Australian superannuation can be a source of national security capital
22 Aug 2024| and

Australia needs to invest more heavily in defence and national security, yet the government is struggling to match rhetoric with reality in the May federal budget.

The budget showed that Australia is pushing back the necessary investment and injection of additional resources to bolster a sovereign defence industry and workforce. One potential solution is to use the A$3.5 trillion that Australians hold in superannuation savings—which is 140 percent of Australia’s $2.5 trillion annual gross domestic product.

There is growing engagement with this idea within the Australian government. Both Treasurer Jim Chalmers and Defence Industry Minister Pat Conroy have publicly supported the use of superannuation funds to invest in defence capabilities. Similarly, the Defence Strategic Review (DSR), the National Defence Strategy (NDS) and the Integrated Investment Program (IIP), while not outright identifying superannuation capital pools, have emphasised the role of the investment community that superannuation funds belong to in supporting Australia’s national security.

There is a compelling case for directing private capital into national security, particularly as the government navigates the strategic necessity of investing in advanced technology leadership while domestic cost of living challenges continue to intensify. Incentivising private capital investment into national priority areas isn’t new to the government. However, to date, the main focus areas have been in sectors such as housing or green energy.

While the funding of the defence industry is often politically contentious, it is important that nuance is given to this narrative and the government takes a forward-leaning role in identifying areas of national security more broadly that need private capital support, such as advanced manufacturing and dual-use technologies.

The primary duty of super funds is to maximise returns for their members, as their capital is the sum of individual Australians’ hard work and savings for their future retirement. As baby boomers retire, priorities are now shifting to low-risk investments. Therefore, the challenge is to ensure that projects are attractive to suitable superannuation investors.

The Housing Australia Future Fund (HAFF) is an interesting case study of the problems of thinking that superannuation is a pool available for government policy initiatives. Due to the strict requirements necessary to meet members’ needs, there were issues with engagement with the HAFF. Even industry superannuation funds have historically struggled to participate despite their political and ideological alignment with the present Labor government and self-interest in housing.

This is a subtle point missed by many: approaching the superannuation industry and asking chief executives of companies that are trustees of regulated superannuation funds to support an initiative is largely meaningless. Neither bank nor superannuation fund CEOs can tilt the rules of their organisations away from prudence and safe custody, no matter how often they are asked or how interested they may be in government projects.

Australian superannuation funds are governed by several pieces of legislation, which together provide a framework for the operation, management and standards of the funds. They are regulated by the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Taxation Office. The regulations subject funds to various risk requirements to ensure the security and stability of members’ investments. Compliance with those requirements is essential for maintaining the trust and confidence of members and regulators and the integrity of the system.

The funds have discretion over the investments they choose or reject within the laws and rules of their investment thesis and strategy. This siloed approach is logical, given the scale of assets under management and the diversity of expertise required to manage the funds, but it does create additional complexity for those seeking to engage, especially if the opportunity does not fit neatly into a single bucket. This is likely to be one of the key challenges for government-sponsored projects seeking backing of superannuation funds, as they are often not restricted to a single investment category.

Navigating superannuation funds’ processes and policies to meet the risk and return requirements on investments is important, but investment opportunities must also be shaped to meet investors’ requirements. For example, while funds can invest at their discretion, many also have environmental, social and governance (ESG) investment policies that may restrict or prohibit investments in specific industries or companies involved in controversial activities, such as weapons manufacturing.

While there are challenges in using superannuation funds for defence investment, there are ways to resolve them. Understanding industries that are dual-use and serve national security writ large is an important distinction in the Australian narrative.

First, governments looking to mobilise superannuation funds to invest in national security must understand that any investments made by a fund must come from the bottom up through the investment process, not top-down through management strategy or influence. If the government wants to effectively leverage private capital (including superannuation funds) in its strategic projects, then it must develop a way to understand what projects have the best chance of making it through those processes and facilitate them.

Second, many defence capabilities rely on manufacturing that broadly benefits national security, such as advanced production of semiconductors or processing critical minerals. Those industries are dual-use: while they support defence capability needs, they are commercially viable and essential for maintaining Australia’s quality of life. For the Australian government, navigating ESG and other investment filters requires a strong knowledge of the investment process and could be resolved through dual-use technology projects.

Third, one option is to create an Uplift Project Office to coordinate engagement with the investment community and government departments tasked with executing strategies that support the whole-of-nation efforts needed to meet national-security goals as outlined in the DSR.

The government already has access to knowledge from a world-class, prudent and scaled investment process through Australia’s sovereign wealth fund, the Future Fund. The Future Fund is not a superannuation fund; it is a sovereign wealth fund that is independently managed to strengthen the government’s long-term financial position through profitable investments. This should be used as an investment template to familiarise the government with the processes and requirements associated with mobilising private-sector capital for national-security-related investments.

Therefore, the Uplift Project Office should sit under the minister for defence to ensure that national-security priorities are embedded in the office’s bottom-up activities and align with complementary top-down activities under the newly established IIP. An advisory council made up of senior individuals actively working across Australian, US and British investment sectors should also be established to assist in setting up and running the Uplift Project Office .

Australia has one of the world’s largest underutilised pools of capital sitting in its superannuation funds. The 2024–25 federal budget needs to provide more to meet the goals of the NDS and IIP. There is a window of opportunity for the Australian government and private capital to work hand in hand to reconcile investment requirements with national-security imperatives. Doing so will be key in ensuring Australia is fortified for the future.