PORTFOLIO POINT: Despite the best intentions, the superannuation system is not creating comfortable self-funded retirement for many Australians. It’s time something was done.
The utopian dream of 20 years ago, where every Australian could afford a decent retirement, is rapidly fading.
It was considered one of the major legacies of former Prime Minister Paul Keating, a superannuation scheme that would create a vast pool of national savings, provide benefits to all Australians and alleviate the financial pressure on government.
“It was a fabulous idea,” a member of the Cooper Review panel told Eureka Report. “But the government was hugely naïve in just handing the whole thing over to the private sector to run.”
Now two decades into the experiment, it is becoming painfully apparent that very few Australians will have anywhere near enough cash to maintain anything near a comfortable retirement.
Workers once knew how much they would have in retirement, courtesy of old style defined benefit schemes. That’s been replaced by a system where the only certainty is how much you pay.
Three years ago, the first major inquiry into the super industry was undertaken by former Australian Securities and Investments Commission deputy commissioner, Jeremy Cooper.
It exposed an industry that had enriched itself at the expense of those it was supposed to look after, rife with conflicts of interest, with exorbitant commissions and fees paid for services that were never delivered.
While some of the worst elements of gouging now have been outlawed, and new regulations implemented, it remains an industry with serious shortcomings.
Fees are still way too high. Performance has been woeful. And rather than a retirement system or pension plan, we’ve been lumbered instead with a badly designed investment scheme. On top of that, successive governments continue to tinker with the system, particularly its tax treatment.
Despite the abysmal performance of most super funds in the past five years, fees have continued to grow.
According to research by superannuation intelligence group Rainmaker, fee increases have outpaced inflation, even in the years since the 2008 meltdown on financial markets that has seen most account holders watch their retirement balances retreat.
“Total super fund fee revenue is about $17 billion, an amount that is up 3.6% in the past three years,’’ according to Rainmaker’s director of research, Alex Dunnin.
Stung by the criticisms, industry lobby groups now claim that overall fees are reducing and at a fairly rapid clip.
That may be true. But it has nothing to do with the industry, particularly the professionally managed retail industry, lowering their cost structures or their fees.
“Superannuation system costs are sliding down ever so slightly but before anyone tries to argue that fees are dropping they should acknowledge that it’s due not to funds lowering their prices but consumers changing their product preferences, getting wealthier and qualifying for fee discounts,” Dunnin says.
During the past five years, the Australian super industry has delivered a 0.8% loss, as its overexposure to the volatile domestic stock market has become its Achilles Heel.
So disillusioned has the nation become, that there has been an exodus out of the professionally managed industry.
According to the Australian Taxation Office, there are now 478,000 self-managed super funds. And their numbers are swelling. The latest figures show an 8% lift on last year and 15% more than in 2010.
But they carry far greater weight than the sheer force of numbers. For while those managing their own super account for around 10% of the superannuation pool by headcount, the amount of money they control adds up to an incredible 32% of the superannuation pool.
The Australian Prudential Regulation Authority estimates that of the total $1.4 trillion in national savings, $439 billion now is being self-managed.
Not only does that make Do It Yourself super the fastest growing segment of the industry, it is now far and away the biggest component of the nation’s super savings, dwarfing the union-run industry funds which account for about $266 billion.
Given that DIY funds operate on much lower costs, the exodus from the professional industry should have seen overall fees plummeting. But there is a good reason that hasn’t happened.
The superannuation industry charges a percentage of assets under management. And with 9% of the nation’s wages pouring into that pool every week, the assets under management continue to swell. So fees rise regardless of performance.
There is an incredible degree of duplication within the industry, to the point that it has become the Sara Lee of the financial world; layer upon layer upon layer.
There are more than 400 super funds. But few invest directly. For that they employ specialist asset allocation firms, who decide which investment funds will be handed the loot. Most of those are run either by our big four banks or AMP. They often trade through brokers. And the ticket is clipped at every step.
While the furore over fees attracts most of the media attention, it really is only half the story. The cancer that is eating away out our national savings pool is the lack of performance.
One of the unique features about the Australian system is its over-reliance on stock markets, particularly the local market. In the five years to 2007, when the market was running hot, super balances grew, often in double digits, and there were few complaints. But that fundamental flaw in the system – with many funds restricted by mandate to be fully invested in local shares – became abundantly apparent during 2008.
The Future Fund, by contrast, has just 10% of its portfolio allocated to the local stock market with debt securities and “alternative” assets accounting for just under 40%. Almost 10% of its portfolio is in cash while forests, infrastructure, property and private equity account for a further 20%.
It is a model for what could have been. Accountable, transparent and subject to public scrutiny, it is everything that our superannuation industry is not. Each year the fund produces a set of accounts on a publicly available balance sheet. Our privately managed funds, by contrast, have their accounts subsumed in other corporate structures, primarily our big banks or AMP.
Successive federal governments have been unable to avoid mucking around with the system. Incentives are put in place, then removed or diluted. In recent weeks there have been persistent rumours that the federal government, intent on producing a budget surplus for political reasons, was considering another assault on the tax treatment of superannuation.
Housed within Treasury it is viewed as a taxation liability rather than a long term social service. In other countries, such as the US, it is administered by the Department of Labour. Our bureaucrats, most of whom will be handsomely rewarded by the Future Fund on retirement, fail to understand that the rest of the nation are foregoing current earnings by socking cash away in superannuation and so should be given a tax break.
Very few Australians understand just how expensive retirement can be. We all are living longer, thanks to improved lifestyles and better health care. That means we will have to save more. But we have a system in place that is failing us as it enriches itself.