Stock markets are falling. Do you a) complain about the Superannuation fund management industry or b) do something about it?
Not that there isn’t a whole lot of complaining to do. Clancy Yeates in the Sydney Morning Herald explained how Australians are getting ripped off by the Super industry: ‘…research firm Rainmaker estimates Australians paid $18.6 billion in fees for their retirement savings to be managed last financial year,’ which is ‘$1075 for every adult in the country, including those who don’t even have super.’
According to the Reserve Bank of Australia, only Spain and Mexico’s savers pay more as a percent of assets under management. But this is where things get weird. You see, the normal rules of economics don’t apply to the Super funds industry.
Believe it or not, the reason for this blowout cost is too much competition. The Reserve Bank says the competition between different Super funds to get their hands on your compulsory contributions is so fierce that…costs go up.
Competition drives up costs? Hmmmm.
People are increasingly setting up Self-Managed Super Funds, which are apparently lower cost, to escape.
Many small funds are lower cost than a few big ones? Hmmmmm. Another economic law, economies of scale, violated.
Or perhaps there’s something else going on.
We think Yates is right about the real reason superannuation fund costs are so high—apathy. The choice of Super fund for 50-70% of employees ends up being made by the employer. Employees don’t have the foggiest idea where 9.25% of their income is going. And employers have little incentive to care what deal their employees are getting.
It’s remarkably similar to a tax, only the money goes to the financial oligarchy instead of the government. More on that in a moment.
Combining compulsory payments with apathy is a very dangerous system. It allows people to get away with murder. Only those who take charge themselves (by setting up a SMSF) deal with the problem.
The Centre of Excellence in Population Ageing Research reckons the situation is so bad Australia Post and Centrelink should be called in to help. The sector needs competition!
Huh? But you just said…oh never mind.
Here’s the scary bit. Professor Piggott from the Centre of Excellence in Population Ageing Research says we need to manage the outflows of the Superannuation system like we manage the inflows. Right now, too many people are cashing in lump sums and doing a runner with the money. They pay off their mortgage, go on holiday, buy a boat and then sit on the pension. This places a dangerous burden on the Super system and financial markets as a whole, as we explained in our speech at the World War D conference. It also leaves the government with the very problem Super was designed to avoid—forcing politicians to increase the pension age fast enough to peeve off the voting elderly. But we’ll leave Mr Hockey to that pit of snakes.
The idea of government managing outflows from the Superannuation system is something we warned about in the panel discussion after the speeches at World War D had concluded. If the government can force you to fork over more than 9% of your income to a private institution, it can also control how much that institution pays out in retirement.
Professor Piggott reckons you should only be allowed to access your savings as an income stream. In fact, your Super balance should be published as the size of income stream you would get if you retired. At the moment, reporting such an estimate is banned! Probably because it’s not really possible to come up with a reliable figure. And Superannuation funds would compete by fiddling with their assumptions to provide the highest promise.
But here’s the key point. You think your Super is your money? Try and get your hands on it early and you’ll see the truth. As Australian Small-Cap Investigator’s Tim Dohrmann put it in an internal email, ‘The sad truth is that at some point in the past couple of years, Australia’s corporate and political leadership stopped viewing superannuation as the personal property of individuals.’
So maybe apathy towards your Super is the best policy. Pretend you don’t have it and will never get it. That way any Super left after stock market crashes, fees and government policy changes will be a pleasant surprise instead of a disappointment.
The really concerning factor in all this is how the Super industry is throwing its political weight around. The financial industry is a notoriously big spender (on politicians). And the union ‘industry’ is notoriously influential in politics. The Super industry is largely controlled by unions. So, put the two together and you get the best of both worlds.
Make no mistake, these people like to meddle. They’ve created an incredible income stream for themselves in Superannuation. The idea that a financial and union oligarchy can forcibly get its hands on a portion of 9.25% of every worker’s income is surreal if you put it like that.
They won’t let go of all those assets easily.
for The Daily Reckoning Australia