team. They work closely with the frontline investment professionals to provide input into their decision-making. We say that ESG issues—environmental, social and governance issues—represent important risks and represent important opportunities that an informed investor needs to take into account when they're making judgements about whether to buy an asset, how to manage it, or when and under what circumstances to dispose of it.

Our ESG approach has three dimensions. The first is to inform the investment decisions. The second is by way of stewardship—so, having purchased an asset, to work with the management of that asset to ensure that ESG issues are appropriately taken into account, again to optimise the retirement outcomes of the fund's members. The third is a little different. The third is where we've heard a number of members of the fund say, 'We don't like the way you're investing. For example, you're investing in coal and we don't want our money invested in coal.' So one of the 11 investment options we have is called the socially aware option. We say to members, 'If you don't like the mainstream approach to investing, we've established this other investment option,' and it excludes a number of products on the basis of member research and member surveys. It doesn't invest in companies that have reserves of fossil fuels, uranium or tobacco, and there are a range of other exclusions. They are the three levels at which we operate the ESG model at the fund.

Dr LEIGH: There have been concerns in the United States over significant investors investing in firms which compete with one another. The fear is that common ownership can dampen competitive pressures because common owners have an interest in the oligopoly doing well, rather than in the individual firm doing well. How do you avoid that risk in how AustralianSuper casts votes on boards? How do you ensure you're not a force against competition in the market, rather than a force for it?

Mr Silk : I'm sorry, I'm not sure I understand that question.

Dr LEIGH: Well, imagine an environment in which you've got two supermarkets that have a common owner. That common owner, if they owned only one of the supermarkets, would want to see that supermarket do well and the other supermarket fail. But if they have a significant share in both supermarkets then, effectively, they have a stake in the duopoly. They have a stake in seeing less competition in the market than would be the case if all of the shareholders in the two supermarkets were distinct. How do you avoid that problem in how you vote on boards?

Mr Silk : Can I take that issue on notice?

Dr LEIGH: Absolutely.

Mr Silk : I'm still not entirely sure I understand the question. Perhaps if I reflect on the transcript I'll be able to provide you with an answer.

Dr LEIGH: Yes.

CHAIR: I'm struggling with clarity as well. You might want to follow it up with some further questions on notice, if you wish, Dr Leigh.

Dr LEIGH: I'm very happy to follow up. In terms of your investment in venture capital, how large is that and what impact does that have on that sector of the economy? I'm thinking of both the public benefit and the benefit to members.

Mr Silk : We've got around a billion dollars, something less than a billion dollars, invested in venture capital. We're typically invested through managers. We've committed something in the order of that figure to venture capital. Again, this is an area where we don't make any investment decision without the view that it's going to contribute to optimising the retirement outcomes of members. The investment in venture is part of that mindset. Like all investors in venture, we're looking for businesses that are going to grow exponentially and be the sort of investment that people look back on and say, 'We wish we'd got into that early.' But we're also conscious that as a significant investor in Australia we can help small companies, companies in the early phases of their development, with capital to grow and build, to employ people and to make a contribution to the economy. As I said, as a significant investor in the economy we see not an obligation to do that, not a national obligation, but we do see, consistent with that overarching objective of operating in members benefits, an ability to do that. We're keen to continue doing that. We've been invested in venture to a greater or lesser extent for 20 years or so and we look forward to continuing to be able to make contributions in that area.

Dr LEIGH: In terms of consolidation of duplicate accounts, the royal commission recommended an approach of stapling members to their first default fund. I understand that there have been other proposals for different forms of stapling. Do you have a view as to the best way of ensuring that there is some sort of consolidation mechanism? I'm aware it's an issue we've touched on before.

Mr Silk : There are two approaches, and I'll come to the second approach in a moment. I think it's really important to focus on what the problem is here and what the high-level solution is. The problem is there are too many superannuation accounts in the system. It is important to note that it's a diminishing problem. In 2010 there were around 33 million superannuation accounts. Today that figure is about 25 million. It's expected to get to around 18 or 19 million, but we need to get there faster or as fast as possible. Either solution that's mooted will help achieve that objective—that is, the solution you've suggested or the other solution, which is an automatic rollover upon changing jobs into the new employer's default fund. KPMG have done some work, which I think has been provided to the committee, which suggested that is a considerably more efficient mechanism and one that's of greater benefit to individuals. Either one will achieve the objective, and let's focus on achieving the objective, and one of them appears to be far superior to the other, that being the KPMG-endorsed model.

Dr LEIGH: Thank you.

CHAIR: I've got one question before we conclude—as outlined, there may be follow-up questions from committee members. It's around the concept of different types of funds and different products that people choose to purchase. There are obviously different ones—different equity arrangements, high-growth arrangements, balanced. Do you believe there is a case to establish a clear definition that operates consistently across funds about what those terms mean, either in terms of their risk profile and the investments that go with them and/or the share of different classes of assets and so on?

Mr Silk : I think that would be a terrific advance. I think the answer to that question needs to be framed by who the audience for that is, and of course that is members of funds to add their comprehension of what they're in and their ability to compare with others. To your point, that is aided if there is a consistency of approach and consistency of terminology.

CHAIR: I think part of the problem is that there are a number of things that affect the superannuation policy space. One is around literacy, but in order to address literacy there has to be some sort of comparability and portability of different product options. The absence of clarity about what balance means in the context of Aus super, in terms of asset holding gives you the comparability therefore of returns and income that comes off that, makes it extremely difficult for customers. I take it that, based on that answer, you would be in favour of consistency around what it means, depending on the different products so that you can compare them and give them a proper rating.

Mr Silk : Absolutely. This is an issue that's been discussed for a number of years. The issue is what that actually looks like and that on a fair and objective basis product providers can support the inclusion of their balance fund, if you like, into a particular category. As long as it's objective and fair and—

CHAIR: And transparent.

Mr Silk : transparent and, in particular, able to be used and interrogated by members, then that's a very worthy objective and one we'd strongly support.

CHAIR: Can I just clarify that you'd take the same view on fees in terms of the totality of fees?

Mr Silk : Absolutely, yes.

CHAIR: So a consistent standard which would provide comparability of fees in terms of funds, in terms of unitised nature of funds and those that are included in—all fees, all costs associated with the operations of a fund?

Mr Silk : Not all funds provided unitised costs to members, as you'd be aware. ASIC has done a lot of work over the years and has recently settled on the RG 97 method of fee disclosure. That was a tortuous process, and one that many in the industry are not entirely delighted about. But the notion of consistent, transparent and common fee disclosure across the industry to aid members' ability to compare across the industry and to be clear about what they're paying is a very laudable objective and one we would strongly support.

CHAIR: In light of time—as I said, there may be follow up questions from committee members—thank you for you attendance here today. The committee secretariat will be in touch with you in relation to any matters arising out of today's hearings. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact.

Proceedings suspended from 10:46 to 11 : 00