Should super funds become lenders? We look at both sides
At a roundtable forum late last year powerful business leaders including Anthony Pratt, Gina Rinehart and Lindsay Fox called on the superannuation industry to start lending directly to businesses, bypassing the banks. So should super funds become lenders?
Yes, says Alex Dunnin, executive director, research and compliance for Rainmaker Group
Super funds are already lenders, though we may not talk about it this way. But this is what in effect happens when they invest in shares or buy bonds. When they invest in shares they entrust money to a company board in the expectation that they will not only get their money back but get a big bonus in the form of a rise in the price of those shares.
It's a similar story when they invest in bonds as they are lending money to the entity that issued the bond, usually a government or large company; it's just that they don't expect the interest payment bonus to be as high.
So the question here is not whether super funds should lend money, because they already are - most funds invest in companies that do this anyway. Instead, the question is, should they lend directly to consumers or businesses rather than only indirectly through equities and bonds?
For superannuation funds big enough to take on these business risks and with sufficient scale to lend enough money to earn worthwhile profits, it could be a good investment.
The proviso is that doing this will require them to operate more like a bank or other lender. They will have to delve into would-be borrowers' private finances to check their credit risk, often asking tough, uncomfortable questions, and if borrowers miss payments they'll have to be willing to get tough to chase them up and foreclose on them if necessary to get the fund's money back. These funds will also need thick skins, because while everybody likes an investor with money not everyone likes their lender. Very few super funds are likely to have the expertise, technology capability and governance depth to do this but provided they do have sufficient capital reserves and are properly prepared they should not be prevented from doing so.
No, says Martin Fahy, CEO of the Association of Super Funds of Australia (ASFA)
The short answer is that they already are! APRA-regulated funds lend to banks in the form of cash deposits and to governments and companies in the form of fixed-interest bonds and the like. Such loans amount to around 32% of fund assets.
However, if the question is should a super fund accumulate a nationally diversified portfolio of home loans, personal loans and business loans across a large number of borrowers, the answer really should be "no".
There are a number of reasons for this. Evaluating loan applications and putting in place security arrangements requires specific skills. Banks and other traditional providers of loans have built up such capabilities and it would be hard for a super fund to start assessing credit applications with the same level of expertise. Massive new infrastructure investment would be needed for funds to administer the loans.
Additionally, superannuation funds would need a whole new level of prudential supervision.
A more modest proposal might be for super funds to lend more to larger corporate borrowers. The relatively undeveloped Australian corporate bond market is an issue that has been raised previously.
Corporate borrowers have a financial interest in obtaining long-term finance at the lowest possible interest rates. This does not mean that super funds should necessarily be the source of cheap finance for corporations. Super funds need to obtain the best returns possible for a given level of risk, to maximise retirement savings.
However, the issue of liquidity must be addressed. Unless and until there is a relatively large and regularly traded market in Australian corporate bonds, there will be limitations on the extent to which superannuation funds will be able to take up bonds issued in Australia by large corporations. Should super funds become lenders?