This report addresses the question of how superannuation trustees, whose funds dominate Australian capital markets, can ensure that they are investing their assets for the public good — in particular how to fund public infrastructure.
The trustees’ fiduciary duties require them to pursue the best financial interests of beneficiaries, which include the careful management of costs and risks. There are also strong arguments that they should consider the ethical values of the beneficiaries. Over the last decade, superannuation funds have increasingly applied ethical criteria to their investments, in order to manage risk, prevent harm and in some cases, to make a positive impact while simultaneously maintaining competitive returns.
Part of this development has been increasing direct investments in infrastructure for its returns and its positive public good. Infrastructure provides long term cash flows that can directly fund income streams to retirees. Infrastructure projects can therefore be ideal investments for superannuation funds if properly structured.
This can best be achieved using indexed annuity bonds (IABs), adapted to the revenue streams of the borrowers and linked to longevity indices so as to reduce risks and costs for both borrowers and investors. For governments, issuing IABs to fund public assets could increase both sides of the balance sheet without significantly increasing sovereign risk and without privatisation.
Trustees need to take initiatives to develop a market for these bonds apart from the financial sector. In this way, the funds in superannuation are ideally poised to be used for ethical investments that serve the public good.