Doubling the value of Australian Super Fund Allocated Pensions
This paper describes the new asset class of rooftop solar available for investment through PrePower Cooperatives. These investments are secure, promise high returns and contribute to an ethical economy. They are specifically designed as local investments where the consumers of renewable electricity are also local investors.
A typical rooftop solar installation in Australia can pay for itself in less than 4 years. The ROI is >20% per annum for at least 20 years. House owners who put up solar can remove most of the cost of their electricity. Despite this high return, it is not currently available as an investment class for self managed super funds or for pooled investment funds. PrePower Cooperatives aim to change this.
In 2019 Australian Superannuation Funds held 2,900 billion dollars in assets. The Funds paid out 40 billion dollars in pension payments and $40 billion in lump-sum payments or a total of $80 billion. New contributions were $119 billion, and the Funds earned $180 million or 6.2% on the asset value. The payments to members of $80 billion are about the same as the new contributions of $119 billion.
During a super fund growth stage, investments tend to concentrate on capital gains to provide future long term income. When the fund is in a steady-state (of income equalling outgoings), these capital gains need to turn into an income stream. Stock market investments dominate Super Fund investments meaning capital growth is at least 50% of earnings. As the funds change from a growth state to steady-state, they need investments where there is little capital growth and where the profits return to pensioners.
Rooftop solar — a cash flow investment
Pensioners have been early adopters of rooftop solar, understanding the long-term, steady return on investment as a great retirement strategy. Unfortunately, it is not an option for pensioners who do not own a rooftop or who cannot raise the initial investment funds. Similarly, it is not an attractive option for people who do not want to take on the risk of installation, ongoing maintenance and the risk that they may move on to a different home.
PrePower Community Cooperatives addresses that market opportunity. A community cooperative has investor members and consumer members. Super fund members can be investor members. Investors prepurchase electricity, the consumer members buy electricity and pay for the electricity with cash or with prepayments that are returned to the investor members.
The 20% profit is divided about equally between the investor members and the consumer members. The investors however get a fixed but flexible return while the consumer members get a variable return in the form of discounts.
The 10% profit to investors can be returned over a different number of years and can be changed on a daily basis. Pensions can have money added as well as money taken out seamlessly and for no cost.
Consumers get their returns as a fixed discount on the published retail price plus the future returns from any reinvested profits.
Super funds can offer these investments as opt-in investment choices and the Cooperative will keep track of the value of each member’s investment. The solar assets go into a trust. Because of the way the Cooperative works the investments are liquid as the member can offer them for sale at any time.
The Cooperative uses an investment software platform that is secure and private, but transparent. It is able to show every member the real-time financial position of the cooperative.
The system is designed to be ethical. By ethical we mean the product is good for society, the system is fair to all members, treats all members equally and is transparent so members are confident in its operation and have a say in the governance.
Local cooperatives have an additional benefit as they help build local communities and generate resilience and wealth.
A Scalable Long Term Investment in Solar
Pre Power Cooperative investments provide scalable solar investments equivalent to a 20% allocated pension for 20 years.10% of the investment returns go to consumer-members who purchase electricity from the Co-op, and 10% go to the investor-members who supply the capital to purchase the infrastructure. Consumer-members buy electricity from the Co-op at a reduced rate compared to grid prices, which amounts to their 10% return. Today the reduced rate is 70% of the grid price. Consumer-members gradually acquire a form of notional equity in solar installations as consumers and get further benefits if the net returns on investment are greater than 20%. They also take the risk of getting fewer benefits if the returns become less than 20%.
Members can be investors, consumers, or both.
Providing consumers with discounts incentivises them to stay with the cooperative. In addition, consumers share in the profits with further discounts from the rooftop investment. When a member leaves a dwelling, the new resident becomes a member and takes over the leaving member’s place. This means Pre Power Cooperatives sustains membership numbers
Pre Power Cooperatives provide a way for pooled super investment funds to invest, on behalf of members, in community solar. The pensions generated from community solar are roughly double those currently offered by the average superannuation fund. Pooled investment funds must allow superannuation members to extract their investments on demand. Pre Power Cooperatives provide this by transferring the outstanding prepayments directly to the member.
Superannuation pensioners can ask their super fund to invest in Pre Power Cooperatives. They gain flexibility, reduce risk and get a high return on investment. Investors in Pre Power Cooperatives can specify how their funds are returned. The return on investment is always the same rate, and there is variability in when the money is returned. For example, instead of an annuity of 10% over 20 years, they could opt for a 15% annuity over ten years or a 5% annuity over 40 years — and they can change between options whenever they wish.
Leaving the funds administration within the super fund reduces the complexity of investment for members. The superfunds can make significant, efficient cash flow investments on their behalf, and through their scale of operation, reduce the cost of investing.
In Australia, for the foreseeable future, solar is a profitable investment. Installations have a long life, are replaceable, and once built, will continue to produce electricity. Pre Power Cooperatives enable a group of consumers and savers to work together and to take advantage of the economies of scale.
Superannuation Pensioners can invest in rooftop solar as a way of getting better income streams from their retirement nest egg. As members of Pre Power Co-operatives, these pensioners can now invest even if they don’t have a sunny roof over their heads or if they can’t consume all the electricity. If super funds were to offer Pre Power investments to their pensioner customers, this would make the process easier and safer for everyone.