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Raise savings quality before lifting levy
This article featured in The Australian on 3 March 2010 and can also be viewed at The Australian website.
By Denys Pearce, managing director of Plan B Group Holdings.
In recent weeks there has been a chorus for the government to act swiftly to raise the superannuation guarantee from 9 per cent to 12 per cent. The superannuation industry's peak lobby group, the Investment and Financial Services Association, proposed that after revealing a $695 billion savings gap in retirement funding.
The ACTU also has warned: "Unless action is taken soon, this will place an unbearable burden on future generations of workers and taxpayers, and drag down the national economy."
Other industry bodies and high-profile advocates have weighed in on the same theme. Their timing is no coincidence. The findings of the Henry tax review, which the government has yet to make public, and the Cooper review, not far behind it, is focusing ministerial minds firmly on super.
Several dynamics appear to be drawing towards the same conclusion: unless we put more money aside for retirement, an ageing Australia will find itself in deep trouble.
The political ramifications of this would be challenging at any time, but especially in an election year. Will the government risk imposing a measure that will be deeply unpopular to a large part of the business community? There is also the awkward problem of the caps on voluntary super-fund contributions that the government cut by a dramatic 50 per cent only recently.
Where is the coherence in a policy position along the lines that Australians need to save more for their retirement and that the super guarantee must therefore be raised, but we will actively discourage those who can afford to from contributing to their own super fund above a basic level?
As a wealth adviser and investment manager, plan B may be expected to join the chorus of the 12 percenters. Who wouldn't want to increase funds' inflows to their business by 33 per cent with a single stroke of the Speaker's gavel? But, as it happens, our conviction is that something else needs to happen first. A very much bigger challenge than how much money goes into super is what happens to it once it's there. The more fundamental problem facing Australians is that so much of the super money they already receive is invested without the benefit of advice and delivers a lacklustre performance.
Many Australians are unengaged on the subject of super. In our 20s and even 30s, retirement is a prospect so distant it's hardly seems worth thinking about. When people do begin to focus, the arrival of their super-fund statement in the post all too frequently presents an abstract figure. Many people have little understanding about whether their fund's performance is good, bad or indifferent, or what kind of lifestyle it may eventually afford them.
Meantime, leading industry funds, controlling tens of billions of dollars of investment, push the argument that "scale delivers efficiency". At its extreme, their argument would manifest in one national super fund, with all members having exactly the same investment strategy: the default fund. But would that deliver the optimal financial outcome for investors, and social and fiscal outcome for the government? I think not. The evidence is that today, most employees, apathetic about super, are invested in the default strategy of their employer-chosen fund that delivers only average returns for notionally average people.
This, not the percentage of money contributed, is the real super problem.
As the graph illustrates, a 9 per cent contribution into an appropriately structured high growth fund delivers a similar outcome to a 12 per cent contribution to a typical employer-sponsored fund over 35 years. For many people, it's not the amount that needs to be increased, it's the performance. The same chart shows how the same 9 per cent, efficiently managed and invested to deliver high growth, out-performs the default fund by 23 per cent, even when advice fees are factored in. That amount of money can make the world of a difference to a retired person or couple, and their burden on future taxpayers.
While many may benefit from having super invested in a fund weighed towards growth assets, not all do. Which is where the value of investment advice comes in. Our personal circumstances, objectives and capacity for risk usually change significantly during our working life, and this should be reflected in the way we harness the returns available for our super.
During our early years, it usually makes sense to have a higher exposure to properly rewarded risk, just as in later years, as we approach retirement, moving at least some of our super into safer assets, such as bonds and cash, is prudent. But neither of these even basic options is available in the kind of one-size-fits all scheme that, in reality, fits no one well. An effectively invested super fund needs individual advice, monitoring and ongoing adjustment.
Legislating for employers to hike super contributions is one way to increase Australia's retirement savings. But it's a crude, painful and inefficient way that would bring no greater benefit than by better using the significant funds already assigned for super.