The madness that lies at the heart of the super system
End of the year. You know what that means. Yet again, it means another year of hanging about the letterbox for the financial statements that shine a light on just how much your wealth has diminished.
End of the year. You know what that means. Yet again, it means another year of hanging about the letterbox for the financial statements that shine a light on just how much your wealth has diminished.What's the stockmarket down this year? Last time I looked, it was 15 per cent. Depending on who is managing your funds, it may well have performed a little better, or, more likely, much, much worse.So volatile is the situation right now it is possible that by Monday, even Archimedes would have trouble calculating how much your wealth has grown.Unfortunately, given the way modern-day Greeks are mucking about with global finance, the more likely scenario is that your rosy future has suddenly taken on rather a different hue.That raises an important question. Why is it that our superannuation - the retirement savings of a rapidly ageing nation - is so exposed to such volatility?The whole idea of savings is that we end up with more - not substantially less than we contributed - so we don't end up being a massive burden on society in the final years before we fall off the twig.Paul Keating came up with the idea when he was federal treasurer more than 30 years ago. But since then, the superannuation game has spawned an industry that looks after itself before it looks after those the original scheme sought to protect.Australian workers have a superannuation pot worth about $1.3 trillion. Each week, 9 per cent of every worker's earnings flows into that pot. And the vast bulk of that money, each week, is punted on highly volatile stockmarkets, with advisers, brokers, traders and fund managers taking a cut at each step.You need to ask the question: is that really where you want your long-term savings invested in times like these?If you are in a default account, as the vast bulk of Australians are, your most likely answer would be: "Come again. Dunno what you are talking about."Our national savings scheme is the envy of the developed world. But while we may have led the world in how to rake in the cash, when it comes to investing the proceeds, we fall way down the ladder. In fact, some local pundits reckon it is a national disgrace.Here is the sad truth. Our super funds are horribly unbalanced and hugely at risk. Pension funds in almost every other country look to investing in a much higher proportion of safer investments, particularly in fixed interest securities. And that is where the argument becomes interesting.Get this. On top of investing in the local stockmarket, our superannuation funds each year send tens of billions of dollars offshore into wholesale debt markets, to capture some low-risk returns.And guess where our very own banks go to borrow trillions of dollars? That's right, those same offshore debt markets. They then lend that money to Australian consumers and corporations, creating a foreign debt problem.Does that make sense? In essence, our retirement money is being sent overseas, borrowed by our banks, and then repatriated and lent here. Fees are raked off at every opportunity and currency hedging or insurance costs add to the financial burden.You have to wonder. Why not just cut out the middleman and have a mechanism where Australian superannuation savings can be lent to Australians? It may be a little cumbersome with consumers but when it comes to our companies, surely it couldn't be too difficult.One of the great difficulties is that we no longer have a corporate bond market in Australia. If companies want to borrow money, they either have to go to a bank or head offshore to a foreign debt market where they just may be borrowing Australian funds.With all the hoo-hah about debt and debt crises in recent times, there's a few fundamental principles that most people forget. The first is that debt is safer than equity. When a company goes under, debtors stand before shareholders. And that's why debt pays a fixed return. It is far more secure. And the risk is lower.If you get your head around that, you'll understand the madness at the heart of the Australian superannuation industry. We are all hugely exposed to the highest risk investments with which you could possibly be associated.So how do we change it? "With great difficulty" is the obvious answer. But next week, some of our brightest minds will gather together to try and nut out a solution.Led by David Livingstone and Mark Burrows, the investment bank Credit Suisse will host a seminar on Tuesday aimed at shifting the behaviour of our superannuation guardians that, if successful, could rank as one of the greatest revolutions in our national savings plan. Given the uncertainty on global markets, the timing couldn't be better.The Treasurer, Wayne Swan, along with a coterie of Treasury officials, were quick to sign up. They want to see the evolution of a corporate debt market, where Australian companies can raise funds directly from Australians, where savings are invested directly into the debt of local companies.There is no logical reason why it shouldn't happen. In the 1980s, Australian corporations could raise cash from local lenders by issuing corporate bonds. For some reason, in the intervening decades, the market has all but dried up. Maybe it was the growth of our banks. Perhaps it was the rise of globalisation and the liberalisation of global credit markets.Reviving the market here is more difficult than it seems. While there is almost universal agreement in the principle, convincing the participants - the companies, the banks, the superannuation funds - to alter their behaviour is far from simple.Government regulation would be one option, but it would be far from ideal. A better solution, perhaps - and one that no doubt will be debated on Tuesday - is whether the newly defined superannuation default funds, where the bulk of Australians have their cash parked, should include a benchmark portfolio.In this way, a certain percentage of funds could be allocated to a local corporate bond market. That could be enough to resuscitate this once active market.Given the massive infrastructure requirements of our rundown cities and regional centres, a benchmark portfolio for default super funds could make billions of dollars available for infrastructure investment. That would be a low-risk, long-term investment ideal for those approaching retirement. Should it happen, the evolution of this market could benefit both ends of the investment spectrum. It would give our companies greater choice when it comes to raising debt. And it would provide our super funds with a safer alternative to park their funds, or at least a proportion of them.No matter which way you look at it, Australia needs to reduce the volatility of its superannuation savings pool. And with storm clouds gathering over global markets, time is of the essence.