Michael Sherris

Australia needs new infrastructure. We need to fund it. And there are substantial assets in superannuation funds. Why don’t we combine the two?

Former Treasury secretary Ken Henry says that Australia’s infrastructure projects should be reformed in a way that will make them more attractive to superannuation funds that fear taking on too much risk.

There are vast assets in superannuation funds that can do a lot of good for Australia. These are a potential source of funding to finance the infrastructure that Australia badly needs.

These superannuation funds will increasingly be seeking assets that will allow them to provide retirement income streams to their members either directly or through retail products such as indexed life annuities.

Among the potential reforms suggested by Ken Henry is one that would see the Federal Government assume greater risk, with less pressure on the private sector, to reassure funds and their investors that infrastructure projects are safe investments, such as the latest proposals for the fast rail network on the east coast of Australia.

Super funds could pay for these proposals now. If these funds are to finance major infrastructure assets they should be seeking long term inflation linked annuity bonds to fill the limited market in indexed linked and long term securities in Australia. This would provide opportunities for the funds to offer income streams to members and have matching long term assets.

I would like to see this taken further. Ken Henry’s Tax Review proposed that the government should issue more long-term inflation linked longevity bonds, to support the development of a longevity insurance market. Now, if we were to be really innovative we may even be able to develop a longevity bond with payments linked to population survival rates to allow the funds to manage mortality risk, which would naturally compensate for the population living longer. This mortality risk is driving the growth of longevity swaps for defined benefit pension funds in the UK and Europe as well as attracting interest in the US.

Australia is one of many countries that has a rapidly ageing population. However there are few products that provide longevity insurance, which is protection against the risk of individuals living too long, running out of cash and then relying on the state. Using these longevity bonds, we could also fund key infrastructure projects in Australia, which are currently suffering from a lack of cash from risk-wary superannuation funds which have seen large losses on projects such as the Clem Jones tunnel in Brisbane.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.