Speech delivered by Kristian Fok, Cbus Chief Investment Officer, to Master Builders Australia National Leaders Summit at Parliament House, Canberra on 20 June 2018
*Check against delivery
The size of the industry
The amount invested in Australian Superannuation is now approximately $2.6 trillion and last year, Australia edged ahead of the Canadian pension scheme to rank as the world’s fourth largest pool of retirement savings. 2
To put this into perspective, Australian superannuation assets comprise nearly 78% of all managed funds in Australia and are more than half as much as the total assets of Australian banks. Another illustration of the sheer quantum of these funds is that the ratio of pension funds to GDP in Australia is 138%.
Every year, the flow of funds into superannuation is increasing – Cbus alone has $2 billion in funds to invest this financial year.
Australian superannuation, as a whole, is projected to double in size by 2025.
And we know that superannuation has repeatedly outstripped predictions about its growth. We simply cannot predict the full impact of the superannuation industry over the next decade with certainty.
Although that’s partly my job…
Today I want to give some insight into the trends for the industry, infrastructure and investment and reflect on two related themes that I see emerging.
First, how the remarkable cash flows in superannuation are both driving and responding to innovation in Australian infrastructure delivery.
Secondly, the need to minimise waste through costs from intermediaries in projects and investment.
Superannuation’s impact on infrastructure
Let’s take a look at the cash flowing from superannuation into infrastructure.
On average, 5% of the portfolios of Australian superannuation funds are committed to infrastructure, including both equity and debt investment.
If superannuation in Australia doubles by 2025, even at current proportions, this would equate to $130 billion flowing from superannuation into infrastructure either in Australia or overseas.
Of our current $45 billion funds under management, Cbus has around $4.5 billion in infrastructure. If the Cbus allocation of 10% of funds under management invested in infrastructure were reflected industry wide, it would mean $260 billion flowing from the superannuation industry into infrastructure by 2025.
The International Monetary Fund estimates GDP multipliers from infrastructure investment measures range as high as $1.80.
The impact of that spend on employment is also staggering. The ABS estimated that the multiplier effect for construction spend resulted in 9 additional jobs per $1 million of spending (and as many as 37 jobs from indirect effects). But if we conservatively use 9 jobs, the jobs attributable to superannuation spend could be as many as 2.3 million by 2025.
Even this massive amount of capital will not keep up with demand for finance for infrastructure which has been estimated at between $455 and $770 billion. The Federal Government alone has announced a capital spend of $75 billion over the next decade.
So what does all this mean for infrastructure and superannuation’s participation in it?
The evolving superannuation infrastructure relationship
First, it changes the investment appetite.
- When superannuation fund balances were smaller, investment in greenfields projects was not realistic from a capabilities and cost perspective.
- With the growth of funds under management, many super funds are now building internal teams and expertise that means greenfields projects are a real consideration. For Cbus, our development experience and track record through Cbus Property, means directly investing in infrastructure is a logical next step.
- While we are never in the business of taking unreasonable risks, we now have the opportunity to participate in investment opportunities where being patient and forward-looking investors with experience in managing capital flows and cash yields is an advantage and represents a benefit for our members.
- With continuing growth in infrastructure projects and the emerging challenges to industry capacity, we need to be more selective about our investments and look for innovation opportunities.
- We are focused on strong risk adjusted return; a diverse mix of quality assets spread across greenfield and brownfield assets, as well as relationships that provide priority access to valuable deal pipelines.
The investment landscape is also expanding
The last decade has seen superannuation investment in many major PPP Projects and government asset sales in the country including:
- Sydney International Convention, Exhibition and Entertainment Precinct
- Queensland Motorways Limited
- Port Botany and Port Kembla
We can expect this trend to continue.
Superannuation funds will have a greater appetite to participate across the project lifetime as developer, financier, direct owner, operator or to get involved in discrete parts of a project.
Super funds are well positioned to be a debt provider to infrastructure, with an increased appetite for patient, longer term project financing and investments extending beyond traditional asset class boundaries.
The emerging capacity challenges facing the construction industry in Australia also set the stage for superannuation funds to play a role in facilitating partnerships between local and international participants, with a sensitivity to our local contractors, jobs and conditions that is unique.
A recent example is our investment in Bright Energy Investments, which sees Cbus, alongside the Dutch Infrastructure Fund (DIF) hold an 80.1 per cent equity interest in a portfolio of wind and solar renewable generation assets in Western Australia that will create 200 new construction jobs.
In fact, we see Cbus occupying a unique position in the superannuation / infrastructure nexus.
- The three overarching themes of our investment strategy are being an innovative long-term investor, with a total portfolio perspective, with expertise in investing in the real economy. This perspective makes infrastructure core business for us.
- While some funds may not all be well placed to assess an infrastructure asset as an investment opportunity, with its foundation in the construction industry, infrastructure investment is a natural competitive advantage for Cbus. The experience we have through our Board and through Cbus Property is unique in the super space in Australia.
- We invest in infrastructure and property because, from an investment perspective, it has been one of the outstanding success stories of the Australian economy, and also because it is where our members work and employers contribute. We want to support them and create a virtuous circle with our investments.
Our infrastructure journey will continue at Cbus, and we are confident that it is contributing to our strong performance. Our Growth option’s investment objective is to return 3.25% above inflation over rolling 10 year periods 75% of the time. This objective has been met.
Our wholly owned subsidiary, Cbus Property, which contributes to local economies through high quality property developments, achieved a return of 24.3% last year compared to an industry average of 12.05%. This is the third year in succession it has achieved returns above 20% and it has generated returns averaging 15.95% per year since inception.
Challenges to growth
I’ve talked about the quantum of funds and its impact driving innovation in infrastructure finance. Now I’d like to talk about one of the challenges of this growth.
First, I wanted to make the point that volatility in taxation and superannuation legislation can act as a disincentive for funds to increase investment. A stable investment environment, with a predictable pipeline, allows funds to be available and maximises returns to investors (who are members).
At Cbus, members are at the heart of everything we do. It’s important that we retain one of the strengths of our super system – the ability for funds, with certainty of default cash flows, to make long-term investments to benefit both members and the broader economy.
As any industry grows, it has the opportunity to benefit from economies of scale but it also faces the challenge of double handling and more entities involved in any single transaction. Infrastructure is no different.
We have seen the growth of financiers who are employing other financiers who are employing consultants who are employing actuaries with sometimes multiple carries on the same transaction.
We recognise that it is in everyone’s interests to minimise waste in infrastructure delivery from conception of project through to delivery and operation.
Both the industry and government are well aware of the procurement costs in infrastructure which come out of not only the public pocket but also come at a cost to the returns for investors like our members and impacts negatively on unsuccessful bidders.
We congratulate the efforts in government – particularly State Governments – to standardise contract documentation where possible and to take a more active role in minimising procurement expenses. There is always more that can be done.
At Cbus, we have looked critically at our own supply chain and how many “clips of the ticket” are being taken out of people’s savings along the way. We have tried to identify how we can drive a better outcome for our members and stop paying for participants in our industry that add little value.
For Cbus, this means building our internal capacity in investments, advice, digital and direct servicing of members and employers. We are continuing to transition Cbus to a hybrid model where our internal capabilities work alongside our existing externally managed funds.
We expect to manage at least 35% of our assets internally by 2022, and to lower our investment costs by around 18 basis points. On our best estimates, this translates to reducing costs to members by over $100 million per year.
Our new internal capability will bring us closer to the market, improve our insights, and give better access to deals (for example, corporate placements and unlisted transactions). Our capacity also enables us to participate directly at more stages, eliminating additional financiers and the increased costs associated with them.
And with internal team costs largely fixed, once teams are established, as we grow, our costs will become even more competitive, compared with management fees which would otherwise keep growing as a percentage of funds under management.
In summary, maximising the positive impact of finance in infrastructure and minimising waste for the future will be two of the key challenges facing our industries.
Established in 1984, Cbus is the industry superannuation fund for the construction, building and allied industries. Cbus is run only to benefit members and recently received recognition for its 10 years as a platinum rated fund by independent ratings agency SuperRatings.*
Cbus also invests back into the construction and building industry, which not only provides strong long-term investment returns, but also helps boost our economy and create jobs within the industry.
Cbus has more than:
- 765,000 members
- 131,000 employers
- $44 billion in funds under management
 http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5655.0Main+Features1Mar%202018?OpenDocument 2 Willis Tower Watson Global Pension Assets Study, 2018:
 Willis Tower Watson Global Pension Assets Study, 2018:
 ASFA super statistics, April 2018
 page i Investing in Infrastructure | International Best Legal Practice in Project and Construction Agreements | January 2017, pricewaterhousecoopers https://www.pwc.com.au/legal/assets/investing-in-infrastructure/investing-ininfrastructure-v4.pdf
 International Monetary Ffund (2009), ‘Group of Twenty’, paper prepared by the staff of the IMF for the G-20 Meeting of Deputies, 31 January 2010 – 1 February 2010, London.