PORTFOLIO POINT: Self-managed super funds are the primary reason why Australia’s superannuation system is doing so well. And we will continue fighting for more system stability.
Australia’s superannuation system is amongst the world’s best, but that could easily change if there is more unnecessary tampering to the system.
A large part of the system’s success is in fact due to the self-managed super funds sector, and Eureka Report readers are a big part of the achievement.
It is not often that Australia becomes a world leader in an industry and develops unique strategies and features in that industry. This week I was yarning to Mercer’s David Knox, who was presenting the Melbourne Mercer Global Pension Index. It shows that we rank third in the world in the quality of our superannuation.
As David explains in the video above, the Danes beat us partly because they have developed a system whereby they constrain access to lump sums for people with larger amounts invested. They have to use their superannuation funds for a pension. For lower-income people, a larger proportion can be paid out as a lump sum.
In other words, they have integrated their superannuation savings to their government pension system and the need for those with lower incomes to get lump sums.
But here in Australia, in our self-managed fund movement, we have in fact overcome the big lump sum problems that exist in our industry and retail funds. When people regard superannuation money as their own (as happens with self-managed funds), they tend to leave it in the fund and are not as anxious for lump sum payments.
Conversely, when people in industry and retail superannuation funds retire they tend to take their superannuation out as a lump sum. Self-managed funds people use their superannuation to provide for income in their retirement and often try and keep the money in their fund as long as possible so they pay low or no tax. In addition, they realise they will incur large outlays if they live for a long time.
As a result, 80% of the private pension incomes that come out of superannuation savings are in fact generated via self-managed funds. So, once again, we are matching the Danes but doing it via the self-managed fund movement.
Moreover, one of the weaknesses that the pension index uncovered was that Australian superannuation funds have a 70% plus exposure to equities. Of course, if the market rises that means that our funds will do particularly well. But if the market falls, savings levels are badly eroded.
I think that 70% equity levels are reasonable for younger people. They need to accumulate their savings and if they do suffer market reverses there is time to recover. But investing at levels of 60% and 70% equity when you are older carries higher risk. If the market does fall substantially, then it can affect your retirement income levels and it is harder to get the money back.
But, once again, it is the self-managed funds that understand the age-related dangers of equity exposure so self-managed funds tend to carry about half the 70% equity exposure that we find in retail and industry funds. Moreover, according to the CEO of the Self-Managed Super Fund Professionals’ Association, Andrea Slattery, self-managed funds have performed better than industry funds in 10 of the last 12 years.
The self-managed funds sector of our superannuation movement is the jewel in the crown, and that is why about one-third of our superannuation money is now invested in self-managed funds
Of course, what we are finding is that a whole raft of misinformation is spread about self-managed funds, such as how the money is simply left in the funds in cash. Nothing could be further from the truth. Sometimes the amount of cash in self-managed funds is inflated because the measurement is taken at June 30 when most contributions take place. But overall the research is showing that the self-managed funds are just as sophisticated as the industry funds, but are more attuned to the needs of the beneficiaries than the publically available funds.
Here in Eureka Report we have been talking about allocations to equity for a long time, and I think we probably played a role in having those allocations at levels that are attuned to what people’s needs are.
In the interview with David Knox you will see he makes a point about self-managed funds that is an alert to everyone. Traditionally it was said that the husband managed the fund and the wife knew very little about it. Actually, some of the survey work by the Self-Managed Super Fund Professionals’ Association indicates that the wife of an ‘investment keen’ husband often has a clear understanding of what is happening in their self-managed funds, particularly as she knows she may live longer than her husband and may need to manage it alone. Similarly, where the wife is the driver, husbands maintain a strong understanding of what is happening.
But David Knox makes a good point – it is important for both parties to know what they need to do if the person doing most of the decision-making were to be incapacitated or die. In our family situation we know exactly what we are going to do if one of us is incapacitated. We have an excellent accountant who can look after the situation. However, you do need to have that position covered because it is a weakness in some self-managed funds.
I believe that one of the weaknesses in our superannuation system is that our federal politicians and public servants keep wanting to tamper with it, and every time they do it lowers confidence in the system because you can’t be sure what is going to happen to your money.
A friend of mine has taken a totally different approach to savings to myself. Whereas I use superannuation, he’s paid tax and negatively geared and accumulated his money that way. He simply does not trust superannuation.
I think it’s important that our politicians stop tampering with superannuation. Some tamperings of the last few years actually need to be adjusted. For example, it is very clear that the $25,000 limit on tax-deductible superannuation contributions is really unfair to people who have not been able to accumulate savings in their earlier years. This can apply to business owners, spouses who didn’t have jobs and a whole raft of people.
Some people are fortunate in having a steady stream of income throughout their life, but increasingly that is not the way life is. You have periods of high income earning but then you have periods of low income earning, and during those low-income periods you simply can’t even afford to put $25,000 into superannuation. So it is very important to be able to put a lot more of that in during high-income years.
In the farming community we have a system of averaging taxation, recognising this problem. Some form of that averaging is needed in superannuation. And there are other areas where politicians’ tampering has affected our superannuation.
What makes the Australian superannuation system so good is that it has an industry and retail section, but also a section where people control their own savings. And in this where we are unique in the world – in my view it’s a model for the world. And that is why here at Eureka are going to work very hard to gain stability in the self-managed fund sector and ensure its prosperity.
I commend the video to you.