Garry Weavan - ex Assistant secretary of the ACTU
Investing in retirees
Garry Weavan: So welcome to Garry Weaven. Garry was an assistant secretary of the ACTU and a leading light in the formation of the Industry Superannuation Movement, which is now a core plank in the $3 trillion Australian superannuation system which leads the world. He was also a founder and founding chairman of IFM Investors, which is now an internationally successful investment organization, managing over $140 billion. Perhaps most of all, Garry brings to this conversation enduring passion to see the working savings of Australians invested well, but also to ensure that there’s dignity in retirement, and people can draw on those savings throughout their lives. Garry Weaven.
Garry Weaven: Thanks Josh, and hello everyone. I’m coming to you today from Melbourne, which is the home of self-inflicted haircuts and golf fairways unblemished by divot marks. But it has been an opportunity, I guess, here in Melbourne over the recent months to reflect. And one of the things I reflected on is really four themes, four related themes: Retirement funding, housing, health services and investment strategy. But before I come to that, I just would like to comment that way back before COVID, when the government announced its inquiry into the Age Pension Superannuation, the third pillar, including housing, I did comment that the specific inclusion of housing was not simply a recognition that secure accommodation is extremely important to people in retirement, but it was also a signal to that part of the coalition’s political base that the government was keeping its options open to use housing, if necessary, to divert away from the industry funds. We’ve seen a lot of press about that and some pretty clear signals of ambivalence, shall we say, around that issue.
So I think that, in a way, it’s probably the superannuation industry’s own fault that it hasn’t really seized the day and used its power and its growth and its position to build an unbreakable bond between their members, between working Australians, and housing. That opportunity has been there, people have pointed to it, but it hasn’t been taken up until now with any significant emphasis. I’m delighted, having said that, I’m delighted to see that now there are a number of funds that are getting serious about investment into the Australian housing market in various ways.
So in terms of my four themes, let me start with something of the left field one, which is health services. So Australia, like a lot of the world, it is facing something of a crisis in relation to health services. While in Australia we have really quite strong collective consensus and support for decent health standards for everyone, at an individual level young people are finding it increasingly a poor bet to engage in private health insurance and subsidize the older and the less healthy, when they themselves see themselves as fit and young and healthy. And so that on its own is creating a bit of a problem in terms of funding for health services, particularly for older people. But at the same time, and particularly since the completion of the mapping of the human genome in 2003 and the growth in application of artificial intelligence since that time, the pace of acquisition of new knowledge in the life sciences, and the application of that to medical solutions, that pace has increased enormously.
So the potential for better healthcare is growing much, much faster than the capacity to finance that better healthcare. And so this is a particular problem for older people, and it is potentially a source of considerable social instability if it’s not addressed. Secondly, the issue of retirement funding. Well, the demographics, I think, of that are well understood, and Nick Sherry has canvassed, or will canvass the issue of adequacy. I simply want to point out that whatever one thinks about the government potential attacks on the current legislation, which would take the contribution rate to 10% and then later on to 12%, whatever one thinks about that, the fact is that for the great majority of people, they’ve had nothing like that level of contribution over their working life. The explosion of coverage in superannuation basically took place in the second half of the 1980s as a result of the campaign then spearheaded by the ACTU.
But for most people that only achieved a base starting point of a 3% contribution, and the universal SDC didn’t operate until 1992, and it took the contribution rate from 3% at that time to 9%, but not until 2002. So the contribution rate at 9% only came about by being phased in up to 2002. So you can see that, for most people, but particularly women who’ve had interrupted working lives and others, as a result of increase in casualisation for example, you see that for the overwhelming majority of people, they’ve had nothing like those levels of contribution that were currently contemplated over their working life. The situation with housing, however, in Australia presents something of a reverse image. So due to the long-term exemption of the family home from capital gains tax, and due to the application of negative gearing to both existing and new homes over the years, the fact is that home ownership, particularly for older Australians, is actually very high, is actually quite high by international standards at this point in time. In fact, something like $1 trillion-$1 1/2 trillion worth of housing equity exists amongst current retirees. At the other end of the spectrum, population growth, tax laws and poor urban planning have created a growing housing affordability problem.
Now of course, to a large degree, what we have here is a wealth and income distribution problem rather than a housing affordability problem. But in either case, a strongly growing, well-managed superannuation system represents the best opportunity to do something about that for working people. In terms now of investment asset allocation, what all of that suggests is that many older Australians are really way overweight residential property, but continue to need somewhere to live. While superannuation funds weigh underweight in the largest Australian asset class, residential property. But clearly household capital offers a partial solution to this by providing funds to householders for either income or re-investment, but including, for those eligible, potential reinvestment into Super and Super Pension, while allowing them to retain and remain in their home for as long as they wish, for life, or as long as they wish.
And it’s clear from the Aged Care Royal Commission, it’s already clear, that there is a lot to be said about aging in place as an alternative to aging in Aged Care facilities. And that’s going to be a trend for the future, provided it is adequately financed and provided for. So household capital, I think, can provide a sound investment opportunity for funds to finance their members and others in or approaching retirement. Now as I’ve said many times before, I think Australian residential property can offer a balanced return; a profile similar, really, to current MySuper products and probably with less volatility than has been experienced by those products. The art, of course, is to access the asset class across the board ultimately, and that would embrace, ultimately, build to sell, build to rent, build to rent to then sell, shared equity, home finance, developer finance, lifestyle communities, and of course household capital reverse mortgages. Now some of those might be difficult to access, unlike reverse mortgages, which is relatively straightforward to access as the investment. But all of those parts of the residential market are achievable with a little vision and focus from funds.
Now it’s been several years since I sat in the chair at ME Bank, but I was pleased to see that they’ve made a modest investment in household capital, and they’re providing a strong funding line for the funding of reverse mortgages. I was also interested to know that the major institutional investor in household capital is actually the UK-based Legal & General. And, presumably, that’s because they’ve been able to see very considerable potential for this type of… Based in their experience in the UK and elsewhere. So I think…
Josh Funder: Garry, can I just stop you there? You’ve mentioned an unbreakable bond between… That’s necessary between the superannuation sector and housing. Australians clearly have an unbreakable bond with their own homes. As they accrue equity, paying off their mortgage, living at home, and as they retire, age in place, and stay out of aged care, which is by far the majority’s intent. What is necessary to achieve the tipping point where, as an investment class, the superannuation sector can have that unbreakable bond with housing to support home ownership and to support retirement at home, but along the way, savings and retirement funding? What are the tipping points to make sure that that unbreakable bond that retail members have, can be supported by the sector?
Garry Weavan: Well, funds. It’s about funds getting out of their comfort zone, because this issue’s been around for many, many years. It hasn’t always been easy. Some of the tax arrangements and so on have militated against some parts of the housing market, but there have been opportunities across the board. And some funds have, of course, done some little bits in that area, but often they’ve been going into offshore markets, in build-to-rent, for example, because it was easier to do than to make the appropriate arrangements, for example, with developers, make the arrangements with banks, make the arrangements with reverse mortgage providers and others.
And because the industry hasn’t picked it up as a traditional or conventional asset class, then the easy route has been to just stay with the stock market. Perhaps if you’re adventurous, get out into private equity and infrastructure to add a bit of real return upside. But it hasn’t been necessary as the funds have seen it. Well, I’ve always thought it is a political necessity, because there are a lot of people, and there’s a significant part of the coalition, which does not like Universal Super, but particularly doesn’t like the industry fund sector. And I think the way to overcome that is to put beyond doubt, the value of Super. And most people already understand that, but if you add Australian housing provision in solving things like affordable housing and other parts of the market, then that question just becomes completely beyond doubt.
Josh Funder: I agree. I think that there’s $1 trillion of home equity that retirees own, but finding a way that the Australian investment sector can invest in that and support an access to that asset, would put beyond doubt the value of the home for both retirement housing, but also retirement funding.
Garry Weavan: Yeah. And it’s starting to happen and the developer community is getting more creative. The funds themselves are getting more creative. There are opportunities to cooperate with banks; it’s not a competitive thing. There are opportunities to cooperate with the banks who of course have got excellent distribution arrangements in home finance. So there’s lots of opportunities starting to emerge, we just need to accelerate that somewhat. I was about to actually conclude my remarks, Josh, just by saying, look, I think if the funds don’t start getting serious about connecting their members to housing, then I think funding will be directed around them to that purpose, rather than through them. So, I guess my final message would be, like the woman in the Industry Super advertising campaign says as she ascends up the escalator, “It’s not too late, Soph, it’s not.” [chuckle]
Shelly Wettenhall: Garry, just a question. I totally agree with you. We do have retirees in a situation where they’re very asset-rich and cash-poor. In speaking to a lot of the retirees at Household Capital, a lot of them are very nervous at the moment given our COVID situation. What words of wisdom you have for them to allay these fears and this nervousness?
Garry Weavan: Well, I think I’m of that generation, I’m with the cohort you’re talking about. I, along with most in my generation, would have to be dumb not to be nervous about some things. Of course, you’re gonna be nervous about travel in the immediate future, and until there’s a successful vaccine. But I do take note that we’ve done some hard yards, but at the end of the day, the fundamentals that existed before COVID, many of those are still there. The pace of technological change and growth is still there. The growth in the economy is potentially still there if it’s handled properly, and there are a huge number, of course, of vaccines and other medications getting very, very close to coming into use. So I think it will be a little tough for a lot of people. I think that there will be… Some people will be concerned, I think, about what will happen with house prices. But the housing market’s very robust. People don’t suddenly just all sell up. The banks have been persuaded to be fairly reasonable. To this point in time, there’s been good management of the capacity to pay. And so provided we take an approach that gradually work our way out, I think everyone will be quickly back on their feet after the next year or so.
Josh Funder: Garry Weaven, thank you very much for your contribution to the 2020 Third Pillar Forum.
Garry Weavan: Okay, it’s my pleasure.
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