Super needs overhaul as retail funds lag industry rivals
The Australian 12:00am September 8, 2018
Alan Kohler
The total amount of money in the Australian superannuation pot is now $2.7 trillion, equal to the market value of two American companies, Amazon and Apple, but let’s not quibble.
It’s regarded by most as a gobsmacking amount of money, a great national asset, yet after 25 years of compulsory super, amassing the mighty sum of Amazon+Apple, the qualifying age for the Age Pension can’t be raised by three years to 70 without leaving millions high and dry. Hardly a triumph of national policy, you would think.
According to the ATO, 14.8 million Australians had super accounts on June 30, 2017. It’s probably now about 15 million. That’s $180,000 a person, which wouldn’t trouble anyone’s pension means test.
As a retirement sum, that would earn $9000 a year at a yield of 5 per cent and wouldn’t cover an annual holiday to the Gold Coast, let alone get anyone off the pension.
Moreover, the boom in property investment in recent years has been largely driven by people panicking as they near retirement with insufficient super.
There are so many problems with our supposedly world-beating retirement savings system it’s hard to know where to begin.
At least one problem is starting to be fixed, by default: the hopeless underperformance of retail funds is being fixed simply by people pulling their money out of them, partly because of the revelations in the royal commission of fees charged for nothing but also because of poor performance.
The latest APRA data shows retail funds suffered a net outflow of $8.4 billion in the year to June 2018. Corporate funds lost $6.5bn. Industry funds, on the other hand, had a net inflow of $30.9bn, twice the combined outflow of the retail and corporate funds.
This is a trend that is only going to accelerate and lead to the complete collapse of the retail super industry unless it undergoes an unlikely and dramatic transformation. There is a long way back for the image of the sector, which has been so blackened by actions revealed in the royal commission, but it’s mainly about performance.
The APRA June quarter data shows the retail funds’ average performance in the year to June was 7.4 per cent. The average industry fund performance was 9.8 per cent. That sort of gap has been entrenched for years.
The difference between those two performances if applied to 40 years of saving $500 a month is exactly double: $1.5m vs $3m. Retail super funds as a class can’t possibly survive with that kind of difference in outcome, and nor should they.
A government that wasn’t blinded by anti-union bias and misguided faith in competition would urge all Australians to join industry funds, and possibly even shut down the underperforming retail funds, to get the cost of the Age Pension down.
If the average annual return of super funds could be maintained at about 10 per cent instead of 7.5 per cent, not only would the cost to the government of the Age Pension collapse, so would the amount of property investing that makes housing so unaffordable.
The regulators meanwhile seem paralysed by the spurious idea that both competition and liquidity are needed.
To overcome the bewildering array of default funds and the unfair dispersion of their outcomes, the Productivity Commission wants to list the 10 “best in class” default super funds for employers to choose from.
There’s no official data available on the long-term performance of the 104 MySuper default funds, so we can’t see which are the now best in class. APRA only publishes individual performances by quarter.
But let’s go with that. In the latest quarter — June 2018 — the 10 best performing MySuper default funds were: Law Employees Super Fund, Max Super, UniSuper, SmartSave, Lutheran Super, Toyota Super, Nationwide, HostPlus, First Super and Meat Industry Employees Super Fund.
Presumably that list is not quite what the PC had in mind since half of them are tiny retail funds nobody’s ever heard of, even though their returns for the quarter were pretty fancy. LESF, which is not an industry fund, returned 6.65 per cent for a single quarter and the No 2 fund, Max Super, run by Tidswell Financial Services, with BlackRock as investment manager, also returned more than 6 per cent for the quarter. Lutheran Super is doing very nicely too, and you only have to show up at the church to get into that fund (I checked).
But how will the 10 be chosen? The only thing that matters in long-term saving is the compound rate of return. Super funds are only in the retirement outcome business — they are not banks providing financial services — and really the only question is what time frame should be used to judge them. Obviously one quarter is too short but should it be 10 years? That cuts out any new ones. One year? Probably too short.
And what about the fact that smaller funds like LESF and Max Super tend to do better than large ones because they can be more nimble, although UniSuper, HostPlus and AustralianSuper did OK in the quarter. But anyway, once a small fund goes on the top 10 list, they won’t stay small for long.
What’s more, a third of all the super money is invested in cash and fixed income. It’s hard to imagine anything more idiotic than investing close to a trillion dollars of the national long-term retirement savings in cash and bonds with interest rates where they are and bonds probably heading into a great secular bear market.
Super funds should be focused entirely on outcomes, which is all about getting the highest compound interest over the long term leading to the greatest possible retirement income.
The risk of short-term volatility is irrelevant.
A system that requires money to be locked up for 40 years but allows the customers to get it out of one fund and move it to another within days is a form of madness.
The result is that all of the funds have to carry crushing amounts of liquidity just in case the customers want it: the 221 funds that have more than four members are sitting on $175bn in cash, ready to go, earning almost nothing after fees and unnecessarily reducing retirement incomes.
And despite some controversy about Hostplus’s high level of unlisted, and therefore illiquid, infrastructure investments, the average allocation among industry funds is just 7 per cent — too low, if anything. The average allocation of retail funds to that asset class is zero.
I have the solution! The government should require all super funds to pay a 1.85 per cent per annum fee for the privilege of being taxed at 15 per cent. That would produce $50bn in revenue, which, as it happens, is the annual cost of the Age Pension.