Superannuation, A Disaster In Wait
Australia’s superannuation industry is running unchecked. After just coming out of a Royal Commission that left the world’s strongest banks battered and bruised, it’s troubling that the super funds aren’t being asked who keeps them accountable. An industry with over $2.7 trillion funds under management and no shareholder voting rights, no real regulatory oversight, and no accountability. It’s a recipe for disaster.
In 1992 the Keating government introduced compulsory employer contribution scheme which made it mandatory for employers to contribute a percentage (%) of the employees salary to superannuation. This was designed create a sustainable pension scheme that shifts the burden of retirement from government to the individual, much like the 401(K) in America, the RSP in Canada or a PPS in Britain. Over the last 27 years the amount in Australian superannuation has swelled to make it the 4th largest in the world, and all for a population of only 25 million people!
This behemoth has been globally lauded as a leading retirement scheme, praised for it’s tax effective strategies and it’s ability to reduce state pension payments. Despite all the accolades the superannuation industry receives, it still has risks and is still run by people. People that can be tempted into unscrupulous behaviour by the lure of money and extravagant lifestyles.
Undue Influence in markets
The first critical issue of the superannuation industry falls at the bedrock of free market society; competition. Super funds have become so massive that they not only crowd out competition but they have undue market influence. Financiers or entrepreneurs seeking to participate in infrastructure, securitisation, debt markets, money markets, and long term projects have to compete against the might of the super industry.
Not only does the industry kill competition in the various sectors it participates in, but even within superannuation there is a lack of competition. The largest fund is almost double the size of it’s nearest rival.
The sheer scale of the funds mean that property developers, infrastructure projects, financiers, and corporates must work to please the super funds or face being squeezed out of their own markets. It also means that these funds crowd out other investors which creates unprecedented market influence.
This influence creates lower returns and undue pressure on businesses that rely on investable funds. For example residential mortgages, or long term infrastructure projects require long term investable funds. These funds are typically raised through a mix of sources that will include capital from the superannuation industry. The super industry’s demands for high minimum returns can result in butchered returns for other participants of the project, higher risk being taken on, or lower quality outcomes. This may be seen as a win for the members of the superannuation funds ,but the reality is that the funds are also invested in the companies they are harming.
AustralianSuper has 7.40% of their total capital invested in Commonwealth Bank of Australia (CBA) equities. Simultaneously they may also be seeking to in invest in CBA’s Residential Mortgage Backed Securities, and Capital Notes. AustralianSuper has definitely created a position of extreme influence over one of the countries largest institutions. The over $2 billion of CBA shares alone make AustralianSuper one of the largest shareholders and a heavyweight in corporate decision making. The troubling thing about this concentration of power is that the super fund isn’t afraid to use it. Recently AustralianSuper exercised it’s rights to deliver a protest vote at the CBA annual general meeting, without any consultation of its members.
If super funds are wielding this much influence over the largest companies in the country then what influence is it exerting over smaller firms. How is the little guy being impacted?
Corporate Psyche
The undue influence and erosion of competition is exacerbated by the psyche of the super industry. These ‘untouchable money machines’ are aware that they are guaranteed regular increases in funds under management. Employers are depositing every quarter, so what pressure is there for the super fund to market itself, to outperform, to create a point of difference and deliver a high quality product offering.
A huge portion of Australian’s would be better off by simply putting their money in a low fee index ETF. Don’t pay for the excessive administration fee’s, insurances, and performance fees the super funds charge. Any business with a guarantee of capital inflow and implied government backing is going to be lazy and eventually reckless. A quick look at history’s other government backed or guaranteed businesses will reflect good intentions followed by a rise of poor conduct.
This poor conduct is best highlighted in the recent Productivity Commission’s review into superannuation.
“Excessive and unwarranted fees in the super system. ” — Australian’s pay an approximate $30 billion a year in superannuation fees.
“A third of accounts (about 10 million) are unintended multiple accounts. These erode members’ balances by $2.6 billion a year in unnecessary fees and insurance.”
“Not all members get value out of insurance in super. Many see their retirement balances eroded — often by over $50 000 — by duplicate or unsuitable (even ‘zombie’) policies.”
The complacent corporate attitude of many super funds sadly costs the Australian people hugely. The seemingly small costs of an administrative fee here and there, are cruelly deceptive and dangerous. The eighth wonder of the world, compounding, has a large role to play in this hazard as one of the key strengths of long term investment (super) is having a long time horizon.
The long time horizon is especially important as money compounds. Which means that each year it builds on itself. In year one you might earn 10% on $1,000 which is $100, and if you were to earn 10% every year for the next 40 years until you retire, then that $1,000 would now be worth $45,259. Compounding is so powerful because every year you earn a little more as the snowball builds.
What this also means is that a rise in monthly fees becomes a significant loss at retirement. Think of compounding that cost, and every dollar the super fund strips from it’s members is lost income and wealth for the members at retirement which will need to be substituted with government expenditure.
The worst performing super funds are effectively losing their customers money with performance below inflation or even in negative territory. Independent analysis by Stockspot found that 25% of the worst super funds were owned by ANZ — one of the four pillars of banking. ANZ was then followed by Perpetual, StatePlus and AMP. All major players.
Their performance is largely attributable to greed, with an average of 2% in fees every year. This means that a person in their 20s or 30s could lose more than $250,000 in fees.
The Productivity Commission found a similar result and produced this graphic.
Government Interference
It’s not just the psyche of the super funds that is concerning, it’s the behaviour of the politicians. Clear examples of poor government behaviour are a Royal Commission that targeted retail funds but not industry funds, constant rule changes, incentives that come and go, and promises that are only ever reneged.
The super industry has become a government play toy. What started as a tool to move people off state paid pensions is still a state controlled mess. Recent ideas to incentives for first home buyers are a shining example of this abuse of a ‘self funded retirement system’. First home buyers are encouraged to deposit money into their superannuation for a tax break so that they can save a home deposit faster. Once the deposit is built then they are able to withdraw their super (retirement savings) so that they can buy into the housing market. Not only does this further supply/demand issues in housing but goes against the entire purpose of superannuation! If you want a smart deposit scheme then create a deposit bank account that pays higher interest. That being said, it was recently announced that this scheme is going to be repealed — super still a state controlled mess.
When Keating rolled out super there was a plan to steadily increase the superannuation contribution rate. This plan has resulted in the contribution amount being unchanged in over 25 years. The more the government plays with superannuation, the more they change the rules, the more they implicitly guarantee superannuation, and the more they fail to stick to their plans, the less credibility the industry has. The Australian politicians are excellent at trust erosion and their continual interference will lead to long term consequences.
Investment Terms
Super is a long term investment tool. Political decisions that mix and change every three years can have damaging effects for the next 30–40 years. A young person starting their working life won’t be able to touch their super for almost 50 years. There is no need for short term interference for political purchase of votes. Steady, safe, and reliable.
As a young person in today’s world I am not only afraid that climate change will decimate the world before I can access super but I am afraid that incompetent governments will destroy the wealth I have saved.
Superannuation funds should be matching terms of funds to terms of investments. Super is a tool for investing in the future. Super is a supply of capital than can be used for innovation, research, development, and fuelling productivity growth. Super is a tool that can drastically improve the lives of it’s members throughout their lifetime by making good investments.
Given the funds need to be invested in a diversified portfolio that includes equities, cash, fixed interest, and the rest. They also need to make a conscious effort to be invested in long time horizon projects. This is a great opportunity to embark on unique projects that may deliver significant economic gains. In economics it’s generally accepted that savings are the driver behind capital investment and innovation. Superannuation is a giant pool of savings without the pressure of ‘at-call’ funds. Use the unique position of the super funds to invest for the long term and become a driver to economic growth.
Control
How do we control an industry that is accountable to no-one?
The recent Productivity Commission Review into superannuation created a series of largely useless recommendations that included another review into superannuation and the creation of a top 10 list. Clearly the government has no clue how to manage the super giant, so we must take it upon ourselves to create a dialogue and start checking the beast before it’s too late.
These are my top five ideas, however I would love to read your thoughts on solving the super issue.
- Compulsory Member Voting
Similar to shareholder rights fund members would be given the right to vote on key fund decisions. This may include voting on executive remuneration, significant changes of strategy or major investments. This would create more active involvement of society and better direction of the funds resources whilst also making the fund managers directly accountable to its members. - Superannuation Regulator
A regular much like the SEC, or ASIC, the super fund regulator would be responsible for ensuring appropriate corporate behaviour, risk management and excessive influence. Sadly most industries need some form of regulator but that doesn’t mean they need to be regulation heavy. There’s usually only a needs for a cop walking the beat. - Break-Up Funds
Break-up of the funds and make them more competitive. The American model of corporate funds, hedge funds, and various 401(k) managers is an example of what a competitive landscape may look like. Self-managed super funds are generally a disaster for performance returns but breaking up the funds may lead to robo-funds and ETF focused funds that are low fee. It may also generate more value aligned funds such as ethical super funds. - Compulsory Disclosure
There is also limited disclosure of company performance and an annual reports. However these are far too dense for the average person or employer when selecting default funds. Compulsory disclosure on fees (AustralianSuper just increased fees — unbeknown to most people), performance, remuneration and investments would be a great step. - Standardised Fund Scorecards
Standardised scorecards that can be used to easily measure fee’s, performance and investment strategies. Just like a nutrition label on food the funds should be instantly recognised for what they are and aren’t doing. This may even include a star rating for their overall product.
If you’d like to read more on superannuation and performance of funds then I have to recommend Stockspot’s Fat Cat Fund Report.
If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.
Also, please note that this article does not represent financial advice, or the views of any organisation; it is only the opinion and analysis of the writer.
Thank you for reading.
Yours,
Chris Leeson
