In the last week or so of October 2012, Alan Kohler and News Limited, through a number of their outlets, commenced a campaign in regard to superannuation. The public relations firm they have used describes the campaign in the following terms:
Called Save Our Super, the campaign is agitating for major changes to the industry – so regular Aussies don’t have to spend their retirements eating cat food because their superfund manager made a poor decision. Basically, the aim is for people to realise superfunds operate to make profits for themselves – not people – and if you end up with nothing at retirement it’s your own fault.
Individuals are being urged to sign up to www.SaveOurSuper.com.au. Those signing up are required to provide some personal details, including email address and year of birth.
The website is associated with both the Eureka Report and Business Spectator. Both publications were purchased by News Limited earlier this year for a reported $25 million to $30 million. Clearly a return on this capital is being sought. A focus of the Eureka Report is on paid subscriptions by trustees of self -managed superannuation funds (SMSFs) and by other retail investors.
Given the ownership of the Eureka Report, a number of commentators have concluded that one of the aims of the campaign is for News Limited to increase subscription and other revenue.
Moving back or moving forward?
While the campaign clearly is critical of existing superannuation supervision and arrangements and is supportive of greater engagement by individuals with their superannuation, it is less clear what specific changes are being sought.
However the campaign does put forward as a benchmark the arrangements that applied when big companies and public-sector employers provided generous guaranteed defined benefit pensions to their employees, or at least the mainly white collar males who had continuous employment periods of 30 years or more.
A problem with a goal of this type is that those days are gone, with changes mostly for the better. Superannuation is now an entitlement for practically all employees. Rather than only 40 per cent of the labour force having super and only some of them ever working long enough in one job to get a good private pension, the coverage rate is well over 90 per cent and individuals get to take their super with them when they change jobs. Getting the level of adequacy provided by a generous defined benefit pension scheme would require employer contributions of 18 per cent or more for all employees. We have all seen the recent scenes on television where heavily in debt Governments overseas are reducing or not paying pensions. The Australian system means that we will never be in this position.
Basically the Save our Super campaign, based on the information published to date, is poorly researched both in regard to its criticism of current arrangements and with its alternative proposals being extremely underdeveloped.
How the Australian superannuation system compares to equivalent arrangements in other countries
The Save our Super campaign criticises group superannuation arrangements in Australia on the grounds that they deliver investment returns that are too low and incur costs that are too high. However recent data show that neither assertion is correct.
Average returns for workplace superannuation funds have bounced back. Recent increases in Australian share prices have pushed the rolling 12-month return up into double digit territory with 10.6 per cent recorded in September 2012; the highest it has been in more than three years (Rainmaker Information). Super fund returns over the past year are now approaching 2½ times what consumers would earn from cash term deposits after tax; fundamentally turning around the negative news on superannuation, at least for those who want to listen.
The strong bounce-back was triggered by the 2.2 per cent September monthly return from ASX listed shares and the 2.1 per cent from international share markets. Rolling 12-month Australian equity returns are now a stunning 14.5 per cent as at September 2012 and international equity returns are now 13.6 per cent, representing a massive reversal in fortune in just the three performance months since June. Three-year returns are meanwhile 4.4 per cent per annum (pa) and 10-year returns are 6.1 per cent pa.
Data from the Organisation for Economic Co-operation and Development (OECD) show a similar pattern, with Australia now near the top of the pension fund investment return league table. According to the OECD Pensions Market in Focus publication, in 2011 the annual real rate of investment returns (in local currency and after investment management expenses) averaged -1.7 per cent across the OECD, ranging widely from 12.1 per cent for the highest performer (Denmark) to -10.8 per cent for the lowest (Turkey). After Denmark, the highest returns in 2011 were in the Netherlands (8.2 per cent), Australia (4.1 per cent), Iceland (2.3 per cent) and New Zealand (2.3 per cent). On the other hand, in countries like Italy, Japan, Spain, the United Kingdom and the United States, pension funds experienced average negative investment returns in the range of -2.2 per cent to -3.6 per cent. Nine other OECD countries saw pension fund returns of worse than -4 per cent in real terms.
Clearly superannuation account holders in Australia are benefiting from the rebound in returns to equities and the benefits of diversified investment portfolios. There is not much upside to investment returns from fixed interest given current low interest rates around the world.
Fund fees and costs
The OECD, in the July 2011 edition of Pension Markets in Focus, compared private pension scheme operating costs around the world. The OECD report notes that, in general, countries with defined contribution systems and those with large numbers of funds tend to have higher operating costs than countries where there are fewer funds and/or collective arrangements.
Since then the reduction in the number of APRA-regulated superannuation funds in Australia would have led to downward pressure on fund costs. The foreshadowed introduction of MySuper products, as well as standard contribution and rollover processing arrangements, also have the potential to reduce costs further.
Very few SMSFs with assets under $500,000 would have operating costs of 0.6% or less of assets.
A new group of agents operating in the sector
Group vehicles have also been criticised for their agency costs, however our concern is that there is not the same assessment of the agency numbers and costs that have accompanied the growth in the number of SMSFs and in their assets. These include media outlets offering information and other services to SMSF trustees.
The Eureka Report charges its readership (many of whom have an SMSF) $435 a year for a subscription. Media outlets also carry paid advertisements by service providers to SMSFs.
Current indications are that the movement of members and assets to SMSFs does not necessarily substantially reduce payments to third parties but it does lead to different service providers. Time costing of SMSF trustees themselves also needs to be placed in the equation to ensure a proper comparison.
Based on aggregate asset allocation (the main driver of investment performance), the SMSF sector on average returned one per cent in 2011-12 and six per cent pa for the three-year, figures which are almost identical to the average performance of other funds.
Individual SMSFs may, of course, outperform if they are overweight in a strongly performing asset class or the fund is actively managed using a successful high conviction investment strategy, but this is no different to the case for well managed pooled super funds.
Equally, individual SMSFs can drastically underperform relative to other funds, particularly if they are exploited by those selling poor quality or fraudulent investments; a concern recently expressed by ASIC.
Room for improvement
The Australian superannuation system is still new and, like any system, needs to keep pace with changing consumer and regulatory standards. Most importantly it must always be assessed against its delivery of adequate retirement outcomes. It cannot be forgotten that the current system will for many Australians provide them with insurance cover and retirement benefits that they would never had had otherwise.
What is happening is a gradual increase in the Superannuation Guarantee to 12 per cent. This will help address the issue of adequacy. Also the introduction of MySuper will assist fund members who are defaulted into a fund through their employment. There will be strict controls over MySuper products, ensuring that they are suited to the members they cover, that their fees are as low as possible, and that key features and fees are clearly disclosed.
The Australian superannuation system is admired throughout the world for its universal coverage, its economic affordability and its substantial favourable impact on retirement savings and the standard of living in retirement. This should be recognised, rather than going down the path of pushing products that are not suitable or equitable for the large majority of the Australian population.