7.  Mandated Superannuation Fund Investment

A support mechanism periodically canvassed by industry and advisers from time to time is a mandated requirement for fund managers to hold a proportion of funds under management in infrastructure securities. The Australian superannuation industry is one of the largest in the world in per capita terms with funds under management around A$1 trillion (around 89% of GDP at current prices).106 Superannuation funds are regulated by the Australian Prudential Regulatory Authority (APRA). The average portfolio allocation of a sample of leading superannuation fund managers in 2007 is set out at Table 6). The disclosure of infrastructure investments varies between funds and the different style of investment accounts that are offered. Infrastructure appears under several asset categories - listed equities, debt securities or unlisted/other securities. In 2003 institutional investors (including fund managers) held over 70% of the equity securities issued by listed infrastructure companies.107 A survey of a sample of listed infrastructure entities for the year ended 30 June 2008 suggests that this remains the case. Around 64% of institutional investors act for superannuation fund managers.108

Fund managers serve the investment preferences of their members who may choose between cash, growth, balanced, high-growth, sector-specific and many other investment options. Several funds maintain dedicated infrastructure funds which may include participation in local PPP projects.

Superannuation funds would appear to be an appropriate store of capital that may be used to invest in listed and unlisted infrastructure projects. The funds can match long-term liabilities to members with similar term investments offering relatively low risk and strong yield performance particularly in the latter stages of the holding term. Local and international fund managers are already significant investors in listed sector-specific portfolio infrastructure vehicles such as Macquarie Infrastructure Group and Macquarie Airports, portfolio funds, unlisted portfolio vehicles such as the Australian Infrastructure Fund and asset-specific PPP investment vehicles such as River City Motorway, Connect East and BrisConnections.

Superannuation fund investment in listed and unlisted infrastructure will continue for managers in pursuit of diversification, returns or long-term yields. However, mandated investment in infrastructure projects and PPPs in particular raises a number of concerns and certainly erodes neutrality between investments which is a cornerstone of an efficient capital market.

First, superannuation fund trustees are required, under the Superannuation Industry (Supervision) Act 1993 to act in the members' interest. The investment strategies employed by trustees are different and may include a member choice of investment profile, reliance on in-house and outsourced management expertise, active and passive investment strategies and links to associates in the retail advisory and financial planning industry.109 Equity also imposes a fiduciary duty on trustees to serve the interests of those for whom they act.

The return of a superannuation fund is largely determined by the manager's performance and this is influenced by asset allocation and the particular investment profile of the fund. As members have discretion to move their accounts between fund managers, the investment performance of the manager is central to the size of the funds that they manage. Central to the fund manager's performance is liquidity and discretion to adjust equity portfolios from time to time, especially with the industry's short-term approach to fund performance measurement.

To require fund managers to invest in PPP infrastructure projects is to limit management discretion and impair liquidity and possibly, overall fund performance. An irreconcilable tension exists between mandated investment strategies and fund manager's fiduciary and contractual obligations to members.

Second, requiring fund managers to invest in greenfield PPP projects may impair fund performance if lower cost PPP investments are available in listed markets. These conditions have existed in Australia in the past 12 months and a large number of listed PPP entities were trading at significant discount to valuation.

Table 4 Portfolio Allocation of Australian Superannuation Funds 2001-2006

SOURCE Ellis, Tobin and Tracey 2008 NOTES Sample comprises 32% of funds under management and 39% of funds over $200m in size. Based on growth default option. 1848

Third, to require fund managers to invest in PPP assets is to impair the level playing field and create distortions for asset allocation and investment neutrality.

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106  Life insurance company superannuation funds and superannuation funds under management at 31 December 2008 (Reserve Bank of Australia 2008).

107  Regan 2004.

108  This estimate is based on beneficial ownership of voting securities for a sample of 13 substantial shareholder notices and the 2007-08 annual reports for listed infrastructure entities (Corporations Act s. 671B, Form 604) (Regan 2009).

109  Ellis, Tobin and Tracey 2008; Sy, Inman, Esho and Sane 2008.