Category: Features

How to future proof your super

The Australian

3 September 2021

James Kirby – Wealth Editor

If you consider that we have a compulsory system where everybody has to put away 10 per cent of their earnings into a super fund, it’s hard to believe the wider public had no way of comparing their fund’s performance until this week.

The release of the government’s super fund performance figures – and importantly the decision to name and shame the worst funds – is a genuine breakthrough. The trillion-dollar question now is what happens next?

It’s worth picturing what is going to occur when more than a million households will soon receive a letter from their fund telling them the most important investment in their life (outside of their home) is in a ‘dud’ super fund.

We should not be surprised if there is uproar from this unfortunate constituency where people who may not always keep up to date with the super industry will be confused and angry.

What’s more this group of stranded investors is going to get a lot bigger in the near future when the exercise is expanded to include all super funds.

In this first version of the performance assessment 13 funds out of 76 in the MySuper category failed to pass industry standards. (If you want to compare your current super fund and see how it fared alongside the 13 loser funds tagged as ‘underperforming’ then simply go to ato.gov.au and it’s all there under ‘YourSuper comparison tool. The best way to do this is to use your MyGov personal password if you have got one of those.)

Within those funds are big names. There are funds linked with CBA and Westpac along with well known industry funds such as the Maritime Super.

Importantly, the majority of the investors stuck in these loser funds were in so-called retail funds from banks and insurers. As expected, non-profit industry funds which often have trade union links were the overall winners.

So what are you supposed to do if you find you are in a dud fund? Should you contact the fund where some call centre operator will probably read a script telling you things are about to get better.

Should you pull out of the fund and move to one that has a better record. You will have to expect that the fund you pick this year (which will be on the basis of its recent performance) turns out to be just as successful in the future. Remember, statistics strongly suggest the winners of today are rarely the winners of tomorrow.

Or maybe you turn your back on institutional super entirely by opening a self managed super fund.

Top advisers suggested this week there could be a material increase in SMSFs when people realise they are in dud funds.

Perhaps this will happen, but you have to ask, would an SMSF be the right choice for people in this situation? Even if they were capable of running an SMSF would it be economically feasible? You need to digest costs of $3000 a year in fees to make an SMSF really work and that rarely makes sense for anyone with less than around $600,000.

Certainly people are more likely to switch funds if they are seriously worried – we know for example that switching activity inside big funds tripled in the immediate aftermath of the sharemarket crash last year.

What to do?

It just so happens that the super system is about to experience some very big changes that are mostly for the better. In a few weeks time – November 1 – the old arrangements where each successive employer could default workers into a different fund is due to formally end.

Combine this new era of stapled super (where you can choose to take the same fund with you through your working life) together with regular publication of performance tables and we are going to get a much more active super investing public.

This is the perfect juncture to explore the idea of a national super fund – a fund that would be run by the government and very likely managed by the Future Fund.

The idea has been bounced around for some time. However, ‘big super’ – industry or retail – does not want to hear about it. Similarly, Self Managed Super Fund professionals won’t like it because people might surrender their SMSF management to a government fund faster than an institutional fund – especially if it is run by an operation with scores on the board.

To be precise, first the government would have to launch the concept and kickstart a fund. It would then have to put the management of the fund out to tender. Under current circumstances, the Future Fund would simply have to win the mandate because it’s returns are exceptional. Across the spectrum, the worst super funds have been doing about 6 per cent, the best have been doing closer to 9 per cent – the Future Fund has been doing 10.1 per cent.

For the investor the winning aspect of such a plan would be that the regular competition to win the right to manage the money would mean it is always underpinned by the best funds – the Future Fund might not always be top dog.

What we got this week is improved transparency in the superannuation system, but we have not seen substantial improvement in the system itself.

Every investor – the apprentice starting out, the young family with multiple accounts, the older couple petrified of low interest rates – are all still mandated to make a choice.

A national fund would allow them to join a fund that sits above and beyond the current choices.

Seven things we learned from the first superannuation ‘shame file’

The Australian

1 September 2021

James Kirby – Wealth Editor

The government’s debut list of dud superannuation funds offers key pointers to the realities of how your money may be managed in our compulsory system

Not a moment too soon the government has published a long-promised super fund performance table: Specifically the recent outcomes at 76 default ‘MySuper’ funds where 13 funds have failed to reach industry standards. It’s a landmark for super and the scheme is only going to get bigger and better. Here’s what we found out:

1. Brand names mean nothing.

Some of the worst performing funds among the 13 dud funds have been offered by the biggest names in the game. Remarkably, a wing of the nation’s biggest bank is here, the Commonwealth Group Super – Accumulate Plus Balanced fund. Similarly, BT – an operation at the heart of the financial services system and a wing of Westpac – is smack in the middle of the sucker list with Retirement Wrap – BT Super MySuper.

Don’t assume a well known name automatically offers a strong fund.

2. There are losers among both retail and industry super funds

Industry funds are the big winners in our super system over the last decade – especially since the Hayne Royal Commission humbled the big banks and insurance groups. But the new ‘shame file’ has both retail names such as Colonial First State FirstChoice Super Fund along with industry funds like the Maritime Super (MySuper Investment Option) and the LUCRF (Labour Union Co-Operative Retirement Fund) MySuper Balanced fund.

3. Savers inside these funds need to be rescued

The government hopes funds which have been cast among the dud list will improve their game or get taken over by larger entities: This might be wishful thinking. A fund that has lost the confidence of the wider market will find it hard to regain momentum. Meanwhile, though large funds might cherry pick among the losers, there is no guarantee the worst funds will be acquired by bigger operators – there will need to be further incentives to get these dud funds to pack it in.

4. Loser funds always say the same thing

Some years ago when it was extremely difficult to compare super funds The Australian – using figures from the prudential regulator – published an extensive performance table of super funds. For weeks afterwards the worst performing funds complained loudly that the cut off point for performance was unfair. Others claimed that they had done wonderfully well since the day the regulator closed off the exercise, etc. The funds at the bottom of this week’s list are offering very similar explanations in their defence.

5. The comparison tables are free and easy to understand

The Australian Taxation Office has managed to present the performance figures very simply for free to anyone who accesses the tables through the MyGov website using their personal username and password.

Using the system on its debut day, the tables divide the funds between ‘performing’ and ‘underperforming’ – with a very useful 7-year net percentage return and fees comparison attached. What’s more there was no delay, crash or waiting time … hats off!

6. Some funds did not present their numbers

Even among the 76 funds that are examined, the regulator discovered that essential numbers were ‘not available’ among several funds which means an investor cannot make a full assessment: Here’s the funds – Mercer Super Trust (Virgin Money MySuper), Mercer Super Trust (Mercer Tailored CRG MySuper), Super Directions Fund (Water Corporation MySuper), the Retirement Portfolio Service- ANZ Smart Choice Super for QBE Management Services, Australia Post Super Scheme, and Australian Defence Force Super Scheme. For its part Mercer notes the performance test requires more than five years of data, and these two Mercer funds have existed for less than five years. Mercer notes that APRA’s separate assessment has the two funds listed as ‘Pass’.

7. It’s not perfect, but it will do for a start.

There are many failings in this exercise: Splitting funds into ‘performing and underperforming’ is simple and uncomplicated but then the process does not fully account for risk weightings or any scoring on the basis of Environment Social or Governance (ESG) considerations.

This is powerful public shaming: But more than a million investors may now realise they are in dud funds and on that basis alone the means should justify the end.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Failing superannuation funds named and shamed

The Australian

31 August 2021

Cliona O’Dowd – Journalist

More than a million workers have entrusted their retirement savings to a dud superannuation fund, the results of the government’s new performance test show.

The new test, brought in as part of the government’s Your Future, Your Super reforms, reveals that 13 of 76 funds — or 17 per cent of those assessed — failed the crucial evaluation and will now have 28 days to write to their members detailing their failure and suggesting they switch funds to get a better retirement outcome.

The named-and-shamed funds include AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list below.)

All up, $56.2bn of 1.1 million workers’ retirement savings are invested in the underperforming funds, Treasurer Josh Frydenberg said.

“As part of the most significant changes to superannuation in nearly 30 years, the Morrison Government is holding underperforming funds to account and strengthening protections for the retirement savings of millions of Australians,” he said.

“Superannuation members can now access a single, trusted and independent source of information to compare superannuation products, including whether they are in an underperforming product.”

The MySuper products were assessed on both investment performance and admin fees. But while the investment portion of the test spanned the past seven years, only the most recent year’s admin fees were included, after a government backflip just weeks ago.

The longer time frame for judging investment performance was to allow funds to target long-term returns and not blame “one bad year” for underperformance, according to the government.

But the last minute change to the admin fees could see some dud funds slip through the cracks, critics argue.

The named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

If they fail again next year, they will no longer be allowed to accept new members. What’s more, the funds aren’t told why they failed: they are simply given a pass/fail mark.

Commonwealth Bank Group Super, the $12bn default fund for staff of the nation’s largest lender, said it failed the test “due to a number of underlying factors”.

These included differences in its investments compared to the benchmark, as well as underperformance of some of our investments.

“Group Super focuses on taking appropriate levels of risk with our investments in order to produce certain returns,” a CBA Group Super spokesperson said.

“Consistent with this, the MySuper Balanced option has delivered on its objectives set by the trustee board, delivering a return of 13 per cent for the 2020-21 financial year and in excess of 7 per cent over 10 years, and with less volatility compared to peers producing a smoother return experience for members.”

The fund’s 13 per cent return last financial year compares to the 20 per cent-plus the best in the industry delivered for their members.

Christian Super CEO Ross Piper said the test didn’t take into account that the fund, which manages $2bn on behalf of its 30,000 members, was one of the fastest growing offerings in the market as Australians increasingly seek out more ethical investments.

“While its intent is positive, its blunt design means all products under a certain benchmark are being tarred with the same brush without consideration for how those returns have been generated and whether the fund is, in fact, delivering far more than just strong long-term financial returns,” Mr Piper said.

Colonial First State CEO Kelly Power said its MySuper product had “narrowly missed” the test benchmark and was confident it would not fail two years in a row.

“We have just announced a further reduction to the administration fee charged on this product of almost $8m per year, effective from October 2021,” she said.

“This means FirstChoice Employer Super will have one of the lowest administration fees of any MySuper product, putting it among the top 10 funds, based on our analysis of recent Chant West data.”

APRA executive board member Margaret Cole said the failing funds had an important choice to make.

“They can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them,” she said.

APRA had intensified its supervision of the failed funds, which will now have to detail to the regulator the cause of the underperformance as well as how it will be remedied.

“Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds,” Ms Cole said.

The results of the test should be treated with “extreme caution”, according to super fund lobby group ASFA.

“ASFA has long supported the orderly removal of habitually underperforming products, however some of those called out by this test are in fact good products which have delivered excellent returns to their members over a long period of time,” ASFA CEO Martin Fahy said.

“This is a retrospective, relative performance assessment where the so-called underperforming products are compared against top performing products.

“Any product that falls 0.5 per cent below the median is labelled as failing. What the published test results don’t tell members is why, and by how much, their fund has failed the test.”

Dr Fahy said the results of the test were potentially confusing for consumers. Indeed, a glance at the ATO Your Super comparison website, which lists all MySuper products and the test results, shows that some funds passed despite having higher fees and lower returns than the duds.

IOOF Portfolio Service Super, for example, has an annual fee of $627 and a seven-year net return of 7.38 per cent and passed the test.

But the Victorian Independent Schools Superannuation Fund, with a fee of $577 and a seven-year net return of 7.58 per cent, failed.

“This is the tyranny of benchmarks. They fail to take account of risk, lifecycle, or ESG screening considerations and instead they preference hugging the index,” Dr Fahy said.

Ahead of the results, Maritime Super CEO Peter Robertson called for urgent change of the assessment.

Maritime and other named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

This is potentially giving members bad advice and could lead to people being financially worse off in retirement, Mr Robertson said.

“We didn’t wait for the results of the performance test to investigate better options for our members. They’re already in a new product. Legally it’s the same product but fundamentally it’s the Hostplus pooled superannuation trust.

“Our fund has been assessed on investment strategies and risk overlays that are no longer in place, which have no relevance to future returns for members.”

Industry Super Australia chief executive Bernie Dean said he supported the introduction of “fair and appropriate” annual performance tests. But he pointed to shortcomings in its current form.

“The performance test recently introduced by the Government contains deficiencies that are not in the best financial interests of all super fund members and that will lead to outcomes inappropriately favouring some funds over others.

“This is a matter that ISA will continue to seek to have remedied,” he said.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian Independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Superannuation funds brace for performance test results

The Australian

29 August 2021

Cliona O’Dowd – Journalist

A new performance test for the nation’s super funds has been hailed as a win for workers, but on the eve of the first set of results one fund on the wrong side of the pass/fail line is calling for urgent change.

The prudential regulator will this week release to the public the findings from the first annual test of MySuper fund performance as part of the government’s Your Future, Your Super reforms.

Funds that fail the test will be named and shamed and within 28 days must write to members detailing their failure and suggesting they move their money to alternative products.

The assessment will cover an eight-year time period that allows funds to target long-term returns and not blame “one bad year” for underperformance.

But its outcomes show insufficient regard for recent innovations and improvement, according to the main super fund for the maritime industry, Maritime Super. The fund is one of a handful widely expected to be on the “dud” list.

Maritime chief executive Peter Robertson said the test did not take into account the steps the fund had taken to improve member outcomes and has called for further reforms of the assessment before the fund gets another fail mark next year.

“We didn’t wait for performance tests, we knew we had headwinds with scale and liquidity and cash flow,” Mr Robertson said of the fund’s move to shift its assets under management to Hostplus.

“We’ve been trying to come up with solutions for that (through mergers that haven’t come off). The Hostplus pooled superannuation trust is a great solution for that.”

Maritime has for years languished at the bottom of the performance rankings but in February announced it had entered into a strategic partnership with Hostplus in a move that would see the funds combine investment assets.

The partnership, in effect from April 30, saw Maritime pool its $6bn in assets under management with Hostplus’s $60bn-plus assets. It also gave Maritime access to investment opportunities typically not available to smaller funds, including infrastructure, property, private equity and venture capital.

But the move copped hefty criticism due to Maritime retaining its executive team and board members, which will see it pay out millions of dollars in salaries and fees each year despite no longer investing funds on behalf of its members.

Teaming up with Hostplus, which was last year the best performing fund in the country, has seen Maritime’s return in its MySuper product lift 6.6 per cent between May 1 and August 25.

“It’s probably not the last chapter in our book: there is more likely than not, at some stage in the future, a merger. But we’ve got to simplify the fund first,” Mr Robertson said.

Maritime and other named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

This is potentially giving members bad advice and could lead to people being financially worse off in retirement, Mr Robertson said.

“We didn’t wait for the results of the performance test to investigate better options for our members. They’re already in a new product. Legally it’s the same product but fundamentally it’s the Hostplus pooled superannuation trust.

“Our fund has been assessed on investment strategies and risk overlays that are no longer in place, which have no relevance to future returns for members.”

Maritime is not the only fund caught out by the New Test.

Ethical fund Christian Super is also set to make the list, despite delivering an average annual return of 8.34 per cent over the past 10 years. (The best performing funds have delivered returns between 9 and 10 per cent over the same period.)

While Christian Super is one of the fastest growing funds, and one of only four funds that is 100 per cent ethically screened, it has just $2bn in funds under management, well below the $30bn APRA has flagged is needed to remain competitive in the sector.

The fund is in effect “paying the price for virtue” and will be penalised for its ethical and impact investments when the results come out on Tuesday, one industry insider said.

APRA should be recognising funds that are innovating and improving outcomes for members in their performance test methodology, Mr Robertson said.

Superannuation changes open windows to ‘your money’

The Australian

18 June 2021

Robert Gottliebsen

Most Australians who do not have a self-managed fund and who are accumulating superannuation savings don’t regard super as “their money”.

But, of course, it is very much members’ money and the wide-ranging, long-overdue superannuation changes that were passed by the parliament this week will cover 90 per cent of Australians in accumulation outside self-managed funds, so many more Australians will realise that superannuation is “their money”.

And self-managed funds are also helped.

The opposition to the changes was surprisingly ferocious from both the large retail and industry funds and their employer/union backers (plus the ALP), which indicates that there will be unpleasant surprises in some funds when some of the provisions are put into practice.

The changes would not have been possible but for the fact that Josh Frydenberg has become the first treasurer since Paul Keating to take an active interest in reforming superannuation.

And that is long overdue because superannuation savings are around $3 trillion. But the initial driver of these changes was Superannuation Minister Jane Hume.

What Frydenberg and Hume have done is to open a series of windows so ordinary Australians can see what is happening to “their money”.

And so the first big change is that the online accounts of the superannuation funds will tell members where “their money” is actually invested. They will also learn how much of “their money” is being spent on marketing.

Superannuation funds need to attract new members to maintain economies of scale because members retire, die or simply leave the fund. Accordingly some marketing is important but lavish marketing with executive side benefits will be revealed.

Members will also learn how much of “their money” is being paid to shareholders in the case of retail funds and employer and union groups in the case of industry funds.

The second window that is opened up is the ability to compare performances. At the moment superannuation is like insurance policies —the complexity makes it impossible to compare funds. What the legislation proposes is that if you have chosen, say, a conservative or high-growth fund it will be compared with funds with similar investment policies on a like-on-like basis.

For many Australians the first step in seeing superannuation as “their money” came when, in the pandemic last year, Josh Frydenberg gave them the ability to extract cash. But over the next year or so, when the data is assembled, friends will be able compare investment performance rates simply and straightforwardly over the barbecue.

These two measures will have a dramatic affect on superannuation.

But there is a darker side to superannuation in Australia that has taken too long to be fixed.

When Paul Keating set up the original superannuation structure it was based on a craft employment system and so most unions and their equivalent employer group had their own superannuation fund. So when a person started in the workforce in a coffee shop they joined Hostplus; then they went to Coles or Woolworths and joined a retail fund; if they did work on a building site it was Cbus and so on.

Millions of Australians ended up with savings in many different funds. Some of the amounts were small because the person did not work in that industry for very long. These savings get eaten up by administration, which represents a subsidy by young Australians for older Australians who tend to have a more stable fund.

In some industries such as retail and building it has been actually impossible for the employee to join any other fund. Earlier legislation blocked these cartels but there are still some legacy arrangements.

Apart from these cartel arrangements in most areas it has always been possible for people to consolidate their funds, but it tended not to happen. The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund, and given it will be possible to compare performances, there will be more shifting.

The government says it will save members $280 million so it would seem for some funds the removal of this subsidy will require costs to be reduced or performance after administrative costs will suffer.

That may be the reason for the ferocity with which the retail and industry funds plus employers and unions tried to stop this very logical and beneficial change to our superannuation industry.

It’s true there are areas of downside. It requires more work for small enterprises and Australian Taxation Office systems are unreliable. But the overall benefits are so huge that it is worth the extra time and ATO risk.

And finally, the area which has been given perhaps the most publicity is the ability of APRA to stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA has the power to enforce that exit.

But the test as to whether a fund is performing badly starts by looking at where the money is invested and so if, totally hypothetically, all the fund’s money was invested in infrastructure then that fund would be compared with the infrastructure assets of other funds.

And if over eight years it was too far below other funds then it would be warned to fix its situation and then a year later action would be taken. And so, a balance fund would be tested on the combination of each of the segments that the fund was invested in. If a person joins a fund that turns out to perform badly they will be alerted and then after nine years they will be told of their fund’s failure.

Two other changes are important.

* The limit on the number of members in a self-managed fund will be lifted from four to six which will make it easier for children and their spouses to join their ageing parents, who may be having fund management difficulty. It confirms the government resolve to maintain a healthy self-managed fund movement.

* Those who withdrew money out of superannuation last year will get the opportunity to increase their non-taxable contributions to cover the gap.

Super funds eye best returns in 24 years

The Australian

17 June 2021

Cliona O’Dowd

Super funds are eyeing their best returns in 24 years.
Super funds are eyeing their best returns in 24 years.

Super funds are on track to deliver the best annual returns in more than two decades, with the median growth fund clocking a 20 per cent return just nine trading days out from the end of the financial year.

The median growth fund returned 1.3 per cent in May, bringing the return for the first 11 months of the financial year to a stunning 19.8 per cent, according to research house SuperRatings.

The median balanced fund, meanwhile, is sitting on a 16 per cent return for the financial year to date.

With markets rising further in June, balanced funds are in sight of overtaking 1997’s 18 per cent return. This would make it the best financial year return since the introduction of compulsory super, according to Super­Ratings.

The gains will also see some of the fastest-paced growth in the nation’s pool of superannuation assets, which totalled $3.1 trillion at the end of the March 2021 quarter.

Since the end of May, the local sharemarket has powered further ahead, gaining 3 per cent to a record high on Wednesday.

Over the past year it is up more than 24 per cent, fuelled by ultra-low interest rates around the world.

The stellar return figures were released hours after wide-­ranging superannuation reforms passed parliament, with Australians now to be “stapled” to one super account through their working life, in a move opponents warn could see millions trapped in “dud” funds.

Before the final vote, Superannuation Minister Jane Hume said the reforms would save Australians “$17.9bn in fees and lost performance over the next 10 years”.

But Industry Super Australia chief executive Bernie Dean criticised the Your Future, Your Super reforms, saying many workers would lose out as a result of the legislation.

“The government was forced to drop a number of ideological proposals and to improve the performance tests for funds, but sadly it stopped short of protecting workers from losing their savings by being stuck in a dud super fund,” he said.

While the median growth fund is on track for a 20 per cent return for the current financial year, the market leaders have fared even better.

The nation’s largest super fund, the $2bn AustralianSuper, recorded a 23 per cent return in its growth option for the 11 months through May. Hostplus’s ‘‘Shares Plus’’ growth offering also returned 23 per cent over the same period, while UniSuper wasn’t far behind with a 21.7 per cent return for the year to date.

As he commented on the strong performance this year, SuperRatings executive director Kirby Rappell was also cautious on the market outlook.

“May is the eleventh month in a row we have seen a positive result for the median balanced fund … While strong performance this year is pleasing, market volatility prevails and we are erring on the side of caution in terms of the future outlook, with equity markets likely to provide investors with a bumpy ride,” he said.

“Further, with rates remaining at record lows, more defensive assets such as cash and bonds have delivered meagre returns, which is impacting retirees’ incomes.”

Fellow research house Chant West has the median growth fund sitting on a 17.5 per cent return for the year to date.

The figures between the two research houses vary slightly due to a difference in assessment criteria for what qualifies as a “growth” or “balanced” fund based on the percentage of ­investments in growth assets. “The past two financial years really have illustrated the strength and resilience of our leading super funds,” Chant West senior investment research ­manager Mano Mohankumar said.

“Despite the massive hit that Covid delivered to financial markets last year, the diversification built into growth funds enabled them to limit the damage, and the small loss of 0.6 per cent for fiscal 2020 was far better than expected.”

With a little over 50 per cent allocated to listed shares, super funds rode the upswing this financial year as markets staged a remarkable recovery.

The cumulative return since the Covid low point in March 2020 was about 25 per cent and funds were now 10 per cent above their pre-Covid crisis highs, Mr Mohankumar said.

Australian and US markets reached record highs in May, with Australian shares jumping 2.3 per cent and international shares rising 1 per cent in hedged terms and 1.2 per cent unhedged.

A strong quarterly earnings season in the US boosted the May performance, while in Britain, confidence was boosted as lockdown measures eased.

In the eurozone, the vaccine rollout gained momentum during the month while restrictions were also eased.

The S&P/ASX 200 on Thursday pulled back from this week’s record high and finished the session down 0.4 per cent following weak overseas leads after Wall Street fell overnight on higher inflation expectations from the US Federal Reserve amid the prospect of sooner-than-expected rate rises.

New, lower-cost superannuation fund era ahead

The Australian Business Review

19 may 2021

Robert Gottliebsen

With one exception, Senator Jane Hume’s superannuation changes make sense and prepare the total superannuation movement for a new era of importance.

That is why initially I was surprised at the ferocity of the opposition. Then the penny dropped.

These changes are going to attract new powerful entrants into superannuation (I detail two starters below) and will hasten its move away from superannuation being a craft-based movement.

This frightens the industry funds because they are based on the craft model, but their excellent overall performance in recent years makes them well prepared.

The one change that Hume proposes that I think is a poor idea is giving government or government bodies the power to stop a superannuation fund investing in a particular security.

Once there is proper disclosure then members are perfectly free to vote with their feet.

Government intervention is likely to create a dangerous precedent. But most of the other changes are long overdue.

For example, we currently have a situation where many people have a multitude of funds because they took on different jobs. Their scattered savings are absorbed in fees, which is a terrible waste.

The new system will see an employee in their first job booking into a fund and staying with that fund in different jobs. Each employer can make a quick check with the Australian Taxation Office to find out the relevant fund or the employee can choose. This is a defined task that the ATO should be able to do well. But I am wary. It will need to be a fast, efficient service.

The employee, of course, can change funds at any time. The alternative of an employee changing funds each time a new job is taken would be horrendously costly to the employee.

At the moment superannuation is not seen as relevant to many young people. But thanks in part to state government actions rents are going to rise sharply and young people will need to find a way to buy their own home. Increasingly in coming years superannuation will be used to help in this first step so it will have a new meaning to the up-and-coming generation.

And of course, although superannuation is important in retirement, a house is even more important.

The second change requires much greater fund disclosure including contributions to owners plus employer and union organisations. Marketing and a vast array of other costs will also be disclosed, along with the portfolio of every publicly available superannuation fund.

Members of superannuation funds will get the same sort of information that is available to self-managed funds. Again, this is a long overdue change because members are entitled to know where their money is invested and how much goes to the owners of a fund, employer groups and unions — it’s their money that is being managed.

And the third major change is more controversial. Funds that don’t match an industry-based criteria may have to merge. The measurement is over seven or eight years and can be tailored to the portfolio structure of the fund. And so, totally theoretically, if a fund had 50 per cent of its money in one class, say infrastructure, the measure will be weighted accordingly. It is possible this will push funds towards indexation, but the simple situation is that funds managers that can’t perform over a long period need to be replaced.

What will become apparent to members of funds is the total cost of running their fund. Most large funds will come in with a cost basis of 0.8 to one per cent, but some will have much higher costs. These prospective extra disclosures are suddenly attracting new entrants into the superannuation race.

The big funds would justifiably believe they can compete, but we are looking at a new era.

The first and biggest new entrant is Vanguard. The giant index-based investing institution has developed a successful business in Australia by attracting small and large investors to low management-cost index-based returns over a wide area of investment alternatives.

It is now planning to enter the superannuation market. Employees can write down Vanguard as their preferred superannuation investment and Vanguard will be shouting from the roof tops that its costs of operations are in the vicinity of 0.2 to 0.3 per cent – well below other funds. It clearly believes there is a lot of business to be picked up.

Another new entrant is known as Flare, which is backed by global investors including KKR, Point72 and Westpac Reinventure. Flare is one of the largest providers of software to manage superannuation and human resource bookkeeping. Its network has exploded in the last 18 months and one out of five Australians who start a new job are enrolled via enterprises using Flare technology.

Flare gives its software free to enterprises but plans to use that software network to market financial services products.

Its first foray into this arena is set to be a managed global superannuation fund for Australians. It expects its costs to be in the 0.5 to 0.6 per cent range – higher than Vanguard – but the Flare fund will contain a managed selection of global investments.

Australian investments will be a comparatively small part. Neither new entrant would have made a move but for the Hume legislation. The fact that two have emerged so quickly indicates that there is more to come.

Problem is the tax on our super is too high

The Australian

Henry Ergas and Jonathan Pincus

12 February 2021

Released by the Treasurer in the midst of the pandemic, the report of the Retirement Income Review has received far less attention than it deserves. While the report covers a great deal of ground, it is disappointing and dangerous in important respects.

To begin with, its discussion of the tax burden on superannuation — which endorses Treasury’s claim that superannuation receives highly favourable tax treatment — is seriously misleading. As a moment’s reflection shows, the primary impact of taxes on savings is to alter how much consumption one must give up today so as to consume more tomorrow. The proper way to calculate the effective tax rate on savings is therefore to assess the impost savers face for deferring a dollar of consumption from the present into the future.

Examined in that perspective, the tax rates on compulsory superannuation are nowhere near as generous as the report suggests. Consider a person who earns $50,000 a year and is planning to retire in 20 years. As things stand, she will be required to put $4750 into superannuation this year, paying a 15 per cent contributions tax on that amount. If her fund earns 3.5 per cent a year — also taxed at 15 per cent — those savings will grow to $7300, spendable in 2041.

However, in the absence of taxes on contributions and on earnings, steady compounding would have increased today’s $4750 to about $9500. As a result, the actual tax rate, which reduces $9500 to $7300, is not the notional or statutory 15 per cent but, at 30 per cent, twice that.

Moreover, every dollar of superannuation reduces our saver’s entitlement to the Age Pension and to aged-care subsidies. And just as marginal effective tax rates on an additional dollar of income from working are properly calculated taking reductions in transfer payments into account, so must the reductions in eligibility be included in the effective tax rate on superannuation.

Factoring the means testing of those payments into the calculation pushes the effective tax rate on compulsory superannuation towards 40 per cent or more, which no one could sensibly describe as unduly low.

Unfortunately, none of this is reflected in the report. Instead, it simply assumes that superannuation savings should be taxed as if they were ordinary income and on that basis asserts that they benefit from a massive tax “concession”.

Perhaps because it doesn’t realise it, the report seems untroubled by the fact that were compulsory superannuation actually taxed on the basis of its chosen benchmark — a comprehensive income tax — our hypothetical saver would face a 93 per cent effective tax rate on her retirement income.

Given how distorting, unreasonable and politically unsustainable such a tax rate would be, its use as the standard for evaluating the current arrangements is indefensible.

The errors in the report’s tax analysis don’t end there — its discussion of dividend imputation is also deeply flawed.

What is significant, however, is the unstated inference its analysis leads to: that superannuation savings are so heavily subsidised as to real­ly be the property of taxpayers as a whole, making it perfectly appropriate for the government, rather than savers themselves, to determine their use.

That matters because the report repeatedly claims that superannuants do not spend their savings “efficiently”. Precisely what it means by “efficient” is never explained; it can nonetheless be said with some confidence that it is using the word in a sense entirely unknown to economics.

Rather, the report treats “efficient” as a synonym for “what we, the reviewers, think ought to happen” — or to put it slightly differently, as what Kenneth Minogue, a fine scholar of government verbiage, called a “hurrah word”, with “inefficient” being the corresponding “boo/hiss word”.

In this case, the “hurrah” goes to savers who completely run down their savings; the “boo/hiss” to savers who leave bequests. It is, in the report’s strange reasoning, “efficient” for retirees to devote their savings to wine, gambling and song, but “inefficient” for them to leave an inheritance to their children and grandchildren, no matter how great their preference for the latter over the former may be.

That the contention is absurd on its face scarcely needs to be said; the only justification the report provides in its support is the claim that it is not the “purpose” of the system to allow savers to leave bequests — which is merely a convoluted way of saying that the report’s authors don’t believe they should.

We are therefore left with a paradox. The reason repeatedly advanced for compulsory superannuation is that people of working age save much less for retirement than they ought to; now we are told that at retirement the bias is dramatically reversed — from then on, it seems, they save much more than would be desirable.

Quite how or why this miraculous transformation occurs is clearly a mystery that can be penetrated only by greater minds than ours; what is certain is that savers shouldn’t rest easy.

On the contrary, they should feel government coercion coming on: more specifically, a requirement to buy annuities or in other ways exhaust their savings, regardless of their preferences — or be driven to do so by some combination of higher taxes on any remaining savings and harsher means testing of social benefits.

Of course, it may be that the review is right: perhaps savers are utterly clueless, as one government report after the other appears to believe, and thus have to be forced to act “efficiently” by layer upon layer of regulation.

But if savers neither know what they want nor are capable of achieving it, what possible justification can there be for continuing to rely on a super­annuation system based on individual decision-making — and every bit as important, in which individuals bear all the risks?

Why wouldn’t we simply shift over time to a government-run contributory pension scheme, possibly along Canadian or Scandinavian lines, that provides middle-income earners with an assured income in retirement — and does so fiscally prudently and at resource costs far lower than those of our current arrangements?

Or has it become the real goal of our superannuation system to force middle-income earners, who depend on that system most heavily, to subsidise an ever-expanding finance industry — including, should this review have its way, the suppliers of high-priced annuities?

These are serious issues; they merit serious analysis. If the government is genuinely interested in that analysis, the Retirement Income Review won’t help it.

Rising tensions plague some retirees

The Australian Business Review

Robert Gottliebsen – Business Columnist

9 February 2021

Many sectors of Australia’s retirees are now enjoying the prosperity that comes from higher sharemarkets and property markets.

But two groups are encountering new levels of tension. The first are those who own a dwelling but have most of their money in the bank. Their wealth is rising but they are becoming income-poor.

The second agitated group are holders of large superannuation balances who are suddenly being declared by young people as “spongers on the system” and “rent-seekers”.

I have encouraging news for both groups.

As people get older they often embrace more conservative investment policies and the bank deposit content of their portfolio rises. In previous years, bank deposits earned reasonable rates of interest, but today there is not much income difference between depositing your money in a bank and putting it under the bed. Banks are merely offering a safe place to store your money.

And so while the wealth of many Australians is rising with the value of their houses, their non-government pension income is falling. Their bank money hits their government pension entitlement and they have less income when their cost of living is rising faster than the CPI, given the high medical content.

There are a number of home loan products on the market, but one that is not often considered is the “Government Pension Loan Scheme”, which dates back to the Keating era but has fallen into disuse. Only about 3000 people took it up last year.

What the government is prepared to do is lend people starting in their 50s — but especially 70-year-olds and above — amounts of money that are not limited by your assets or income. The loans are secured on real estate, usually the family home. They are delivered fortnightly and the amount that is allowed is capped at 1.5 times the aged pension. The percentage of the value of a house that can be borrowed depends on people’s age. It gets very high in the nineties.

The loans are repaid when the family home is sold. While that does lessen later flexibility, many older people who are reluctant to borrow on their house are living in virtual poverty despite their wealth. A clear weakness in the loan scheme is the interest rate has not been adjusted to today’s world and is still 4.5 per cent, but my guess is that before the year is out it will be reduced.

A large number of people have seen a 10-20 per cent rise in the value of their dwelling in recent times. The government scheme supplements income but it does mean that there is less money for children to inherit. But I think it’s reasonable that some of the wealth that is being created in the housing boom is shifted into older people’s living standards.

Big super balances

The second group are in an entirely different situation.

Over a period of years there has been a switch in attitudes to the large amounts of superannuation held by older people. For a long time superannuation rules encouraged people to invest large sums in superannuation. This ALP and Coalition government policy deliberately created some very large superannuation balances, which are very difficult to achieve under today’s rules. The policy of maximising the amount of money people held in superannuation continued right through the Abbott/ Turnbull Coalition years.

Indeed, one of the most successful policies to retain the large superannuation sums was a Coalition government brainchild to freeze many superannuation plans issued prior to 2006-07, and allow the frozen money to be released via retaining large superannuation balances.

The Coalition’s policy was therefore to encourage people to use their personal money and leave large sums in super. That’s not today’s agenda, so one of the controversies in superannuation is how much people should withdraw in their 60s and 70s.

Current Superannuation Minister Jane Hume thinks that not enough money is being withdrawn and people’s living standards are suffering.

While this is might be true, many people are nervous about the amount of money they will need in their 80s given the rising costs of medicine, etc. And of course people in their 80s and 90s are required to take large sums out of superannuation. The level of under-withdrawal of superannuation money by people under 80 depends on what graph you look at. If all superannuation is counted, including zero balances, it is clear that people do withdraw their money. But if you take out the zero balances then there is a conservative rate of withdrawal in the 60s and 70s.

It’s important for the government to honour its election promises and not make major changes in this area — especially given its recent policies to actively incentivise the retention of large sums in superannuation.

But on an overall community basis, people have the fitness to spend money on travelling and other areas in their 60s and 70s, which they might not have in their 80s and beyond.

Retirees warn of hit to their incomes worth tens of billions of dollars

13 June 2020

Sydney Morning Herald

Shane Wright – Senior economics correspondent for The Age and The Sydney Morning Herald.

Retirees are facing a massive hit to more than $100 billion worth of vital income streams as the coronavirus pandemic crushes their superannuation, personal savings and share dividends.

Older Australians say the retirement system is in crisis and leaving them financially vulnerable, forcing them to call on the Morrison government to consider changes in areas such as the age pension, deeming rates and access to the Commonwealth Seniors Health Card.

The Alliance for a Fairer Retirement System, representing millions of retirees and older investors, has written to key finance and welfare ministers urging reforms including to measures previously introduced to take pressure off the federal budget.

In the letter, obtained by The Sun-Herald and The Sunday Age, the alliance says the coronavirus pandemic has dramatically hit retirees dependent on investment income to such an extent it now put the nation’s economic recovery at risk.

“Retiree spending, and willingness to spend, will have critical impacts on the economy in any post-stimulus recovery phase,” the alliance said.

“However, under the current market conditions, there is a risk older Australians will further withdraw from the economy, slowing the recovery. Retirees are unlikely to have the confidence to spend if they continue to face significant impacts on their income.”

Retirees are facing a string of inter-related hits to their finances. Company dividends are being slashed by many listed firms in a development that JPMorgan estimates will cut income to investors by $68 billion in 2020.

Falling interest rates, while beneficial to those with mortgages, are leaving people dependent on their savings cash-strapped.

Interest rates on savings and term deposits continue to fall. In the past week, the average rate on a five-year term deposit edged down to a fresh record low of 1.09 per cent.

On a one-year term deposit, the average interest rate fell a quarter of a percentage point last week to a record low of 1.2 per cent.

Income from rental properties have also collapsed with many tenants unable to cover their rent.

The alliance said it all meant many retired Australians’ incomes were being stripped away by the impact of the coronavirus and the situation “could extend for years”.

The government has already reduced the deeming rates – the assumed rate of return made on investments that affects the pension income test – due to the fall in global interest rates caused by central banks trying to protect their economies from the pandemic.

But the alliance wants the government to go further, starting with another cut in the deeming rate.

It also wants an automatic revaluation of assets used by Centrelink to determine the pension accessibility for retirees, arguing the last revaluation was done at the peak of the share market before the start of the pandemic.

The alliance has also called for the government to re-think the taper rate changes it introduced in 2017 that helped save billions in pension payments. The alliance says those changes now mean that couples who may have almost $900,000 in assets are up to $1000 a month worse off in income compared to a couple with $450,000 in assets.

While people of retirement age are entitled to the Commonwealth Seniors Health Card if they have an income of less than $55,808, the alliance argues many self-funded retirees are unaware of their eligibility to the scheme. It wants all retirees to have access to the card and for the government to promote its availability.

The federal government is nearing the end of a review of the retirement income system, prompted by a Productivity Commission review of the superannuation sector, although its reporting date has been pushed back to July 24 due to the pandemic’s impact on agencies.

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