Category: Newspaper/Blog Articles/Hansard

Super effort to achieve what workers really want

The Australian

30 November 2019

Judith Sloan – Contributing Economics Editor

It was all going so well for the industry super funds. The election of a Labor government and they would be home and hosed.

There would be no talk of cancelling or deferring the legislated increase in the superannuation contribution rate from 9.5 per cent to 12 per cent. Those pesky requests to improve the governance of the funds by having more independent trustees would fade away.

Life and total and permanent disability insurance would remain an effective compulsory part of superannuation; after all, the opt-out arrangement had been introduced by Bill Shorten when he was the responsible minister. There would be some pretence about dealing with multiple accounts but no real action.

As for removing the quasi-monopoly position of industry super funds nominated as default funds in the modern awards, all discussion would abruptly end. And why would the ambition end there? Fifteen per cent sounds better than 12 per cent when it comes to a guaranteed regular flow of money to the funds.

All those dreams are now a fading memory as industry super funds confront a government that is not entirely convinced of the rationale for compulsory super and is determined to fix problems in the system that disadvantage far too many workers and retirees.

We don’t hear so much these days about our superannuation system being the envy of the world.

These claims were always made by those with deep vested interests in the system; in particular, the vast industry that hangs off the management of funds and their administration.

Some of the core problems of our superannuation system have been highlighted by various reports of the Productivity Commission. They include:

• The unclear purpose of superannuation.

• The excessive costs attached to investment and administration.

• The problem of multiple accounts leading to balance erosion.

• Unwanted (and sometimes worthless) insurance.

• Unaccountable governance with too many trustees having inadequate skills.

• The continuation of poorly performing funds.

Don’t get me wrong; superannuation has been a great product for some people, most notably those with earnings in the top quarter of the distribution. However, this observation is not sufficient to justify a system of compulsory superannuation. Moreover, it is clear any savings on the age pension have to be weighed against the cost of the variety of superannuation tax concessions that apply.

It also needs to be noted here that, on average, the investment performance of the industry super funds has been very good and sup­erior to most retail funds, although there is the qualification of the ­absence of like-with-like comparison. Self-managed superannua­tion funds also generally have produced very good returns.

The government has been attempting to deal with some of the problems in the system after the remedial efforts that were made in its previous term were largely thwarted. Two changes have been implemented to merge inactive low-balance accounts with active ones and to make insurance an opt-in product for young workers and for those with low-balance accounts. Both changes were opposed by the industry super funds.

Neither of these changes deals comprehensively with the problems of multiple accounts or forced insurance but they are a start. More surprising have been the recent boasts of Superannuation, Financial Services and Financial Technology Assistant Minister Jane Hume about recent merger activity of industry super funds. Examples include the linking of Hostplus with Club Super and First State Super with VicSuper. Certainly the issue of failed mergers was raised in the Hayne royal commission into banking.

However, the issue of fund consolidation is actually two separate issues. One relates to funds that are clearly of sub-optimal size, leading to a failure to capture economies of scale. The second is about poorly performing funds and the need to remove them from the pool of default funds.

The work of the Productivity Commission makes it clear that a member who lands in a poorly performing fund and stays there by dint of inertia stands to lose up to several hundreds of thousands of dollars in terms of the final balance. It’s not apparent, however, whether the recent spate of fund mergers will deal with the problem of poorly performing funds.

In the meantime, the mergers of some large industry super funds could potentially lead to an anti-competitive configuration of a small number of behemoths that will be able to dictate many aspects of corporate behaviour given their large shareholdings. It’s hard to see how the government would regard this as a desirable outcome.

The hottest topic in super­annuation remains the fate of the legislated increase in the super­annuation contribution rate. Unless the statute is changed, this rate will be ratcheted up by 0.5 percentage points every year from July 1, 2021. A rate of 12 per cent will apply from July 1, 2025.

Every annual increase will cost the government about $2bn a year in forgone revenue given the cost of the tax concessions. This is a significant sum in the context of the likely tight position of the budget in that period.

The superannuation industry is highly committed to these legislated increases going ahead. Some absurd pieces of research have been released to suggest that higher superannuation contribution rates do not involve any reduction to wage growth, something that is contradicted by the theory and actual practice, including on the part of the Fair Work Commission.

In the context of low wage growth, it will be a big call by the government to ask workers to forgo current pay rises in exchange for higher superannuation balances in several decades.

Moreover, for many workers, these higher superannuation balances will simply have the effect of knocking off their entitlement to the full age pension. For them, compulsory superannuation is effect­ively just a tax — lower current consumption now and the loss of the full age pension in the future. It’s not clear what the government’s real thinking on this important matter is. The Prime Minister and Treasury are maintaining their support for the legislated contribution increase but may be happy to include the Future Fund in the mix of investment options to improve the competitiveness of the industry.

Other members of the government favour a cancellation of the increase or smaller rises across a longer timeframe. There is also some support for making the increase voluntary; workers could choose between a current pay rise or a higher super contribution rate.

The bottom line is that superannuation remains a dog’s breakfast from a policy point of view. The government has made some small strides to improve some aspects of the system, but the high fees and charges imposed by the funds remain a significant issue.

Far from being the envy of the world, it has become apparent that our system of compulsory superannuation was a serious policy error enacted for short-term reasons to fend off a wages explosion. It may be too late to turn back but thought needs to be given to significantly reforming the system in ways that reflect the preferences of workers as well as generating a better deal for taxpayers.

Super industry riches on hold after Labor poll loss

The Australian

3 August 2019

Judith Sloan – Contributing Economics Editor

The election result was a major disappointment to the vast major­ity of players in the superannua­tion industry. A Labor govern­ment would have ushered in a veritable purple patch, for the industr­y super funds in particular.

There would have been no ­debate about whether or not the Superannuation Guarantee Charge would be lifted from 9.5 per cent to 12 per cent. Indeed, there was a possibility that Chris Bowen, as treasurer, might have brought forward the increase in the contribution rate. According to legislation, the SGC will increas­e to 10 per cent from July 1, 2021, and reach 12 per cent in 2025.

All that pesky discussion of ­removing industry super funds from the default lists in modern awards would have faded away. And there would have been no talk of removing the monopoly posit­ion of industry super funds in key enterprise agreements.

The whole idea of the selection of 10 “best in show” default funds for new workers would have been quickly forgotten. And anyone who even mentioned the potential role for the Future Fund as a manager­ of superannuation funds would have been quickly dismissed.

To be sure, some lip service would have been paid to reducing the magnitude of fees and charges imposed by funds. And there might have been some feeble ­efforts to deal with the problem of multiple accounts and unwanted and/or unusable life insurance.

But bear in mind nothing would have been done to upset the industry super funds or the freeloading insurance companies. There would have been no discussion of moving away from opt-out insurance, for instance.

But those dreams of guaranteed riches and expansion have largely evaporated for the industry, and the players must deal with a government that is far less committed­ to the whole notion of compulsory super than Labor. It is now hand-to-hand combat as the industry seeks to defend its curren­t privileges, as well as truly lock in the rise in the SGC.

The appointment of senator Jane Hume as Assistant Minister for Superannuation, Financial Services and Financial Technol­ogy has also sent shivers down the spines of the well-remunerated folk in the super industry. Not only is she whip-smart but she also has direct professional experience in the industry, including a stint at AustralianSuper, the largest indus­try super fund.

There are many issues to sort out above and beyond what should happen to the SGC. Some of them were canvassed in work undertaken by the Productivity Commission, as well as in other reports, including ironically the Cooper review that was commissioned by the Labor government and release­d in 2010.

A large slate of bills to reform various aspects of super was developed by the Coalition in its last term in office. But the combination of the composition of the Senate and the unrelenting opposition by the super funds, the trade unions and Labor meant most of these bills were never even presented to the upper house.

Mind you, future threats by superannuation lobbyists of elect­oral retaliation for unco-operative crossbench senators may well have lost their impact.

The issues the government must deal with during the coming term include: the governance of super funds, strengthening the regulation of super, the elimination of multiple accounts, the ­establishment of single default ­accounts that will follow members as they change jobs, the fate of poorly performing funds and fund mergers, and whether insurance should become a fully opt-in arrange­ment.

For all the carry-on about our system of compulsory super being the envy of the world — read: the envy of fund managers around the world — there are multiple problems­ with the system, including the often perverse interactions with other components of our retiremen­t incomes system. These will be the likely focus of the upcoming Productivity Commission review into retirement incomes.

It’s not clear where the government will direct its ­efforts in terms of improving the efficiency of the super system and improving the accountability of the funds. Earlier this year, a small step was achieved when a law was passed that means that inactive — defined as those for which there has been no contribution for 16 months — accounts with balances of less than $6000 will be shifted to the Australian Taxation Office, oftentimes to be merged with another account held by the member.

The effect of this change is that unwanted insurance premiums will no longer be unwittingly deducted­ from these accounts and their value can be preserved. A further­ change is in the wind that will convert insurance to an opt-in ­arrangement for all new members younger than 25 and for members with accounts of less than $6000.

Even these small modifications have attracted the ire of some of the super lobbyists, who allege that members will unknowingly lose the value of insurance. They cite figures about the number of under 25-year-olds with dependants — it’s 10 per cent — as well as the proport­ion with mortgage debts. They predict that insurance premiums will rise because younger members will no longer be forced to cross-subsidise older ones.

The key problem of multiple accounts remains unresolved at this stage. The Productivity Commission­ says about a third of super accounts — 10 million in total — are unintended multiple accounts. This results in the loss of $2.6 billion per annum in pointless fees, charges and insurance prem­iums. The government needs to act on the recommendation of the Hayne banking royal commission that each person should have only one default super account and that there must be a mechanism to “staple” a person to this single default account. Again, the industry is pushing back on this proposal.

One of the more ludicrous proposa­ls doing the rounds is that members’ super benefits should automatically transfer each time a worker changes a job unless the worker nominates otherwise. This is surely no one’s idea of a stapled product, with workers potentially changing funds every time they change jobs.

What the industry super funds really fear is that many young workers would enrol in either REST or Hostplus — the funds covering retail and hospitality workers, respectiv­ely — as their first fund and, under a stapled arrangem­ent, they would stay in these funds for the rest of their working lives. Needless to say, this does not suit the other funds, even though both REST and Hostplus have been high-achieving funds. The point is, there is an enormous reform task to clean up the super industry and to make it work for the interests of members rather than the interests of the funds and other industry players. The costs of inaction — running to many billion­s of dollars per year — mean further changes are inevitable.

The government should keep an open mind about future changes to the contribution rate. A much better alternative would be for fees and charges to fall to world-best-practice levels — well below the 100 basis point mark — in which case there will be no need for the rate to rise. And the idea that super could be a voluntary arrangement, at least for low-income workers, should not be dismissed out of hand.

Compulsory super grew from a grubby deal between the then powerful trade unions and the federal government as a trade-off for a pay rise. Most of the details weren’t worked out, with the regulation of the system and taxation arrangements pasted on over time. It’s time for a major service, if not a new car, and that car may not be called compulsory super.

Super: PM knows too many are still missing out

The Australian

29 July 2019

Jim Chalmers

For three decades compulsory superannuation has afforded Australians the best chance of simultaneously providing a decent retirement for us all while building a fighting fund of capital for our nation to invest in its own future.

Already the $2.8 trillion pool of savings is bigger than our gross domestic product, and bigger than the GDP of all but seven countries, just behind India but bigger than Italy and growing fast.

Much of that wouldn’t exist without compulsion, but remarkably it’s still not enough.

A just-released analysis from the Association of Superannuation Funds of Australia shows there continues to be a significant gap between the $640,000 it considers necessary for a comfortable ­retirement for couples and what people are actually accumulating.

That’s why it’s so critically ­important that the superannuation guarantee is lifted from 9.5 per cent to 12 per cent on the currently legislated timetable.

Analysis by actuarial firm Rice Warner shows that without that further lift in super, most working Australians will be forced to rely on the Age Pension for most of their retirement income. But a gradual rise to 12 per cent would provide most with ­adequate ­income after they finish working.

Industry Super Australia has shown that the substantial difference between 9.5 per cent and 12 per cent for today’s 30-year-old worker on about average full-time earnings would be $90,000 by retirement. In this environment it beggars belief that Liberals in the Morrison government want to freeze the superannuation guarantee at 9.5 per cent. When the additional 2.5 per cent could go into super or wages, they want it to go to neither but instead to further pad the extraordinarily high company profits that have fuelled a record stockmarket.

The superannuation guarantee has been frozen since 2014 and since then wages have barely moved either. When savings are inadequate and wages growth is sluggish, Liberals want to rob almost 13 million Australians of the super increases they need, deserve and were promised. The party of wage stagnation and rampant wage theft is now coming after workers’ super as well.

The same party opposed universal compulsory super; froze it multiple times; tried to abolish the low-income super contribution scheme; and even tried to weaken penalties for employers who don’t pay the right amount. Now some want to freeze super and, worse, others want to make it voluntary for some workers. They want to take the compulsory out of compulsory super.

Australians never heard a peep about these plans during the election. Coalition members and candidates wandered around the country crying crocodile tears for retirees at the same time as they harboured extreme plans to cut super and attack pensions. Then, after the election, when the Prime Minister told his partyroom to stop commenting publicly on these plans, the cam­paigning only intensified — a direct and deliberate challenge to his authority.

These Liberals’ latest attack is built on one heavily contested and disputed think tank report that claims an increase in super would lower living standards for some Australians. This conclusion is partly driven by the tougher pension ­assets test which penalises retirees for saving, and which the government introduced with the Greens to cut the pension for 370,000 pensioners and kick 88,000 pensioners off the pension altogether.

Australians will see through these faux concerns for low-­income earners and weak wages growth, and the Coalition’s crocodile tears for retirees. They know these are just excuses to undermine and diminish a super system that the Liberals and Nationals never believed in from the beginning.

Super was conceived as a trade-off between wages and savings but most Australians will not be convinced that much or any of the 2.5 per cent of forgone super in today’s climate will find its way into the pockets of low-income earners as wages.

Nor will Australians be comforted by the weasel words of Scott Morrison and Josh Frydenberg who, in one week, refused to guarantee the legislated super ­increases, then committed to them, and now say they will be subject to a retirement incomes review. A review that could become a stalking horse for these proposals and worse, such as including the family home in the pension assets test.

On behalf of the government, the Treasurer needs to give a far more definitive statement in support of the legislated increases to the superannuation guarantee on the current timeframe. Anything less risks a repeat of the national energy guarantee debacle, when extremists on his own backbench forced him into a humiliating retreat and proved that in the Liberal Party the tail wags the Treasurer.

Australia’s retirement savings system is the envy of the world. It has its imperfections, but lifting the guarantee rate to 12 per cent by 2025 is not one of them. When the adequacy of retirement ­incomes is a pressing challenge, and when our ageing population puts pressure on pensions, Australians need more super, not less.

Jim Chalmers is the opposition Treasury spokesman.

Backbench bid to block super guarantee increases

The Australian

22 July 2019

Adam Creighton – Economics Editor

Josh Frydenberg is facing growing backbench calls to ditch the superannuation guarantee ­increase to 12 per cent as the government prepares to launch a­ ­­­far­-reaching review into the effectiveness of the $2.8 trillion savings pool.

Seven Liberal MPs in the four biggest states, including chairmen of two parliamentary committees, have criticised the increase as unfair and inefficient, urging the government to halt the legislated increase from 9.5 per cent, or wind it back for low-income workers.

The MPs include Andrew Hastie, chairman of the house intelligence and security committee; Jason Falinski, MP for Mackellar; Amanda Stoker, who succeeded George Brandis in the Senate; and the newly elected senator for Queensland, Gerard Rennick.

Their remarks follow a series of reports that have questioned the efficiency, fairness and effectiveness of the savings system ­established in 1992 by the Keating government.

Mr Hastie told The Australian said he would prefer more people retired owning their homes.

“I’d rather have people have more of their own money to pay down their existing debt such as their mortgage and ease the cost of living now,” he said.

The superannuation guarantee requires employers to pay 9.5 per cent of workers’ gross ­incomes into retirement saving accounts they can access at 60.

Senator Rennick said lifting the compulsory saving rate drained money from the regions, which needed it, to the funds management industry in Sydney and Melbourne, which didn’t need it.

“The money doesn’t go into greenfield investments; they just buy existing shares rather than contribute money to the economy by starting infrastructure projects,” he said.

“There’s enough going to super now, and the best people to decide how they earn their money are the people who earn it,” he said.

In 2013, the Abbott government delayed by two years Labor’s timetable to increase the rate, which is now on track to reach 12 per cent by July 2025 following an increase to 10 per cent in July 2021.

The Treasurer has welcomed the Productivity Commission’s recommendation for an inquiry into the ­impact of super on ­national savings and the Age ­Pension.

“What we need to fully understand with this (legislated) increase is what is happening to retirement incomes, what is happening to the nation’s balance sheet,” Mr Frydenberg said recently, reiterating that the government had “no plans” to stop or delay the increase.

The review, yet to be formally approved by cabinet, puts the ­Coalition on course for a historic clash with the union movement and financial services sectors, which influence and manage the nation’s superannuation savings pool.

The super sector fears the forthcoming inquiry could recommend against lifting the compulsory saving rate, as the Henry tax review did in 2010 — advice the Rudd government ignored.

The tax concessions cost the government more in revenue than offsetting reductions in Age Pension outlays, it found.

Tim Wilson, chairman of the House of Representatives economics committee, said workers should have the option to opt out.

“I struggle with the idea that we should compel business to increase super contributions for the distant tomorrow when people are facing wage and debt pressure today,” he said.

Super accounts incurred more than $30 billion in fees in 2017, ­according to the Productivity Commission’s review of the efficiency and competitiveness of super, completed last year, which found a third of accounts were unintended and “evidence of ­excessive and unwarranted fees”.

Senator James Paterson said he hoped the review would look at the “wisdom of forcing workers to lock away even more of their income”. “All the evidence shows it comes at the cost of their take-home pay today and might not even improve their standard of living when they retire,” he said.

Mr Falinski said the super system was opaque. “Like many Australians, and the Productivity Commission, I am unconvinced the system is serving its customers, much less its intended purpose,” he said. “So in those circumstances, how can you possibly support an increase?”

A Grattan Institute analysis earlier this month found workers faced a $30,000 hit to their lifetime income if the rate increase went ahead, from a combination of lower wages during their working life and reduced access to the Age Pension later in life.

Craig Kelly, the MP for ­Hughes since 2010, said the increase would not need to be compulsory if it were a good deal for workers.

“If you want to go to 12 per cent, everyone is free to do so,” he said, referring to $25,000 concessional contribution caps that let workers to make voluntary super contributions.

“And there’s a strong argument for workers on lower incomes to be able to access it now, especially if it’s not going to change their pension entitlement,” he said.

An estimated 7 per cent of employees, including a fifth of those under 30 on low incomes, would prefer to take their 9.5 per cent super contributions as wage and salary income, according to the Parliamentary Budget Office in a policy costing released last year.

Senator Stoker said wage rises “must take priority” over higher superannuation contributions.

“This is an urgent economic and political imperative,” she added.

Two Nobel prize-winning economists, Eugene Fama and Richard Thaler, were critical of superannuation late last month, singling out the high fees and inferior default arrangements compared with systems abroad.

A typical member’s balance would be $165,000 higher in retirement, or about seven years’ worth of Age Pension, were un­interested workers contributions put into better performing funds, the commission found.

Economist Nicholas Morris found Australian super funds were about four times more expensive than equivalent funds in the US and Europe.

Keep it simple, or we can kiss those super benefits goodbye

The Australian

22 July 2019

Graham Richardson

Superannuation remains a complet­e mystery to me. The myriad rules and regulations under which it struggles to operate are beyond me as well.

In fact, it is hard to believe that many of the people who see the amount that goes into super taken out of their wages have ­little or no idea what happens to it. What is truly scary about this is that the Australian Prudential Regulation Authority had to concede that three funds out of a total of 11 had serious problems.

Few will even know the problem exists because years ago most of us knew our eyes were glazing over when some expert was trying to explain this arcane system.

Now trillions of dollars is being put into cash, equities and god knows what else and we don’t even question the wisdom of these investment decisions.

Instead, we have blind faith it will all work out in the end. We place our trust in trustees we don’t know and will never meet. With all this apparent success, there seems little need for concern. Sadly, the government is desperately searching for ways to curb the industry funds.

Conservative thinking in Australia has it that union officials are inarticulate, violent thugs and therefore there must be something corrupt about industry funds, even if they can find no evidence of wrongdoing. The fact that industry funds continually produce the kind of results that make them the best performers drives the conservatives to distraction. Mind you, for many of them that is a very short trip.

What I have not seen is any reduction in the take-up rate of pensions, yet the basic purpose of super is to give the workers a ­better retirement and lower the burden on the public purse.

Scott Morrison should be smart enough to forget about finding fault with industry funds and work co-operatively with them. There are times in politics when you have to admit failure, and this is one of them.

The current push is to allow people to use their super early: they want access to it to help put a deposit down for a house or unit or they may just be ill and need access to pay medical expenses.

In my view, we should be very wary of this approach. We have bank accounts we can draw on for these purposes but our super is something else again. If you pour all your prospective retirement income into your house, there will not be enough left to live with so you want to dip into your super again if there is sufficient still remaining. Convenient though this may be, it undermines the basic purpose of super to provide something extra in later years.

Putting on a new porch may seem important at the time but it is not the main purpose of super. If we allow a practice to develop whereby we can use super to improve our homes, a whole new field of rorts will be opened up.

The adage keep it simple, stupid, should be rigidly applied in this case.

Maximise retirement savings

The Australian

22 July 2019


After decades in which successive governments have shifted the superannuation goalposts, the last things savers want is the Morrison government’s forthcoming review to recommend changes that could shrink their nest eggs. But savers would be the winners if reforms are enacted to save them fees and make the $2.8 trillion sector more efficient. As Adam Creighton reports today, Josh Frydenberg is facing concerns from a broad group of Coalition backbenchers who believe the government should ditch the legislated rise in the compulsory superannuation guarantee. The guarantee is scheduled to increase to 10 per cent in July 2021 and reach 12 per cent in July 2025. The group includes the chairmen of two influential parliamentary committees — Victorian MP Tim Wilson and West Australian MP Andrew Hastie.

If the size of the guarantee is to be reviewed it would make sense to factor the matter into the review, which will have much to consider. A recent study by the Grattan Institute showed that raising compulsory superannuation in stages would leave many workers poorer, as they would forgo wage rises, some of which would stimulate demand and economic activity. On the other hand, almost 30 years after the Keating government brought in compulsory super, taxpayers are still carrying most of the burden of providing retirement incomes for our ageing population. In 1992, 80 per cent of retirees received government income support; the same percentage still receive full or part pensions. On current settings, Treasury analysis shows the proportion not drawing a pension will remain static at 20 per cent in 2047. What is changing slowly is that fewer people are receiving full pensions. So far, despite vast growth in the super savings, the goal of more Australians becoming financially independent remains elusive.

Part of the problem, as Nobel prize-winning economists Eugene Fama and Richard Thaler identified recently, is that Australia’s funds have some of the highest costs in the world.

Any systemic changes must put workers’ and retirees’ needs first, which has not been the case for a long time.

Doing sums to manage your longevity risk

The Australian

13 July 2019

Scott Francis

Longevity risk is important to think about in planning around financial futures — the risk of outliving our assets.

To make some sort of assessment about managing this risk, indeed about managing our investments and income, we need to be able to build a set of financial assumptions that provide an estimate of the future.

The key input into this process is the rate of return that is assumed for the investment portfolio earnings.

Given that this is effectively a forecast for the future, it is clearly not possible to know what that number will be — the challenge is in making the best estimate of the range of possible earnings that we can.

This estimate is especially important for people who might be contemplating a long retirement. They might retire in their 50s and live into their 90s or beyond.

Let’s consider a person who is now 60 and looking to retire.

Let’s assume they have a generous investment portfolio of $1,500,000. They know they will not receive any part age pension to supplement their investment income.

From an asset allocation perspective, let’s then assume they are targeting $75,000 per year to live on, and want to keep four years of living costs, $300,000 in cash and fixed interest assets, and invest the remaining $1,200,000 in growth assets (an 80 per cent growth, 20 per cent defensive split).

Historical data suggests an attractive rate of return from cash investments in Australia compared to what is currently available.

For example, from 1990 to 2018 the average annual return from cash investments was 5.5 per cent per annum (according to Vanguard), against an inflation rate for this period of 2.5 per cent, suggesting an after-inflation (or real) rate of return of 3 per cent a year.

However, for realistic expectations with the RBA cash rate at 1 per cent, and the best cash and term deposit accounts not providing a return significantly higher than this, a more realistic assumption for the long-run return from the cash and fixed-interest investments in a portfolio would be a real return of about 1 per cent a year.

Insuring for the future

Jeremy Siegel, Wharton finance professor and author of Stocks for the Long Run, has long been a proponent of maths that suggests the long run real (inflation adjusted) return from the sharemarket is 6-7 per cent a year.

Let’s make this an optimistic calculation of an expected return to start with, and use the 7 per cent real return.

We now have a real return of 1 per cent per annum from the 20 per cent cash/fixed interest part of the portfolio, and a 7 per cent real return from the growth (shares) part of the portfolio, to provide a total real return of 1 per cent x 20 per cent, and 7 per cent x 80 per cent, creating a total combined return of 5.8 per cent per annum.

The average real return from Australian shares over the period 1900 to the end of 2018 has been measured at 6.75 per cent per annum.

This is not much different from the Siegel figure and would provide a total real return for the portfolio of 5.6 per cent.

One note of caution worth sounding is that the Australian sharemarket returns have been world-leading over this period (1900 to 2018).

The average return from world markets, calculated for the Credit Suisse Global Investment Returns Yearbook, was a real return of 5 per cent a year.

In our range of scenarios, it is worth considering the possibility that future Australian returns will be similar to the average world return.

For a portfolio that is made up of 20 per cent cash and fixed interest investments, and 80 per cent growth investments, the total real return will be 4.2 per cent a year.

Over the 1900 to 2018 period, the Australian sharemarket was an outperformer.

But what if there was a period of underperformance?

If the world average return is 5 per cent a year, and the Australian sharemarket were to underperform world markets by 20 per cent, that would provide a return of 4 per cent a year.

Of course, one of the key ways of insuring against Australian underperformance is exposure to international shares, but let’s assume that the portfolio is largely Australian and underperforms the 5 per cent per annum real return by 20 per cent, providing a real return of 4 per cent a year.

The total real return from this portfolio will be 3.2 per cent per annum, and provides us with a “conservative case” figure for calculations.

Assuming that the person in the case study only wants to spend their investment returns each year — and remember they hoped for $75,000 a year — the range of estimates for their spending is between $51,000 and $87,000 a year.

There remain other issues to consider, including fees, taxes (although you would assume in retirement this level of assets should be able to be structured to be tax-free) and the tendency for investors to achieve lower-than-market average returns through efforts at market timing and stock selection.

Separately, there is the possibility of a sharp downturn from which the portfolio struggles to recover and, on the positive side, the added benefit of franking credits in the Australian tax system.

There is also the question of whether the retiree might be prepared to withdraw some of their portfolio capital to add to the investment returns.

All of this is not easy to quantify.

Starting with a reasonable understanding of the possible range of investment returns is important.

Revealed: the new SMSF generation

The Australian

13 July 2019

James Kirby – Wealth Editor

For a moment there it looked like the entire self-managed super fund scene was in a tailspin: thriving industry funds, woeful tales of bad financial advice and a deeper sense that for many the entire experiment in self-directed retirement had lost its way.

Yes, growth in the SMSF sector is slowing.

But the SMSF scene is alive and well. Moreover, SMSF operators are getting younger, they are starting funds with less money than previously and importantly they are double-dipping in a very smart way, with almost half of those launching new funds making sure to retain investments in their original employer funds.

Our picture of the sector gets better each year, with better data. The latest Vanguard/Investment Trends survey, which is based on no fewer than 5000 SMSF operators and 300 specialist planners, offers an exceptional snapshot of the market.

There are 20,000 new SMSF funds opening each year (against 40,000 a decade ago). However, there is every chance this number will grow from here now that the Morrison government has been returned and the threat of a pro-industry fund ALP regime has been removed.

More importantly, the big development this year is what might be tagged as the “hybrid approach” — keeping two funds going for different purposes. The new generation of SMSF operators are not “anti-industry funds” — it would seem they are much too smart to take an entrenched position of that sort when there are advantages to having one foot in the APRA-regulated fund ­sector.

Until very recently, the choice between SMSF and big funds was seen as binary — you went one way or the other. But now it is common to use both formats for different purposes. The survey shows that almost half (49 per cent) of people who started SMSFs last year held on to money inside their former funds as well. What’s more, that figure is climbing fast — it was only 29 per cent in 2017, then 34 per cent in 2018. Investors are holding on to money inside the larger funds primarily to keep their access to cheaper life insurance: big funds get better rates than if you are operating by yourself in an SMSF.

However, Michael Blomfield, chief executive of Investment Trends, also says people are leaving money inside industry funds to diversify, especially to get access to unlisted investments such as infrastructure and private equity.

“It’s what you might call a core and satellite approach,” says Blomfield.

Indeed, this trend has been exploited by industry fund Hostplus, which has just launched a range of funds that SMSFs can access without actually becoming members of Hostplus.

If this so-called self-managed option experiment at Hostplus succeeds, no doubt a string or rival industry funds will copy the initiative in the years ahead.

Younger and younger

Separately, the survey shows a median SMSF commencement age of 47 (down from 52 in 2010) and a median starting amount per capita (per trustee) of $230.000.

This is surely a healthy development and suggests the sector is going to become more mainstream and less heavily identified with wealthier, older Australians than it has been in the past.

Just to look at the trend a little closer, the median amount trustees have when starting a new fund has dropped consistently — it was $420,000 before the global financial crisis and $320,000 in 2014. So much for analysts suggesting you need $500,000-$1 million to start a fund. SMSFs are for people who want to control and manage their own money.

This new research also attempts to answer one of the most commonly asked questions about SMSFs, which is how much time do they take to run? The easy response might be “how long is a piece of string?” After all, the more complex a portfolio the longer it is going to take to manage. Nonetheless, it is suggested on average the whole business takes eight hours a month (we’ll assume the survey did not try to measure that most elusive figure — time spent “thinking” about investment allocation).

Among the most obvious developments in the area is the steady and welcome diversification away from Australian shares and cash — though notably the average cash holding is still a whopping 25 per cent and it has barely changed even as rates have slid to historically low levels. Indeed, the allocation increased slightly over the past 12 months.

In terms of where the diversification is taking place, it is in the exchange-traded funds market, which is emerging as the key gateway to the wider world for private investors. There are 190,000 investors using or planning to use ETFs, up from 140,000 a year earlier.

There is also a consistent lack of confidence in the financial advice sector shown in the survey, which may improve in the months ahead as new standards are introduced in relations to educational qualifications for advisers.

Similarly, it would seem confidence levels on market returns are low, too. “Investors’ outlook for market returns is very low at 1.4 per cent, far below the expectations of many economists, including our own,” says Robin Bowerman, head of market strategy at Vanguard Australia.

One last thing: despite the gloom and doom among SMSFs, it looks like there has been a lot more talk than action. Examining the intentions of SMSF operators for the future, the survey found one in five had considered closing their funds over the past year — a fourfold increase on the numbers in 2013. But in reality, the actual figure was less than 10,000.

Boomers, this battle ain’t over

Weekend Australian Magazine

13 July 2019

Bernard Salt – Columnist

My fellow baby boomers. I know that many of you are feeling pleased with yourselves, having at the federal election staved off an attack on the benefits associated with your recent or imminent retirement. I’d like to report that thanks to this collective effort the issue of franking credits has receded into the annals of history, never to be spoken of again.

That is what I would like to say – but of course that wouldn’t be the truth. The truth is that the franking credits issue, and the angst over a range of other retiree benefits and entitlements, will never disappear. It’ll merely hibernate before bursting back into life. The reason is obvious: politicians will see populist opportunity in finding ever more inventive ways to limit public spending on retirement.

It is foolhardy for any political party to launch a full-throttle attack on middle-class baby boomers now. Those born between 1946 and 1964 are currently aged 55 to 73 and straddle both full-time work and retirement. They are fit and healthy (for their age) and many are still at the top of their game, which means that if attacked they can inflict lethal damage on an aggressor. And that is precisely what happened at the May election.

Dark forces that seek the curtailment (or demise) of the self-funded retiree say we can no longer afford to keep these privileged Australians in the manner to which they have become accustomed; we must wipe away some – some – of the egregious benefits that coddle their pampered retirement. And those dark forces have an unassailable advantage over their ageing quarry. They are younger. They are leaner. They are hungrier. All they need to do is wait. The next assault on the reserves of the well-off baby boomers will come as their numbers diminish, as their herd frays. Some time in the next decade, the stalkers of self-funded retirees will re-emerge, take aim at the by then wearied and bedraggled boomers, and release – with glee – their slings and arrows of discontent. Strike the weakened: that is the brutal law of the jungle, and of politics. Future tribes of self-funded retirees may well huddle together for protection, but the assailing forces will be too strong, and intoxicated by the promised spoils.It was always going to end this way for the self-funded retiree life form: their numbers afford a measure of protection early in retirement, but later it’s a different story.

By the 2030s the great retirement reorganisation will have taken place and the once vast herds of roaming, roaring baby boomersaurus will have diminished. And, of course, as the thinning progresses, and as the savannah’s resources are recovered and redistributed, a new generation of retirees will present itself.

Enter the Xer retiree, born 1965-1982. This is the get-on-with-it generation, the Quiet Generation, the generation that for a lifetime was besieged from above and below by louder and more opinionated voices. A lifetime of access to a national superannuation scheme will deliver Xer retirees into a kind of promised land, largely free of bothersome baby boomers and totally disconnected from the mutterings of the infernal Millennials.

And here is the irony. The vast number of boomers in retirement forces a rethink about the benefits bestowed upon retirees. But when Xers get to retirement’s promised land, it’ll be time for politicians to loosen the purse strings. Boomer retirees do the heavy lifting; Xer retirees reap the rewards. Is this karma or is this luck? I suspect the answer depends on which generation you were born into.

Context needed ahead of super guarantee rate changes

The Australian

11 July 2019

John Durie – Senior Writer/Columnist

The federal government is committed to increasing the guaranteed superannuation level from 9.5 per cent to 12 per cent and arguments against the move continue but for the wrong reasons.

The Grattan Institute is leading the charge. It concedes that its modelling will produce the outcome it wants, based on the inputs that, at the right levels, support its view that superannuation robs workers’ wages.

The facts are somewhat different when the system is measured from a more holistic economic view and looking at people’s income in both work and retirement.

The think tank acknowledges its work is based on assumptions, which could be questioned.

Next year, Treasury is due to hold its next intergenerational review, which every five years looks at the sustainability of present policies, and using its MARIA model will map out long-term pension needs.

This, too, should provide some context for the coming changes.

Still, Grattan’s latest missive met with the expected torrent of arguably self-interested abuse from the superannuation industry, which was so loud in its protest against the claim that super robs people of wages that it almost invites suspicion.

The reality is when the system started in the late 1980s and early 1990s, one aim was to provide retirement income and another was to offset inflationary wages.

Such a claim can hardly be supported today.

Another reality is that national savings and retirement income have not been studied in depth since Vince Fitzgerald’s report in 1993, which is why it makes sense to look at the issue again before the contribution rate rises and after some obvious low-hanging fruit in the industry is cleaned up.

The Productivity Commission report was centred on the ­efficiency and effectiveness of superannuation, not incomes policy.

The Productivity Commission comes at the issue from a different view, arguing that increasing the superannuation guarantee may have an impact on employment levels, because a boss faced with high costs won’t employ someone.

The impact of the minimum wage on employment was addressed in its 2015 workplace relations report.

That is why it wants the government to have a look at the issue as part of its inquiry into retirement income.

It doesn’t agree with the Grattan view on super robbing people of wages, but is not sure about the impact on employment, a debate that obviously extends to the minimum wage.

The low-hanging fruit being acted on includes closing so-called zombie funds, which are multiple accounts held by people moving jobs but costing them collectively something like $2.7 billion in fees.

There is the default debate that links wages awards to superannuation, which should be cut and the issue is just how.

One version being kicked around Canberra is an extension of the PC’s best-in-class 10 funds from which employers can choose to including 20 funds but rotating five of them each year as a natural selection process.

The governance issue is overblown, but in theory there is no reason to keep bad governance alive just because some super funds are performing well right now.

Like its sometimes banking ­industry parents, the superannuation managers have not complained about this windfall.

Another issue is default fund portability, which is what to do with money contributed as you change funds.

One often forgotten answer is member choice, which means any worker can choose whichever fund they like.

There are allegedly some award defaults that cannot be transportable, which is obviously dumb.

The contribution rate is scheduled to increase by 0.5 per cent a year from 2021, taking it from 9.5 per up to a maximum 12 per cent in 2025.

This means there is plenty of time to decide the level of increases and make the appropriate reforms ahead of the present legislated timetable.

The Grattan report was conflicting because not so long ago it was arguing that the increase in the guaranteed rate would not have an impact on pensions. Now it is saying an increased rate means less pension.

This, of course, is what industry consultants Rice Warner and others are arguing, saying it’s actually good for the overall budget and economy. People save more through super than they do outside the system because the money is managed better.

It argues that, over time, any losses in income tax are more than offset by the tax collected long-term from super and the extra savings are spent in retirement while also saving pension payments.

But the debate is a sensitive one, as the last election showed, with a strong vote against the Labor Party’s franked income tax policies.

NAB has added more grist for the mill yesterday with its updated economic forecasts showing this year’s tax cuts will add 0.1 per cent to GDP growth, as opposed to the RBA rate cut, which will add 0.8 per cent to 2.8 per cent.

This puts the government’s arguments about enough fiscal stimulus into a new light, because it basically says the tax cuts will have no real impact on the economy, but the much-maligned interest rate cuts will.

For the record, NAB is tipping 1.7 per cent average growth this calendar year, increasing to 2.3 per cent next year.

In contrast, the RBA has the economy growing by 2 per cent this year and by 2.8 per cent for the rest of our natural lives.

On the other side, the age pension costs the economy about 2.6 per cent, which is relatively low by world standards. But if the super increase was scrapped, the increase in the cost of the pension, to about 4.6 per cent, would be meaningful. In an ageing economy, that is a big hit.

Tech giants to testify

Representatives of four tech ­giants will appear before a US congressional antitrust committee as part of a review into their market power and impact on private lives.

The review comes as Josh Frydenberg prepares to release the Australian Competition & Consumer Commission report into the power of platforms, which could be as soon as next week.

The Treasurer has yet to decide whether to release the report of its inquiry into Google, Facebook and Australian news and advertising with a formal government response.

The Wall Street Journal reports the US House antitrust committee has summoned representatives from Google, Facebook, Apple and Amazon as part of a review into “online platforms and market power”.

The hearing comes ahead of a major debate in Washington about whether to limit the influence of tech giants over Americans’ lives, and how. Australia is in some respects ahead of the US, with the ACCC having studied the issue for 18 months, including its impact on media.

The issue is not restricted to the Western world, with the China Skinny newsletter reporting a big slump in the appeal of tech giant Baidu, due to concerns over the way it operates. Chinese authorities are also cracking down on practices that Google and others have faced in the West, including directing ­advertisements from its own pop-ups.

Google is banned from operating its search unit in China.

The report said digital ad spending in China is forecast to grow 22 per cent this year.

While Baidu’s share is shrinking, Alibaba’s ad revenue is forecast to be $US27.3bn ($39.4bn) — 63 per cent greater than total ad spending on TV. According to eMarketer, digital ad spending is expected to account for 69.5 per cent of total media ad spend this year, and Alibaba’s digital advertising revenue will be more than double that of Baidu’s.

China Skinny reports Baidu’s market share has fallen from 86 per cent in August 2015 to 64 per cent in May this year. Baidu reported its first net loss in the first quarter.

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