Who's managing the managers of our nest eggs?
Date: February 13 2003
It's all aboard the superannuation gravy train - except for the workers, writes Kenneth Davidson.
In 1986 the Hawke government had a problem: how to renege on its commitment to maintaining real wages and still keep the trade union movement within the Accord process.
The solution? Privatise pensions. Instead of a 3 per cent wage increase, workers were given a 3 per cent superannuation guarantee, which has since risen to 9 per cent of earnings.
The net result for most workers will be that their superannuation package at the end of their working lives will be large enough to ensure they will lose all or part of the age pension. In other words, the superannuation guarantee is a payroll tax that falls almost entirely on workers.
But this tax is different from most taxes: the workers have no say about how the superannuation guarantee tax is used. About a third goes into genuine savings, about half goes into a bloated capital market and the remainder goes into the pockets of those in the financial services industry who market and operate the superannuation funds.
According to John M. Legge in Dissent magazine last year, "tax farming" under the guise of the superannuation guarantee is not a new idea. It was used extensively in feudal society. Its malign effects today have been disguised until recently by the sharemarket bubble, which it helped finance. But the looming recession, and the collapse of the bubble, mean workers can now clearly see that the superannuation guarantee is a gravy train for the financial services that it created.
There is now about $500 billion tied up in superannuation funds and the 9 per cent superannuation guarantee adds a further $30 billion each year. The cost of managing these funds each year ranges from about 0.4 to 3 per cent of the value of the funds, with a weighted average cost of about 1 per cent.
On the assumption that the average fund enjoys a long-term return of 6 per cent, this means 20 per cent of the annual returns of the funds ends up in the pockets of the operators who manage, advise and market the funds.
This rake-off amounts to about $5 billion a year. By comparison, the Tax Office collects about $120 billion a year on running costs of about $2 billion a year.
According to Ian McAuley, who advises the Australian Consumers Association, this means an average employee with 45 years' unbroken service, whose 9 per cent superannuation guarantee has been invested in a fund with an inflation-adjusted return of 6 per cent, ends up with a with a gross accumulation on retirement of $507,000, of which $120,000 ends up with the fund managers and their advisers.
So what do the superannuants get for their substantial fees? Not much, based on this week's report by the ACA and the Australian Securities and Investments Commission. Their survey found that 51 per cent of the advice given to superannuants was rated borderline to very poor and only 2 per cent was rated very good.
There is a wide disparity in fund performance. Company and government funds operated on behalf of their employees, and industry (union) funds that until recently were closed, operate on expenses of about 0.4 per cent, compared to about 1.5 per cent for wholesale and retail funds, which have to compete for members.
Funds in the first group also tend to perform better than the wholesale and retail funds over the longer term.
The wholesale and retail funds perform more poorly and have higher costs because they are under pressure to perform well in the short term to gain and retain clients, and, unlike the company, government and industry funds, they have marketing expenses associated with winning new clients.
Competition between funds based on performance is simply an expensive "beauty contest". On the assumption that financial markets are not corrupt, and that information affecting share price is equally available, fund managers can't outperform the market over the long haul.
The information that will have the biggest impact on future share prices is that which is not known yet. In other words, it is a gamble, albeit one that requires more skill than buying a lottery ticket.
John Mayard Keynes, who was responsible for investments for Kings College, Cambridge, said in his 1938 report on the college's finances: "The management of stock exchange investment of any kind is a low pursuit, having little social value and partaking (at its best) of the nature of a game of skill, from which it is good that most members of society are free."
In a comment on the ASIC-ACA report to industry representatives, Ian McAuley pointed out that the industry is "structurally corrupt" in that, for the most part, the people who are advising superannuants are really "sellers" of financial products rather than "advisers".
The Howard Government obviously has given no real thought to the issue of national savings and retirement incomes apart from looking at regulations that will undermine the viability of industry funds by forcing them to compete for their members, thereby increasing their expenses.
The Government pretends to have a serious interest in increasing national savings. Yet there are more efficient, more equitable and more ethical ways to lift savings than through the superannuation guarantee - ways that would have the bonus of boosting the funds available for national infrastructure, which will contribute far more to national growth than gambling on the global share market.
Staff columnist Kenneth Davidson is co-editor of Dissent magazine. Email: dissentmagazine at ozemail.com.au