Karl Marx never saw this coming. His view of economics was binary, with the capitalist exploiters on one hand and the exploited workers on the other.
He didn’t foresee “workers’ capital”. He never imagined that one day the savings of the proletariat would accumulate, via their pension and superannuation funds, into a worldwide pool of more than $US30 trillion. To give you some idea of the relative size of that sum, it’s more than 10 times as much as is held in the world’s hedge funds or private equity firms.
Globally about one-quarter of all the assets under management belong to workers. In Australia, superannuation funds hold about $1.7 trillion, or a bit more than the country’s annual GDP. And industry funds, run on behalf of unions, hold about one-third of that. We’re talking big, big money.
The growth of workers’ capital has been spectacular, but not nearly as revolutionary as some feared and others hoped. It has not, for example, done anything to slow the long decline of wages as a proportion of GDP, evident in Australia and across the developed world. Nor has it mitigated rising inequality of income and wealth.
It may indeed be a contributing factor to both those trends, for pension and super funds have consistently shown themselves every bit as profit-hungry as the corporations they invest in and partner with.
Workers’ capital, in short, behaves very much like boss’s capital.
Britain’s Financial Times carried a story this week relating to the tax position of Europe’s largest shopping centre, Westfield Stratford City. Britain’s largest union, Unite, which represents some 1.4 million members, was drawing attention to the fact that the Westfield development, through a complex web of vehicles in offshore tax havens, had paid an effective corporate tax rate of just 0.5 per cent in 2012.
In an environment of austerity budgets and cuts to public services, it complained, this tax minimisation had denied the public of £14.4 million ($25.7 million) that year alone.
But the most interesting part of the union’s critique was that it condemned not just Australia’s Westfield but also two pension funds, ABP in the Netherlands and the $200 billion Canada Pension Plan Investment Board (CPPIB), each of which held a 25 per cent stake in the development and which were also minimising tax.
And the only reason this has become public is that an Australian union, United Voice, angered at Westfield’s refusal to negotiate better pay and conditions for union cleaners at its Australian properties, partnered with other unions and civil society groups in Britain and the US a year or so ago to put the forensic accounting cleaners through Westfield’s affairs.
So Westfield and CPPIB provide a case study, but there is no reason at all to believe they are the only ones doing it.
The information United Voice and its partners dredged up serves to highlight a conundrum: unions, representing workers whose services are being cut, are at odds with the pension funds, representing workers whose pensions are being padded.
To what extent, then, are pension and union fund members, as investors, exploiting themselves as workers, consumers and citizens who use government services?
As a result of the investigation, the president of the Canadian Labour Congress – the equivalent of our ACTU – has written a strong letter to the CPPIB noting that its investments in Westfield’s British properties are held through a “complex corporate structure” involving firms in the tax havens of Jersey and Guernsey, apparently “designed for the primary purpose of avoiding UK taxes”.
This, the letter says, is just the sort of tax practice “that has drawn public opprobrium and ignited media campaigns in Europe, targeting Starbucks, Amazon and Google in recent years”.
It seems highly unlikely anything will change as a result. The pension fund has lately been talking up its partnership with Westfield in Britain, the US and here. And while the Canadian union movement has stated its point of principle, it must also be cognisant of the reality that its members are the winners in the arrangement, while the losers are in faraway Britain.
You might lately have heard of the CPPIB. Margaret Simons, in her story on the future of the ABC and SBS in this paper last week, noted that of the two broadcasters’ total public funds, 20 per cent “disappears straight into the pockets” of the CPPIB, which owns the broadcast infrastructure.
Prime Minister Tony Abbott, on the Canadian leg of his “open for business” overseas tour, mentioned other CPPIB investments in this country, such as Sydney’s M7 tollway, as part of his pitch for more investment here by the half-dozen or so big Canadian pension funds.
“I hope more of them will look to Australia,” he said, “because I think there is great potential [for them to invest] as part of the asset recycling fund that the Commonwealth has put in place in the budget.”
The term “asset recycling” is the new euphemism for the privatisation of government assets, a practice that has proved consistently, wildly unpopular with the electorate.
There was further evidence of this last week, when Queenslanders were polled about their views of the state government’s plan to privatise $33 billion in state assets. Only 23 per cent supported the idea. Similarly, polling has shown 74 per cent of people in NSW – including two-thirds of conservative voters – oppose the Baird government’s plan to flog $20 billion worth of electricity assets.
This is understandable given the lived experience of workers and consumers of past privatisations, says Ben Oquist, strategy director of the progressive think tank the Australia Institute.
“The much-hyped benefits have all too often been far outweighed by price hikes, job losses and significant long-term revenue losses to the government that did the privatisation,” Oquist says.
The punters hate privatisation. The superannuation funds that represent them, however, are hungry for the selloff, as confirmed by Gerard Noonan, the president of the Australian Council of Superannuation Investors, which represents non-profit pension funds.
Privatised infrastructure is an ideal place to invest because it means “solid returns and long-term, stable arrangements”, he says.
There is little downside, apart from the risk of overpaying for the assets in the competitive rush to buy.
“We actually compete with the Canadians,” says Noonan. “They tend to be public-sector funds with big amounts of money.”
The Australian funds are also very cashed up, courtesy of compulsory super contributions and the tax breaks that encourage higher-income earners to invest in them.
Individually and collectively, through a company called Industry Funds Management (IFM), Australian super funds, too, are major international players.
“For instance,” says Noonan, “through IFM we recently bought Manchester and Stansted airports in Britain. We own Thames Valley water, the water reticulation system in the UK, a toll road in Chicago …”
United Voice, as a spinoff of its investigation of Westfield/CPPIB, has identified similar investments using tax dodges. Such as Arqiva, a British telecommunications company that provides infrastructure and broadcast transmission facilities and avoids tax on a Westfieldian scale. It is 14.8 per cent owned by IFM.
The many other examples form a clear picture: as so-called workers’ capital has grown and internationalised, its behaviour has mimicked that of other multinational enterprises.
“It’s a paradox,” says Mike Rafferty, research fellow at the University of Sydney Business School. “On the one hand we as workers and citizens get upset when we see companies dodging tax to within an inch of the law. And on the other hand, as investors in these companies – mostly compulsorily, via superannuation – we have an interest in them maximising their profits, which presumably includes using the same corporate financial planning techniques that Google and Starbucks and Westfield use. This paradox is only going to get bigger as governments race to privatise and superannuation funds become desperate to find long, stable forms of cash flows.”
Richard Murphy, the British economist and chartered accountant who has probably done more than any other individual to bring to light the tax avoidance schemes of multinational companies, has some sympathy for the behaviour of the super and pension funds.
Given that fund managers and trustees have a fiduciary duty to maximise members’ returns, they really have no option but to join the tax avoidance game.
“In the sense that most pension funds are invested in major corporates and most major corporates are doing tax avoidance, I believe it is their duty to do so,” says Murphy.
Equally, though: “They are representing the people who suffer through tax lost, because ordinary people are paying more because the corporates aren’t. The objectives of the funds are thus almost inherently in conflict with the interest of the members.”
Murphy’s complaint is not that the funds play by the current rules – they more or less have to – it is that they are not even trying to change the rules.
If they are direct investors, he says, “they can make a specific decision with regard to the structures used”, and if they are shareholders, they can agitate at company shareholder meetings.
But mostly they don’t.
Through his work with the OECD on monitoring and addressing multinational tax avoidance, Murphy says he sees growing engagement by various civil society groups, and increasingly unions, concerned about the role these funds play in shifting the tax burden and diminishing the capacity of government to provide services.
“I expect this to become a much bigger campaigning issue for trade unions,” he says.
But United Voice aside, he’s seen precious little from Australia. “I have most certainly met Australian tax authorities at the OECD, but I most certainly have not met Australian trade unionists.”