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Legislative Council - Fifty-First Parliament, Second Session (51-2)
2008-07-03 Daily Xml
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LOCAL GOVERNMENT (SUPERANNUATION SCHEME) AMENDMENT BILL

Second Reading

Adjourned debate on second reading.

(Continued from 6 May 2008. Page 2704.)

The Hon. R.I. LUCAS (11:54): I rise on behalf of Liberal members to support the second reading of the legislation. The current local government scheme is administered by the Local Government Superannuation Board and conducts its business, we understand, under the name Local Super SANT (South Australia Northern Territory). The scheme operates essentially like a private sector scheme at the moment, and the state government has no financial responsibility for the scheme, although the scheme is established under the Local Government Act and there are a number of links. The second reading explanation makes clear that there are a number of links with state government instrumentalities such as, for example, the scheme's accounts being subject to audit by the Auditor-General. A number of others were also instanced in the minister's second reading explanation.

We are told that the scheme has just over 20,000 members and that the number of members is growing. We are told that a number of schemes are involved. We are told also that there are 172 active and participating employers, which is interesting in itself, because there are only 68 South Australian councils. There are provisions under the current arrangements for various bodies or organisations to be declared covered by the legislation, and we are told that 20 of those are Northern Territory councils and 84 of those are other non-council employers, a significant number of those being private hospitals.

In the briefing I had on this legislation I was informed that these other non-council employers at some stage or another had some association with local government operations in South Australia, so I am assuming those private hospitals must have had some association at some stage with local councils, but there are a number of other bodies or organisations that immediately spring to mind where, clearly, there have been occasions where local government employees have spent some period of employment with those associated organisations, and the scheme has been utilised to allow continuing coverage for those employees.

The second reading explanation makes clear that the genesis or catalyst for this piece of legislation was apparently the Local Government Superannuation Board. We were told in the second reading that it was the board that approached government seeking amendments to the scheme, and the second reading explanation traces a little bit of the history of those discussions and a little bit of the history of the operation of the scheme, which for my purposes I do not need to repeat. The guts of the bill is in essence summarised in the following paragraph of the second reading explanation:

The plan of the Local Government Superannuation Board is for the scheme to also become a 'public offer fund' three years after the governance restructure in the Bill comes into operation. As a public offer fund, Local Super will be able to provide its services to any employee and employer. One of the other benefits of being a 'public offer fund' will be that employees who resign from council employment will be more attracted to leave their accrued benefit with Local Super and request their new employer to direct future superannuation contributions back to Local Super as their scheme of choice. As a trade off for becoming a public offer fund, the Local Government Superannuation Board has acknowledged that it will need to forgo the benefit of the existing mandatory requirement for South Australian councils to direct all their new employees into the scheme. In other words, it is proposed that in three years time, Local Super will operate in the Commonwealth's full choice of fund regime, and all new council employees will be able to select the superannuation scheme of their choice. One of the other consequences of moving out into the private sector and competing for new members, is that Local Super also accepts that it will need to allow existing members of the scheme, as an option, to request their employer to direct future employer financed contributions to an alternative fund of their choice.

That paragraph in essence summarises the principle behind the bill. Put simply, the local government superannuation fund, or Local Super, will for all intents and purposes be a fully functioning independent superannuation fund of choice operating under commonwealth superannuation guidelines. As the second reading explanation makes clear, in doing so obviously it takes on board some element of risk. Obviously the board and the state government believe it is an element of risk that it is capable of handling not only currently but also in the future.

The wonderful joys of state government or local government superannuation of the past, where all local government employees were required to be members of the local government superannuation scheme and had no other choices, will be gone, and compulsory flow of membership and income for which they can invest will not necessarily always be there. If local government super not only now but at some stage in future does not perform, employees will be able to move seamlessly their superannuation contributions away from local government superannuation to any superannuation fund they might choose. I am sure that the Hon. Mr Parnell, who will speak after me, will be delighted at that prospect because it will allow them to choose any number of ethical or socially responsible investment funds—

The Hon. P. Holloway: Or unethical ones.

The Hon. R.I. LUCAS: That is indeed right: those who are only interested in maximising their financial returns can be as ethical or unethical as they like in their choice of funds. I am sure the Hon. Mr Parnell will not disappoint me by neglecting to feature that in his contribution in support of the legislation. In doing that, it raises elements of risk in terms of the viability and ongoing financial viability of the local government superannuation scheme because they will have to be out there competing in the marketplace for membership and income and they will be judged on their performance.

To that end, when I was being briefed I sought advice from the Chief Executive in relation to the investment returns and the recent investment performance, and in the spirit of trying to expedite the passage of the legislation today I will read the advice I received so that it is part of the formal record. The Chief Executive, Mr Szuster, stated:

I have attached a summary of our performance for our growth option over one, three and five years against the SuperRatings survey. The SuperRatings survey is the representative survey for superannuation funds in Australia and used by all of the media agencies when comparing superannuation fund returns. This analysis shows that Local Super's investment performance has been in the top quartile over all periods. In addition, Local Super has been rated as a platinum superannuation fund by the SuperRatings for 2008, which places us in the top 10 per cent of superannuation funds in Australia. This rating covers all aspects of the scheme's operations, including investment performance, governance, fees, administration and member services. The one area that the scheme excelled was in governance.

That is from the Chief Executive of Local Super. I seek leave to have incorporated in Hansard without my reading it a purely statistical table headed 'Local Super investment returns, 31 December 2007'.

Leave granted.

Local super investment returns: 31 December 2007
Net returns compared to SuperRatings survey
Fund net return as at December 2007 1 month% 3 month% FYTD% 1 Year(% p.a.) 3 Year(% p.a.) 5 Year(% p.a.)
Local super—growth 0.54 0.90 3.02 10.48 13.54 12.72
SuperRatings top quartile -0.28 0.02 2.10 10.20 12.94 12.68
SuperRatings median -0.71 -0.59 1.56 7.75 11.67 11.90
SuperRatings bottom quartile -1.18 -1.39 0.46 5.78 10.55 11.21

The Hon. R.I. LUCAS: Based on that performance, at this stage Local Super will be judged by its members and any future members as being competitive. The government is intending—and we will agree to it—to take a punt that not only the current board and management are performing competently compared with their peers but that future boards, executives and management will perform competently compared with their peers and, if they do not, they face potential problems in terms of ongoing membership of their schemes and the revenue or income they will attract from those members.

It is not all easy pickings and smooth sailing in fund management performance. In the discussions I had I asked questions about the range of investments and not just about the overall aggregate performance. I asked questions about decisions the board takes in relation to what it thinks it ought to be investing in. Most of the government related funds are managers of managers. They have professional advisers they oversight and they live or die by the selection of those managers.

The advice I have been provided with is that there have been at least two occasions—there might be more—where there have been specific investments by local government superannuation: Adelaide Airport and something called Australian Renewable Funds (I stand to be corrected on that as I am trying to read my writing from a briefing a month or two ago.) In relation to Adelaide Airport, it is an interesting one because these days, in terms of much public discussion about the need for massive infrastructure development, a lot of governments, politicians and fellow travellers say that superannuation funds ought to be investing in major infrastructure developments, and they ask why those funds are not being directed into that area.

Again, if I can speak as an individual, if they can be justified in terms of their performance with respect to investment, that is a good thing; but if I am a member of local government super I want it invested in things that will maximise my return, not necessarily because some politician somewhere, or some group of politicians at a government level (whether it is local, state or federal) deem that this is a good public sector infrastructure investment and it would be a good idea for super funds to be invested in it. The Adelaide Airport is a good example, because my understanding is that, for the first eight years of that investment, there were very low returns for local government super, but that in the last year or two years there have been very good returns.

It has been a decision taken on a long-term basis; and, clearly, we are talking about 10 years in the case of Local Super. It took, I think, 16 per cent of Adelaide Airport investment, which is a massive stake for a local super fund. As I said, for the first eight years there were very low—virtually negligible—investment returns. I do not know, when it was pitched to the board 10 years ago, whether it was as clear as that when the board signed off on it, that is: 'Board members, for the next eight years you will get virtually zippo return on this, but in about the eighth year we will get very significant returns.' I suspect it probably was not pitched that way to the board. I am sure it would have been pitched to the board that it was a long-term investment.

I am not sure whether it would have been as brutally frank as that, or whether management and others would have had that degree of detail. The bottom line is that it looks like being a profitable investment for the fund, and those employees who stayed in the fund for that 10-year period or so have seen significant returns. Those who did not in the first eight years might have seen that 16 per cent (whatever that turns out to) being invested in a range of other investments having a higher rate of return during that period. The other one is, I think, Australian Renewable Funds, or something like that. My understanding is that there has been something like a $10 million loss on that investment. A decision was made to take a punt on that investment and it has not worked out.

Now, let me be the first to say that all range of managed funds make investment decisions, some of which are profitable and some of which are not. I do not seek to portray a significant investment loss on this one as indicative of either poor management by the managers or poor investment decisions overall by the board. What I do indicate is that in this brave new world (or, indeed, even at the moment, but it is more so in the brave new world) you do have pressures in not having a stable base, that is, when you have a locked-in base in terms of the members of your scheme you know that you will have that locked-in base forever and you can take your punts on your investments and see how you go, but ultimately people are locked into having to stay with you.

When you move into the brave new world where people can all move, you will be judged brutally on your investment performance. You do not have a locked-in, mandatory base; and, if you do take too many of these decisions where you have significant fund losses, your overall performance will decline and people will make decisions. I hasten to say, again, that I do not want to over-emphasise the impact of one particular loss, because the reason why I put on the record the formal advice from the chief executive is that overall they advise us that their performance has been in the top quartile of similar funds. I assume that would have clearly taken into account all investments, whether or not they were good or less than good in their investment performance.

Again, I indicate opposition support for the legislation. Should the bill pass in the council, as we expect it to, we wish Local Super—the board, management and the members of the fund—well in the brave new world over the next three years, but particularly after the three-year transition period has expired. We hope that the wishes of Local Super in going into the brave new world will prove to be fruitful for its members in terms of the continuing strong performance of its investment returns for the future security of employees in local government (and anyone else for that matter) and their families.

The Hon. M. PARNELL (12:12): The Greens support this bill, which enables a restructuring of the Local Government Superannuation Scheme. It will come as no surprise to members to hear that my contribution today will touch on the subject of ethical superannuation. I do not want to disappoint the Hon. Rob Lucas. The reason why it is relevant to this bill is that Local Super, which is the business name under which the Local Government Superannuation Board conducts its business, does have an ethical superannuation fund of sorts. I want to do two things in my contribution, that is, try to dispel two myths in relation to ethical superannuation. The first myth is that members do not want it and they will not choose it if you offer it to them; and the second myth is that these ethical funds do not perform financially.

I think that the experience of Local Super shows that they are both myths, and if we learn from the experience of Local Super and translate that to the superannuation options offered to state public servants and to members of parliament, we will have a vastly improved system. The first issue in relation to the choice that members of superannuation funds are offered is that I believe it is useful to compare and contrast the choices offered to local government employees under Local Super with those offered to state public servants under Super SA. As members would be aware, Super SA provides the choice of seven investment options to members of the Triple S Scheme: cash, capital defensive, conservative, moderate, balanced, growth and high growth.

The default position for Triple S is balanced. In other words, if one does not elect any other option, one automatically falls in to the balanced fund. Some 93.76 per cent of Triple S members are in the balanced option, and 6.24 per cent are in other options. There are a couple of ways of looking at that. One is that only 6.24 per cent of people make any choice at all. You could say that some people have chosen the balanced option, and they exercised their choice by exercising no option and going to the default position. At the end of the day, a relatively small number of people exercise choice.

Let us contrast that with the options available to Local Super members. The minister's second reading explanation points out that the Local Super scheme is actually made up of several schemes, both defined benefit and accumulation in style. However, my understanding is that at least one of the main ones is the Marketlink scheme. Members of that scheme are offered six options for investment: cash, conservative, growth, Australian shares, international shares and—this is the important one for us—sustainable shares. So, there are six choices.

The default position if you do not make any choice is the growth option. But some 21 per cent of Local Super scheme members have chosen other than the default option. At the state level, it is only some six per cent, and at the local government level it is 21 per cent. We can ask why that is, and it may be that, when faced with a choice of conservative or growth, some people think, 'Well, this is for my retirement, so I'd better be conservative,' so they perhaps do not go for growth. The point is that one in five people make an election. The really critical figure for us is that 4 per cent of Local Super members who have investment choice have part or all of their benefit invested in the sustainable shares option. So, 4 per cent of people have chosen that option. This option was first introduced on 1 October 2002. Local Super points out as follows:

This is not an ethical option as such as it does not have a negative screen for various issues. It aims to invest in organisations that operate the business on a long-term sustainable basis taking account of environmental, social and corporate governance issues.

With respect to Local Super, when we look at the definition that I have put forward on a number of occasions in relation to ethical investment, it is largely that: it is taking into account environmental, social and, more recently, moral issues in investment. So, it is a form of ethical investment. I think the myth that there is no demand is exploded by these figures.

On Monday, I attended the Legislative Council's Budget and Finance Committee, one of the more sensible committees set up by this chamber. It provides an excellent opportunity to quiz important public servants. We had the opportunity to ask some questions of the Under Treasurer, Mr Jim Wright. I asked him about what the blockages might be to superannuation options being available for state public servants. Whilst he was not quoting from any specific document, his view was that there was low demand; he suggested that maybe 1 per cent of people might take up this option. Clearly, in the case of Local Super, when the option is there, 4 per cent of people have taken it up.

In his second reading explanation, the minister talks about there being 20,700 members of Local Super. So, if we apply 4 per cent to that figure, over 800 members have elected to choose the sustainable shares option. I do not have the exact figures for the proportion of total members in the Marketlink scheme, but my understanding is that it is the major scheme.

The second myth that I want to explode is this idea that investing in ethical superannuation is akin to making a donation to charity; that one will not make any money and that it is basically money sunk and lost. Looking at the performance of Local Super SA, if we compare its sustainable shares option with its growth option we find that, on balance, the sustainable shares option outperformed the growth option. If we take the first year of operation, the growth option has a very low increase of less than 1 per cent, very similar to the sustainable shares option, which went down 1 per cent. So, in that year, there was a 2 per cent difference.

However, the following year (2004), the growth option returned 11.97 per cent, but the sustainable shares option returned 16.1 per cent, a considerable increase. The following year (2005), the growth option returned 14.29 per cent and the sustainable option a little bit less—11.72 per cent. The following year (2006) was a great year for sustainable shares. They went up 23.66 per cent, yet the growth option went up only 14.95 per cent (some 8 per cent or so difference), so the sustainable shares outperformed growth shares.

In 2007, back to a closer comparison, growth went up 16.69 per cent and sustainable shares went up 15.39 per cent. When we look at those figures, on balance we can see that the sustainable shares have outperformed growth shares.

In supporting this local government superannuation amendment bill, I draw honourable members' attention to the fact that its scheme is successful. It offers an ethical option which is taken up by members, and it is an option that performs. I urge all members to apply that information when next we consider providing an ethical option for state public servants and members of parliament.

The Hon. P. HOLLOWAY (Minister for Police, Minister for Mineral Resources Development, Minister for Urban Development and Planning) (12:22): I thank the Hons Rob Lucas and Mark Parnell for their contribution to this debate and indications of support. The Hon. Rob Lucas referred to some answers that he has been provided with and he has put those on record, so there is no need to follow up anything in relation to that. If there is anything further, we can deal with that in the committee stage.

The Hon. Mr Parnell has made those comments about ethical superannuation before, of course, and the government has responded to that. I think the bill shows that you do not have to prescribe in legislation the possibility in relation to such schemes. You do not need ethical superannuation clauses to enable people to have that option, and that is really the point that the Treasurer has made in other debates.

He has indicated that he would look at the capacity of that happening through the public sector schemes, but I think those things are probably better done by administration rather than by legislation. I again thank honourable members for their contribution to the bill, and I look forward to its speedy passage.

Bill read a second time and taken through its remaining stages.

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