We find the Australian superannuation industry fascinating. The idea that people willingly let the government remove a portion of their income for future savings, ultimately because they cannot adequately provide for their future themselves, makes us think they view the Australian public as children: they have to help us save, because we can’t be ‘trusted’ to save ourselves.
Of course, there is definitely a reason for superannuation, or at least a solution that emphasises future savings and planning for retirement.
There is significant research showing how short sighted we are about our financial future, valuing current consumption over future spending and thus perpetuating under saving. We all know what the average Australian is retiring on, and as a result we were presented with a ‘moral hazard’ as the social cost of future pensions for an ageing population meant that a solution had to be found. However, based on current standings, it is definitely debatable whether an adequate one has been arrived at.
What is interesting is that the amount of our income being removed is set to increase by one third. So for many entering the workforce in the coming years, 12 per cent of their income will disappear into a poorly performing account for forty years. Many blame recent market conditions for these poor results, but in an excellent article in The Financial Review, economist Christopher Joye highlights some facts that are particularly interesting in what is a very dysfunctional industry.
‘Over 15 years after compulsory super was enacted, an APRA survey found that “more than 90 per cent” of funds did not oblige trustees to have “formal educational qualifications”, while an amazing 81 per cent of funds didn’t require trustees “to have superannuation or investment experience”. It should be no surprise that our money has been sub-optimally managed, and that growing numbers are opting to do it themselves.’
It is very tempting to show exactly how sub-optimal this management has been; there are countless statistics supporting this, each one more frightening than the last. However, few people know about the conflicting interests inherent in the system, as trustees frequently put members’ money into products the parent entity owns.
For instance, in Commonwealth Bank of Australia’s FirstChoice Personal Super product, 30 per cent of all money goes directly into CBA-owned funds, while a further 50 per cent is put into CBA-owned ‘fund of fund’ schemes that invest up to 20 per cent straight back into CBA funds. For AMP, 55 per cent of the $18.4 billion AMP Flexible Lifetime Super product goes directly into AMP managed funds, with an additional 28 per cent invested into AMP’s fund of funds.
Industry funds seem to be more independent, with the $48 billion AustralianSuper using 90 external managers. However, more than 40 per cent of its money ends up with related parties. To put trustees at ease, AustralianSuper has sign-offs from an ‘independent’ asset consulting firm – a firm it owns a direct stake in.
As Joye states, ‘It is questionable whether trustees always abide by the super legislation’s sole purpose test, which says they must ensure savings are always invested solely for members’ benefit.’