Could politicising super depoliticise it?
Coalition Senator Andrew Bragg has been outspoken in his concerns about the growing power of the industry (or union) superannuation sector. Between himself and fellow Coalition member Tim Wilson MP, they are singlehandedly putting the blowtorch on a sector that avoided the worst of the Royal Commission.
In a paper this week titled Competition for Workers’ Superannuation, Bragg characterises the current super system as a “closed cartel” with high fees, low competition and non-meritocratic fund flows. In the paper he proposes that the nation’s sovereign wealth fund, the $197 billion Future Fund, take over the Commonwealth Super Scheme and become the default fund for all Australians.
Under the proposal, members would have to opt-out and choose a fund they wish to invest in, putting the onus on default funds to then improve returns and boost costs to attract new members. As opposed to the current model where default funds are nominated through employment agreements, fund mergers and other deals.
As an adviser, I often get asked the question of whether this type of proposal has merit. Many would suggest the nature of my profession, the majority of which involves guiding people on how to manage their retirement capital, would mean I automatically disagree. Surprisingly, I actually think it has merit.
In over fifteen years in the industry, I have met a broad spectrum of people that have chosen to take control of their retirement destiny. The Australian superannuation system is unique in allowing mums and dads with no investment experience or structure to determine how their retirement funds are invested.
Whilst a sign of a strong financial system and progressive regulatory environment, it is also dangerous; even more so in the age of social media. The ability for all types of investment issuers, both high quality and fraudulent, to gain access to individual investors has never been easier.
In my work I meet people on a daily basis that have little knowledge of the basics of investing, as small as the concept of dividends or managed fund structures. Most concerning of course, is the lack of any real structure to their investment approach, or policy through which investment decisions are made.
There are a number of reasons why people choose to start their own SMSFs, but one often quoted is the fact that they despise the alternatives. Whether it is large corporate “vertically integrated” super funds that felt the blowtorch of the Royal Commission, or the seemingly unstoppable union-aligned funds, they simply didn’t trust either enough to hand over their most important asset.
Industry funds have been the biggest beneficiary of the breakdown of the vertically integrated sector, but as Bragg highlights, it isn’t solely due to merit. This isn’t the point I intend to dwell upon. The returns delivered by the top industry funds have clearly been exceptional, but what has become evident is that they are best-suited to those in the growth or accumulation phase of superannuation investment.
Most industry funds seem solely focused on gaining ever-more members, whether in the form of mergers or through extensive advertising. Yet it is hard to see how these funds are able to remain relevant for every member when the numbers exceed one million people. This clearly makes it difficult to provide any level of tailored service, and more importantly to engage with members on a regular basis.
This was best shown during the worst of the pandemic, when billions was lost as a result of members switching from growth options into cash. As we know now, the market recovered strongly and these people missed out on significant returns.
While I am yet to see demographic data, I have little doubt that the majority of those switching back to cash were those in drawdown phase. I know this because I spoke with several people, with the most common reasons being variations of “I can’t afford to lose any more money” and “I need to protect what I have left.”
There are two issues here, of course. The first is that the industry fund sector appears better-suited to the growth phase of superannuation, with the bulk of its members under the age of 40; these funds are clearly focused on delivering the best possible long-term returns. Importantly, the same approach is not possible, nor appropriate, for those in retirement phase, who have a different mindset and very different objectives.
The issue. of course. is that the only way to stop someone from making the worst decision in a moment of stress is to provide personal, human advice, not through an application or help desk. Another key reason many people chose to switch to cash was the lack of transparency into how their funds were performing and what they actually owned.
The benefit of the Future Fund option in this case, is that there will be a single source of truth from which financial advisers are able to provide this type of advice. Rather than having to understand the differing investment approaches of multiple industry funds, most of which offer limited transparency, they will be able to advise based on a single, legislated investment approach.
Similarly, removing the temptation towards relative rather than absolute returns, would allow the Future Fund and every other fund for that matter, to focus on delivering risk-adjusted returns.