Counterrevolutionary Vanguard

The union-linked funds that own about 30 percent ($1 trillion) of super funds are dwarfed by the “Big Three” global index fund managers. BlackRock, Vanguard, and State Street, which manage a portfolio of around US$15.5 trillion, are together the largest shareholders in almost every publicly listed company on any global stock exchange. Vanguard, for instance, owns about 7.5 percent of Apple. Combined, the Big Three own about 17 percent.

Index funds, pioneered by Vanguard founder John Bogle, have gradually achieved their enormous scale through a combination of low fees and predictable returns for investors. They are designed to replicate the performance of a stock market index (for instance, the S&P 500 or ASX 200). To do this, they buy up a representative slice of every significant company on the market. This is a mostly automated process requiring little human input.

Vanguard recently announced that they’ll be establishing a super fund to compete in the Australian pension market that will take the same approach to investment. Unions and their associated industry funds should be very worried about this development. Vanguard will easily be able to outcompete them in terms of fees.

Vanguard’s largest index fund has annual management fees of 0.03 percent. Their Australian offering, roughly comparable to a typical super fund, has fees of 0.27 percent. By comparison, industry funds on average charge around 1 percent.

On top of the competitive advantage that Vanguard has in terms of management fees, there’s no evidence that industry funds offer better long-term return than Vanguard’s simple index-following approach. Indeed, this was Bogle’s main assumption in founding Vanguard. Beating the market is hard work — it’s safer to just follow it passively with minimal costs.

Industry funds try to promote themselves as nonprofit, by which they mean that they return their profits to investors. But, in this sense, Vanguard is also a nonprofit. As the Vanguard website explains:

The Vanguard Group is owned by Vanguard’s US-domiciled funds and ETFs. Those funds, in turn, are owned by their investors.

That leaves union funds with a stark choice. If they refuse to change, they will slowly but surely be crushed by the competitive advantage that a colossal investment fund like Vanguard enjoys.

This will deprive the union movement of much of its remaining influence over workers’ long-term welfare. It will also increase the amount of the economy that is privately controlled. The alternative is to transform super into a truly egalitarian system.

Make It Collective

By design, Australia’s existing superannuation system reproduces inequalities built into the labor market. This is because employers must pay super as a proportion of wages into individual accounts that then earn compounding returns. Upon retirement, high-income workers may find they own a significant pool of capital.

Meanwhile, lower-income workers — disproportionately women — retire with the lowest super balances. The same will be true of younger or marginalized workers who are trapped in precarious or informal employment. As wages continue to decline and precarious work becomes more prevalent, the number of people with a stake in defending superannuation is shrinking year by year.

To make matters worse, in its present form, superannuation undermines genuinely redistributive institutions like the age pension. This is because conservative political forces are able to present them as a last-resort safety net rather than a guarantee of the right to a decent retirement.

Labor and affiliated unions are fond of describing Australia’s super system as “the envy of the world.” Yet unions elsewhere are campaigning against moves to impose the same individualized account structure super is built on. Meanwhile, lobbyists like John Arnold, a former Enron trader who went on to make billions in hedge funds, are campaigning in favor of this structure.

Attacks on super are not new. Labor’s Paul Keating was the politician who designed super and made it mandatory in 1992. He now claims he had the opportunity to create a nationalized, collectively owned system but opted for a private, individualized design instead:

If you look at the Norwegian fund or the Dutch fund . . . your wages are levied at a certain amount. It goes into a national fund. The fund is managed by the government and you get a pension from it. I didn’t want that. What I wanted was [that] you got your pension from it, but you own the capital.

To save super, we have to undermine the individualistic ideals that have been bound up with the scheme since its founding. If super was held and distributed collectively, it could be an enormously powerful tool for wealth redistribution and the collective good. If we place solidarity — and not individual interests — at the heart of super, we could begin to give the union-controlled pension fund an advantage over funds like Vanguard.

A Fairness Fund?

A fierce yet technocratic debate currently rages about plans to lift employer contributions to super from 9.5 percent of base wages to 12 percent. One side contends this increase will result in a genuine lift to total overall wages while the other asserts that lower pay raises will undermine these gains in the future.

This focus couldn’t be more wrong. Winning higher wages is clearly a priority, and if higher super contributions contribute to that, then that will, of course, be a good thing. But on the basis of the present system, increasing employer superannuation contributions will disproportionately benefit highly paid workers, accelerating inequality.

There’s a simple demand that could change this. If the scheduled 2.5-point increase in superannuation went into a collective fund instead of individual accounts, we could, over time, build a much more egalitarian superannuation fund. Under democratic control — perhaps divided equally among union and public representatives — we could use the proceeds to reduce poverty and inequality and to build toward a collectively owned economy.

There is an unlikely blueprint for how this could be possible: Vanguard itself. Like any business, it’s a self-perpetuating engine of capital accumulation whose goal is to maximize profit. However, the scale and breadth of its ownership means that the profit motive follows a different dynamic.

Vanguard’s management isn’t merely concerned with a narrow set of investments. Rather, it is concerned with the performance of the entire economy and all capital.

If we increased the amount of money held by worker-owned superannuation funds, then this would allow these funds to have a similar influence. Instead of investing piecemeal, the workers’ movement could exercise meaningful control over whole industries, and eventually the commanding heights of the economy.

Moving toward larger combined funds could also address more short-term problems with super. As they exist today, Australia’s super funds skim $30 billion per year of our wages in fees — effectively wage theft. Consolidating super could cut this waste by reducing pointless expenses like advertising and duplicated administration.

Real Democratic Control

Consolidating super would be a first step toward a partially Norwegian model. Norway’s pension fund has helped give the country the highest levels of public ownership of any economy on Earth — 76 percent of Norway’s non-housing capital is publicly owned.

Of course, without democratic ownership and control, a consolidated super fund will never serve the common good. At present, although half of the board members of the industry fund are representatives from unions, the other half represent employers. It is perverse that employers should be asked to make decisions about their employees’ savings. And it is more perverse still that workers are made to pay billions in fees for the right to have their bosses manage their money.

The situation is even worse when you turn toward the other two-thirds of the superannuation scheme that are privately owned. Here fund managers have no duty to represent the workers whose savings they manage.

Genuine democratic control would involve working-class people who aren’t employed in the formal labor market but still deserve a say over the democratic management of the economy — for example, people with caring responsibilities unable to work, the unemployed, students, and so on. A select group of wealthy investors would no longer make all the decisions about investment in the economy and the use of funds created by workers’ pensions. Instead, these decisions would be publicly agreed upon through democratic mechanisms.

Discussing the revolutionary potential of socialized finance capital may seem strange given the fact that support for finance is often associated with the Right. Yet as far back as 1910, Marxist political economist Rudolf Hilferding discerned a positive side to the vast accumulation and concentration of financial capital. As Hilferding wrote in his book Finance Capital:

The socializing function of finance capital facilitates enormously the task of overcoming capitalism. Once finance capital has brought the most important branches of production under its control, it is enough for society, through its conscious executive organ — the state conquered by the working class — to seize finance capital in order to gain immediate control of these branches of production.

Index giants have made Hilferding’s prediction a real possibility. As Harvard professor John C. Coates has argued, whoever runs the index funds will soon run everything. We are, Coates insists, moving to a situation in which a small number of institutions will own the bulk of equity capital of large companies.

These institutions are not democratically run. In most cases, a very small group of board members are granted the right to vote on the direction of the firm. If these trends continue, Coates concludes, we could end up in a situation in which “roughly twelve individuals will have practical power over the majority of US public companies.”

Financial corporations and right-wing politicians will continue to transfer worker pension funds to private hands unless the Left begins fighting to transform super, making it egalitarian and democratic. The path forward is unclear, and the scale of the transformation is daunting. But seizing 2.5 percent more from employers and investing it for our collective good would be a strong start.