‘Growth, Innovation and the Building Recovery’ Justin Arter CEO Cbus Super, address to National Leaders Summit

Thank you for the warm introduction, Denita, and for the invitation to speak here today.

I would also like to acknowledge Simon Butt, MBA National President and representatives of all the MBA associations around the country.

I acknowledge the traditional custodians of the land on which we respectively stand. The Ngunnawal people in the Canberra area and the Bunurong and Wurundjeri people (from Melbourne, where I am speaking from today).

I’d like to thank the MBA for the opportunity to speak to its members for the first time since being in this role.

Of course, I’m disappointed that I’m unable to be there in person, but COVID-19 continues to keep us on our toes and I’m pleased the MBA has been nimble enough to gather people in person as well as virtually.

As you may know, I became Cbus Chief Executive at the height of the COVID-19 pandemic crisis last year.

Despite having spent many years working abroad, I was attracted to the strength of this fund and of Australia’s superannuation sector, and because of what I saw as an opportunity to be part of something unique and very valuable to Australia’s working population and economy.

Coming from some of the largest fund managers in the world, including Goldman Sachs, JB Were and Blackrock, I was able to take a sober, outsider’s view of Australia’s retirement income system.

I was able to compare Australia’s system with what was happening in UK and European funds.

I liked what I saw. Which was this: a single-minded mission to grow the retirement incomes of millions of Australians.

A key part of the appeal for me was the way that Cbus invests in property, and not only because it generates jobs and benefits right here in our own home for our industry, our contributing employers and our members, but because of the extraordinary risk adjusted returns that it generates.

That’s something I wanted to be part of.

We are heading into the second year of a global event, that’s unprecedented in scale and breadth in most of our lifetimes. While it will continue to be a bumpy ride, the economic outlook is improving.

Globally, the forecast is more positive than what might have been expected in the midst of the pandemic last year.

The IMF (International Monetary Fund) global economic growth forecast released in January was revised up from the previous forecast as a result of the rollout of the COVID vaccines globally, faster than expected recovery in employment and expectations of policy support for an extended period.

The pace of economic activity at home is being driven by unprecedented levels of policy support …including cash rates at near zero and expansive fiscal stimulus measures alongside targeted management of COVID. In particular, I know that the MBA have been very pleased with the take up of the Homebuilder scheme.

As the population adjusts to “Covid normal’, improvement in business and consumer confidence has improved quickly.

We have however seen some short-term disruptions to activity due to localised Covid clusters within Australia, but these appear to becoming shorter in duration and breadth of impact.

On balance, Australia continues to navigate well through this, with domestic activity starting to open up, as reflected in improving mobility, improving levels of confidence and continued growth in the labour market.

Globally, activity also is improving, however there is a considerable divergence in the pace of recovery.

China is well ahead, whilst in the US, UK and Europe there remains fragility due to the high number of cases of infections.

Looking ahead this year, we anticipate we will see strong rates of growth in economic activity, albeit at lower levels than would otherwise have been the case.

Within Australia, the recent data suggests that we are through the ‘eye of the storm’ with activity and employment improvement at a reasonable rate.

We acknowledge there is considerable uncertainty both here and overseas, but we believe the policy support and management of the health crisis is laying the foundations for a much more positive 2021.

Looking forward, in an environment of lower for even longer interest rates and secular headwinds such as high debt levels, we can expect total portfolio returns to be lower on average.

We believe active management of investments and a Total Portfolio approach to decision making, with a very keen eye on cost management, will continue to deliver strong returns for our members.

The opportunities we will seek are shaped by the current climate.

We’ll continue to invest in businesses with strong sustainable cash flows, aligned to secular growth opportunities.

There is a very valuable role in our portfolio for property and infrastructure with over 20% of our portfolio in these two asset classes.

We will continue to seek investments aligned to secular tailwinds such as renewables, and digital infrastructure.

A more positive economic forecast than expected is of course encouraging for the construction sector.

We recognised that there were investment opportunities for us in the post-COVID economic recovery period, and this would not only create jobs for our members but could also provide opportunity to generate strong investment returns.

Our internal investment team moved quickly on the opportunity for project finance for construction, recognising that there would likely be pressure on funding in general given market conditions and that there was strong merit in supporting strong projects that deliver sound risk-adjusted returns.

Our debt funding for viable projects that may have otherwise struggled to get off the ground due to conditions outside their control, helped create a pipeline of work that is supporting the industry.

In a nutshell…

We started 2020 with only one construction funding deal on the books and ended the year with four transactions representing a funding commitment of over $300 million, and funds advanced of over $150 million.

These include three apartment developments in Melbourne and one in Sydney – creating an estimated 1000 jobs.

Across our internal strategies and external managers, we participated in a range of equity capital raisings for Australian corporates, providing multiple hundreds of millions in important additional capital for quality businesses during this difficult period.

2020 was also the year Cbus trialled a new approach to investing in the social housing sector, partnering with the NSW Land & Housing Corporation and the Commonwealth’s National Housing Finance Investment Corporation (NHFIC) on an innovative pilot that will increase the amount of debt funding available to community housing providers.

The initial project involves the construction of 96 dwellings over 6 sites in NSW, with Cbus providing subordinated debt behind NHFIC.

The Cbus funding increases by over 25% the amount of debt funding that would otherwise have been available for a project of this nature.

This project is currently at the RFP stage with the aim of construction starting close to the middle of this year.

Looking at the opportunities that lie ahead…

Funding has already been approved for a new development of more social and affordable housing – this time in Victoria.

While the detail is still confidential, I can say that the developer we are working with was keen to start the year with funding certainty so that they can engage with builders about getting this $50 million + project started.

We continue to talk directly to developers in the market and work closely with the major banks on opportunities.

Banks are still in the market providing capital for construction deals but often they are constrained by concentration limits for the sector, the developer or the builder, or by the capital they have to set aside for construction loans.

Cbus working with them helps to make deals happen. We expect this to continue throughout 2021.

Through Cbus Property, we are evolving our innovative approach to building and construction.

We’re proud to be a leader in the area of sustainable building design – because it’s the smart thing to do. It’s what tenants and purchasers want.

Cbus Property will be a major leader of the different built world coming out of COVID.

The conversations Cbus Property is having are all about the future of the office environment and what the residential apartment environment looks like.

The seismic shift in the way we work and our health and wellbeing needs over the last year will permanently change how we think about property.

We’re at the forefront of innovation, whether it’s through sustainable building design and energy efficiency, future-proofing with scalable technology for amenity such as electric vehicle charging stations, battery storage and data spines in buildings, or designing and building for the new way of living and working in a post-COVID world.

Our goal is to continue to be a leader in strategically responding to change.

In the most challenging year that most of us have witnessed in our lifetime, Cbus has performed well. The strength of our model has never been more evident than during this crisis.

Around 80% of our FUM is in the Growth (MySuper) option and Cbus was one of a small cohort of funds who delivered a positive return for the financial year.

By the end of December our 1 year return was 5.07% and importantly over the long term our returns are highly competitive, with the Cbus Growth (MySuper) option ranked among the very top performing funds in the SuperRatings SR50 Balanced Survey over 5 and 10 years.

Our investment fees and costs have reduced significantly over the last three years – saving members in our growth option $135 million in investment fees last financial year.

Our fund continues to grow, with our Funds Under Management ticking over $60 billion in January.

We continue to explore growth opportunities because scale delivers benefits to members.

Last year, we announced that we had been chosen by Media Super to be their merger partner, adding to our scale (and thus improving cost efficiency for our members) and providing the benefits of our investment strategies and strong returns to their members.

Increasing scale has enabled Cbus to invest in transformation programs like our investment internalisation.

And our growth strategy aims to ensure Cbus maintains its position as one of the largest industry superannuation funds.

Cbus will actively pursue growth in both the short and long term to ensure that we can stay strong for our members and for our employers.

As the largest fund for building and construction sector, Cbus strongly advocates for the bespoke measures that our fund provides our members, who have unique needs due to the inherently hazardous nature of their work.

This week the Government introduced the Your Future Your Super Bill. The objectives of the Bill are to get rid of multiple accounts and underperforming super funds. We support these objectives  – but have three areas where we believe the Bill must be improved to ensure that the policy objectives are achieved without negative consequences.

First, the Bill requires employers to pay SG contributions to a worker’s existing fund, unless they choose a different fund.

Most workers already have a super fund when they start work in the building and construction industry.

We have already commenced our discussions with to the Government and MPs from across the spectrum to ensure that the Bill does not leave construction workers stapled to a fund that is not designed for them and paying for insurance that won’t cover them.

As you would know, construction is an inherently hazardous industry and to support our members and contributing employers, our fund provides tailored TPD insurance coverage that most funds do not offer.

Cbus liaised with the Government and crossbench to develop a workable exemption for workers in hazardous occupations in 2019 when new laws were introduced to stop under 25s from paying for default insurance cover in their super.

We’re seeking a consistent approach here – an exemption for hazardous workers from the stapling proposal so they can default into a fund that provides them with adequate insurance, and we’re confident the Government will listen to us again and work toward a fair outcome for people who need tailored insurance products.

Secondly the Bill also introduces new rules about fund expenditure and new performance benchmarks. We are concerned that these proposed new requirements will not apply consistently to all funds, and thus not all members in the system will benefit.

For instance it is common for retail funds to make payments to parent or related entities to fund the payment of dividends to shareholders. It is also common for much fund expenditure including advertising to be channelled via a parent or related entity. The Bill does not subject these third party payments to be the new expenditure requirements, and this will be likely to have anticompetitive effects.

Thirdly, while we strongly support the government’s objective to stamp out underperforming funds, we are concerned that the proposed benchmarking approach which  uses passive benchmarks will be detrimental to funds who invest directly in unlisted property and infrastructure, of which we are one of the biggest and most successful. This could over time curtail investment by super funds in the property and infrastructure developments.

And as noted above, we also think that all products must be subject to performance benchmarking and to the proposed consumer comparison tool. It seems curious to us that the benchmarking and comparison tool provisions will not apply to much of the choice sector, especially given the PC called out this sector as having significant underperformance, compromising outcomes for their members in retirement.

Our ask is simply that the rules are applied evenly, to all funds and all super products and that the needs of those working in hazardous industries are accommodated.

Cbus is the fund that helps build Australia, and this creates benefits for all of us.

Our expertise and our results are closely tied up in the success of the building and construction sector.

The success of Cbus Property is integral to our story.

Since inception in 2006 to June 2020, Cbus Property has generated annualised returns of 15.3% p.a. (net of fees) and created over 100,000 direct jobs in the building and construction industry.

This stellar result includes the downturns of both the GFC and now COVID.

This success connects us closely to you as our key industry partner.

It’s a long and valued partnership that has delivered outstanding results for the industry, and a better standard of retirement for our three quarters of a million members.

I look forward to this productive partnership with the MBA continuing and to being able to attend future events in person. Thank you.