Taking a slice
Just over a century ago the classic Australian children’s book The Magic Pudding was published reputedly as an antidote to both conventional fairy tales and the Great War food shortages.
But the story of a pudding that renews itself after each slice is carved off has over time also become an allegory for the risks of relying on one funding source for multiple government ambitions.
Author Norman Lindsay’s pudding called Albert has now graduated from the doleful domain of fiscal policy to geopolitics, as the Albanese government tries to ward off US President Donald Trump’s tariff threats with a slice of Australian retirement savings.
Compulsory superannuation saving is one of Australia’s signature structural economic reforms from the 1990s and has made the once foreign capital dependent country a net offshore investor. However, under the current government it has been increasingly called on to fund all sorts of worthy domestic projects from social housing to renewable energy.
And it is also being called up to play a role in economic diplomacy initiatives from economic diversification (away from China) ambitions in Southeast Asia and India to domestic defence equipment manufacturing. This week it joined the big league as Treasurer Jim Chalmers jostled with the likes of erstwhile Australian friends Japan and India all promising Trump more investment in the United States.
How many cuts can the modern magic pudding bear?
$2.8 trillion and counting
New research from the superannuation industry projects that the current $2.8 trillion in “institutional” retirement savings, mostly accumulated since compulsory contributions from employee income started in the early 1990s, is set to become the world’s second largest pool of such money in the next decade.
That will overtake Britain and Canada and only lag the US which explains why the superannuation industry has been in Washington this week talking big numbers that might impress the new president.
The trip was planned before Trump’s election in recognition of the fact that the retirement savings have now become too big to invest in the domestic economy. For example, the total pool of (institutional and private) pension money at about $4 trillion is larger than annual GDP and the total capitalisation of the domestic share market. The superannuation funds already own an estimated 40 per cent of the stock market and financial regulators have recently raised concerns about whether this concentration of ownership raises prudential stability issues.
Australia notably avoided US penalty tariffs on exports of steel and aluminium during the first Trump Administration by drawing on longstanding close security ties, but more importantly its bilateral trade deficit.
This time the economic coercion stakes are higher with Trump’s trade adviser Peter Navarro accusing Australia of unfairly exploiting the previous tariff exemptions and Trump himself pressing countries for more inbound investment rather than just promises to avoid reduce trade surpluses. For example, both the Japanese and Indian leaders Shigeru Ishiba and Narendra Modi talked up their companies’ inbound investment as well as promising to import more American commodities when they met Trump this month.
There is plenty of superannuation money looking for an offshore home.
So, the Australian superannuation industry roadshow to promote its already $400 billion investment in American shares and other assets may prove serendipitous. Last week the industry said in a statement: “As Australia and the United States continue to strengthen diplomatic and economic ties, the historic (superannuation) summit is a rare opportunity to acknowledge and celebrate what brings our nations together.” Once, that sort of language would have referred to a century of Australia backing the United States in wars around the globe, but in the Trump era the sound of money might be louder than guns.
Piling on
The curious thing about the enthusiasm this week that Australian retirement savings might save the Albanese government from Trump’s tariffs, is the lack of any context around the way those same savings have previously been called up to underwrite the government’s Asian economic engagement strategy. That’s a strategy once subtly aimed at reducing trade dependence on China, but now perhaps equally important in providing some insulation against Trump’s mercantilism.
Indeed, Prime Minister Anthony Albanese used his first bilateral offshore trip to Indonesia in 2022 to in effect order the Labor-linked industry superannuation funds to visit Indonesia under the leadership of former Labor government minister Greg Combet to look at ways of boosting Australian investment there. As he put it during his visit: “That’s a huge opportunity of a win–win.”
When the funds dutifully arrived three months later, Financial Service Minister Stephen Jones said he was “making good on Prime Minister Albanese’s promise to engage our super funds with the enormous opportunities emerging from President Widodo’s economic plan for the future.”
And while this week Chalmers was telling the super funds in Washington that “longstanding trusted allies with shared interests make the best economic partners,” back in 2022 his deputy Jones, with the imprimatur of Albanese, was telling the same funds in Jakarta that they should be “exploring opportunities in markets in which our funds do not currently invest.”
The Jones position was taken up forcefully by former Macquarie Bank chief executive Nicholas Moore in his report on business opportunities in Southeast Asia. He said the government should encourage superannuation funds to examine opportunities in the region through both their own direct investment and support for other companies.
The previous Coalition government’s 2018 economic strategy for India also called for government assisted visits to that country by superannuation funds to expose them to India’s growth outlook and to potential Indian investment partners.
Mixed messages
As this week’s US promotion mission underlined, there is plenty of superannuation money looking for an offshore home. And the $400 billion of institutional super money alone already invested in the US is about six times the total Australian direct investment in Southeast Asia.
The highly politically attuned and Labor-linked industry super funds are probably quietly relieved to be talking up their investments in a familiar English-speaking Western market after all the exhortation to take more risks in faster growing and possibly riskier Asia.
While such shifts in investment culture necessarily take time, there have been few public outcomes from the government’s jawboning about Asian risk opportunities and the super funds are busy opening more offices in familiar western markets. Two of the recently announced Australian investments in Southeast Asia have essentially been decisions by the spiralling number of government investment funds.
For example, the $2 billion Southeast Asia Investment Finance Facility, inspired by the Moore report, has made its first investment of $75 million in a Singapore government initiative to co-fund renewable energy ventures in Southeast Asia.
And when a group of Australian investors visited Jakarta in January following up the Moore report, one of the highlighted investments announced was a US$8 million commitment by the government’s own aid impact fund Australian Development Investments to an Indonesian venture capital firm.
In a similar pattern, the New Roadmap update to the six-year-old India economic strategy, which was released this week, made almost no reference to the role of superannuation funds among its list of engagement strategies ranging from chef executive forums to a solar panel training scheme. It merely notes the biggest fund – Australian Super – has invested in India’s National Investment and Infrastructure Fund.
