Australia's super system is a national disgrace

It doesn’t take more than a few moments of thought to understand that Australia’s superannuation system is not the paragon it’s cracked up to be.

Savers and retirees are fully exposed to both market and longevity risk, there is very little regulation around where the money should be invested and virtually no regulation of fees.

In other words, Australians are required by law to save 9 per cent of their salaries in an effectively unregulated privately managed system.

The industry will argue that it is, indeed, tightly regulated, but not where it counts. Other utilities’ prices are set according to the returns on capital of the providers; in super, not only are fees essentially unregulated, but few customers even know what they are.

Those who can actually work out the dollar amount by multiplying the basis points by the amount in their fund, which is not very many people, would have to make sure they include all the different fees in their statement – administrative and investment fees. It’s virtually impossible.

So the superannuation industry is in the happy position of providing a service that is mandated by law where the price is both unregulated and effectively unknown.

No wonder there are 400 super funds in this country and many more investment managers fighting to manage the $1.4 trillion in super and $9 billion a year in inflows, and little wonder that the fastest growing sector is self-managed super.

I met an English investment manager for a coffee yesterday who, unsolicited, expressed amazement at the levels of investment fees in this country. “How long has this been going on?” he wanted to know.

But that’s not the worst thing about our superannuation system. The worst thing is the brutal risks to which Australians are routinely exposed.

Between about 1985 and 2000 all capital, both private and public, was removed from the support of retirement pensions. Up to that point most corporations, life offices and governments allocated part of their capital to guarantee their employees a certain retirement income.

But in the space of a few years they all rushed out of “defined benefit” super, as it was called, to “defined contribution”, or accumulation, funds. Billions in capital was given back to happy shareholders or deployed elsewhere by even happier managers and politicians.

It has taken about a decade for the risks of this process to become evident. For the first 10 years the fact that Australian super funds had over-exposed their unknowing clients to equities was not a problem because the stockmarket boomed.

Now the funds have been going backwards for five years and suddenly the nation’s retirement savers are exposed to what is politely called “sequencing risk” – that is, if you want to retire when the market is down, bad luck!

In general, very few people in Australia now know what they will have to live on when they retire. It is a lottery. In the space of two decades we have gone from knowing and not having to worry, to not having faintest clue, and worrying like hell.

Many people, realising late in life that they won’t have enough, start taking bigger and bigger risks as they approach retirement to improve their returns, when the opposite is recommended. For some this pays; for many it is a disaster.

Meanwhile, when we retire we are left to our own devices with a lump of money. Usually, but not always, we consult an adviser. Sometimes we give the lot to a nice man who then runs off with it.

The advisers used to be paid commissions by investment managers, as well as unscrupulous shysters, to ensure that the money found its way back to them.

Those commissions are now banned, in the face of a ferocious campaign from the industry, but the money still mostly goes back into “balanced” investment portfolios – that is, shares, property, hedge funds, private equity, bonds and cash – using expensive managers for each category.

As during the saving years, retirees are thus playing the asset markets once again; nobody is guaranteeing them anything.

So once they retire, Australians are exposed to the greatest risk of them all: that they will have the misfortune to live a long time.

According to the Bureau of Statistics average life expectancy in Australia is now 79.5 years for males and 84 for females. But that’s an average – half the people will need to fund a retirement of more than 15-19 years (assuming retirement at 65), and many will live much, much longer than that. It’s another lottery.

Moreover, the crackdown on smoking, the advent of effective anti-cholesterol drugs and advances in cancer research, among other things, will ensure that life expectancy increases dramatically from here.

The cost of retiring, already enormous, is set to soar. Yet just as nobody know what fees they are paying to have their savings lost, nobody knows what it will cost them to retire and whether they will be able to afford it. Mind you, it’s usually better not to know, because you can’t afford it.

As Winston Churchill would say, superannuation in this country is a riddle wrapped in a mystery inside an enigma.

It is a national disgrace.