The trouble with Super

After my article on the fund management industry, I’ve received many requests from regular MacroBusiness readers for an in-depth analysis of superannuation.

In my former career as a financial planner and portfolio manager, I found myself almost exclusively specialising in superannuation, particularly asset allocation. This was mainly by design as the majority of clients within the financial planning industry are superannuation based, for a variety of reasons.

First, there are huge tax advantages, secondly, its unreasonably confusing, thirdly the industry is set up to “capture” and skew wealth assets to super, and finally most Australians are so apathetic about it that they don’t care (or don’t know) what a planner (and everyone along the chain) is charging them to sort it out.

Thus, there is an opportunity to provide MacroBusiness readers with a better overview – filtered through the experiences of someone from the industry – and a different analysis of superannuation in Australia from the one presented by the mainstream media and financial press.

The problem is, where to start? It’s literally a trillion dollar topic with wide ranging areas of discussion that impact completely different investors, from Baby Boomers to Gen Y to high-net worth to mortgagees. From exploring the regulatory risk and asset allocation problems to taxation implications and hedging possibilities, superannuation is indeed a “super” topic.

I started writing some outlines, going over my research notes and noting additional requests and suggestions from regular readers and realised this couldn’t be done in a brief manner.

After consideration, I’ve decided to create a series of articles, published weekly/fortnightly. Here is the tentative list (not necessarily published in that order):

  • Super for Gen Y and Gen X
  • Legislative and Regulatory Risk
  • Types of Super (e.g industry/retail/government/DIY)
  • Insurance in Super
  • Hedging and Risk Management
  • Security Assets
  • The Opportunity Cost and Inflexibility of Super
  • How to pay less (or zero) Tax in Super
  • Funny Assets in Super
  • Trading in Super
  • Estate Planning – who gets your Super?
  • Why consider Property in Super?
  • Super Strategies
  • The Personal Sovereign Wealth Fund

This is a passionate subject for me as I have strong views that what is recommended to the majority of Australians is either incorrect, or incomplete, particularly risk management. I don’t pretend to know everything about superannuation, so I will be leaning on some other professionals to help in certain areas, and that includes feedback from readers, which is always welcome.

Disclosure: The author is a Director of a private investment company (Empire Investing). The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Comments

    • AlanR

      I tell my clients that they treat the running of a SMSF with the utmost respect. It is their money and their retirement and should never be abused.

      Trust no one.

      Ensure that you maintain all documentation and maintain a day per page ‘diary’ solely for your superfund.

      These ‘jottings’ can be taken and formalised into minutes at a later stage. It is a brilliant resource when end of financial year approaches.

      Ensure that you jot down, even take photos and copy the advice for your file. Too much information is not a bad thing. If the ATO audits, they always have a bad attitude when their is less documentation. More the merrier to keep them happy and confirm reasons that certain investments made and as to where the money went.

      If in doubt, then seek professional advice. If your accountant cannot give you the time of day on this, find one that can.

      The ATO has a sufficient information to glean on their website for starters.

      http://www.ato.gov.au/superfunds/pathway.aspx?sid=42&pc=001/149/030&mfp=001/149&mnu=49150#001_149_030

      Read that then do some more reading.

      Knowledge is a wonderful thing.

      • Whacked or Prince,

        “Trust no one.” – agreed.

        Quick question – what if you were to own physical gold and silver as a major part of your superannuation portfolio and it was located in a safety deposit box – does the ATO still need to see it?

        • The Nod

          Have a client with a few gold bars locked in a safe. Perth Mint also available… very few ‘mint’ storage systems around.

          So you have it in a safety deposit box.

          Speak to your accountant and / or auditor as to whether he will accept the following set of rules.

          Hope the AU is with the receipt on purchase?

          First get a certified copy of the receipt. Keep in a separate place.

          Ensure that the box is in the name of the Trustee and get a Bare Deed of Trust signed (basically a piece of paper confirming that the ignots are held by the Trustee for the beneficiaries).
          All receipts should be in the correct format.

          If more than one beneficiary, change the rules at the Bank, so that the box HAS to be accessed by both beneficiaries.

          This is hard, then get them to confirm in writing. Keep with the certified copy of the receipt of purchase and all other correspondence in regard to the bars.

          Buy a digital camera.

          Speak to a friend, a recognised third party who is a JP/Doctor or a Chemist or another Accountant.

          Each year attend the Bank with the third party, take the contents from the box and place on a velvet black fabric. Take a digital photo (with the date) and have the JP/Chemist/Doctor sign an acknowledgement (pre-prepared) stating the number of bars and a copy of the receipt, have it dated. Attach the photo at a later date.

          Keep in the file.

          Cumbersome method but only way I was able to convince the auditor that the bars were present.

          He was not happy over the fact I did not have any insurance … relied on an opaque letter from the Bank Manager.

          Now please note .. I get GREAT satisfaction in attending the vault and removing the AU. It actually FEELS good…. I even gently rub a clothe around the bars to remove fingerprints… I think I have the fever!

        • Why hold gold when you can hold gold miners. My personal view is that we will see gold at USD 2000 or more in a year or two. So why not buy gold miners whose current production costs are currently 2-300 dollars less than the current gold price (in USD) If gold goes to USD 2000 the leverage that you will get from owning these marginal producers will far outweigh any appreciation in the cash value of gold bullion – that is provided the AUD ain’t buying 2 USD by then of course 🙂

      • Big trick question.

        Short answer: let me get back to you on that one – I’ll be covering PM investment/holding in my “Security Assets” article.

        😀

    • Will be one of the major articles Alan. SMSF/DIY super is the best option for almost anyone (except a public servant or defence personnel who are banned from using it….), for a variety of reasons, control first and foremost the most important.

      Whacked is right – running your own super fund is not for the faint hearted. Its definitely NOT a hobby, it needs to be approached in a business like manner.

      Having said that, its relatively easy to manage if you get your systems correct, and I will be going over that.

  1. I look forward to these articles. I’m also quite passionate about super and risk management so i’m always keen to see the views of other professionals.

  2. Great news.

    Super is something I have only really started paying attention to over the last few years. Having been a IT contractor for many years I ended up with super all over the place. I finally got it all in one bucket and the GFC hit and my super (like many peoples) took a real hit while in a default (balanced growth) portfolio. Really put me back a few years.

    I will be reading with keen interest. While I know I am on the simply and bottom end of the scale I do hope your articles will give me some insight into how to play the game with some smarts.

  3. Wasted Opportunities

    Sounds great Prince. If possible, please try and differentiate areas less relevant for people further from retirement, or where we might benefit from different strategies to those closer to retirement.

    I seem to remember you or others suggesting ‘growth’ options, but they don’t seem particularly appealing in the current macro climate.

    • Big PHAT disclaimer on this one.

      Taxation is the single biggest issue and I hope the Prince can cover that side of it for you… basically

      Depending on what age you are, dictates the strategies.

      Me personally would say if under 50 and a family then financially you WILL be constrained. The need for liquidity is paramount to live and to educate your children.

      If employed just rely on the employers 9% contribution. If co contributions for your partner can be worked through at tax time, then do so only if you can afford it, as Government will match. Be patient, as time is on your side.

      Self employed people should look at super as a legal tax deduction tool.

      After 50 look at your cash-flow/commitments and children. Salary sacrifice and if both working take maximum advantage of this situation. Self employed different scenario, which requires tax timing methods to maximise benefits.

      Very very hard for anyone to cover all of the nuances and I hope that The Prince can.

    • Wasted – one of the biggest “troubles” with super is the fact its skewed completely to focus on retirement, when the actual concept of retirement is outdated and the focus is off wealth accumulation and protection outside super, particularly for younger people.

      There are quite a few growth options and almost all of them are nearly impossible to achieve in non-SMSF super….so I will be going over those.

  4. How about a last chapter on the ethics of super:

    The state forcing workers to save.
    The state changing when workers can access savings.
    Why super? are taxes too high?
    Why ‘subsidise’ the finance industry via compulsory saving?
    Reforming the aged pension, reset to life expectancy.

    The usual looney-libertarian questions…

    • Well there are some issues here you clearly aren’t thinking about. Particularly in regards to the demands of the state upon the worker.

      Considering the worker can and does place demands on the state, the state should be entitled to have a say in terms. Such as;

      “The state forcing workers to save.”

      The worker at the moment can opt not to save, then place a demand upon the state for income support. This is a reasonably fair squaring of the ledger.

      “The state changing when workers can access savings.”

      The purpose of these enforced savings is to provide enough income when work ceases. Access has to be adjusted in correlation to life expectency. It is management of longetivity isk, other th worker goes and demands income support from the state.

      “Why super? are taxes too high?”

      No, quarantining is required because the worker will game the system, knowing that failure will be backstopped by an income suport system.

      “Why ‘subsidise’ the finance industry via compulsory saving?”

      It is in the hands of the finance industry because the perception is the private sector will perform this more efficiently that the government.

      “Reforming the aged pension, reset to life expectancy.”

      You mean the worker retracting the level of demands it places on the state ?!? Boganomics shows it won’t happen in this country.

  5. Bring it on Prince! For some reason I’m a little sceptical about the information the corporate super machine provides…

  6. Sandgroper Sceptic

    Looking forward to this. In my experience the industry providers hate this sort of thing as it might threaten “their rivers of gold.”

    Aside from liquidity, under 50s need to be aware of the sheer legislative risk there is little point in pumping money if the rules change and you cannot start withdrawing until you are 95. Note I regard super as a decent tax effective vehicle but the changes to this area in the last 1-2 decades have been massive and ongoing.

  7. As a former FP in the industry since 1985 and seeing the changes over the years it is now an entirely different industry….. but largely the problems of remuneration and the clips taken by the “food chain” have nearly always meant that the Clients were the bunny’s. There were in my time very few Planners that were providing anything more than a sales pitch and product flogging…. particularly if they came from the “life” industry… churning was rife .
    The few of us that came from a Accounting background always looked at a fee for service cost basis even though the fee was calculated on FUA on a % basis.. and the profession of FP was really only getting off the ground in the late 90’s as the education of FP’s from “product floggers” to all round advice became the focus of FP….. there are however those that even today are still not truly doing the work of FP’s although this is now much better with the Graduates coming through. However the transparency issues for those working for the large institutions are still a problem….. my experience is that a true FP is selling trust…. and unfortunately too many FP’s are still abusing that trust.

    There are still products out in the market that are feel good products that guarantee levels in markets etc… a con in my view which prey on clients insecurities… and are a betrayal of the trust placed in the adviser…. if your client is insecure then maybe the strategy needs to be reviewed to reflect their tolerance to risk
    cheers

    Macrobear

    • I’m currently in FP, and I really empathise with your sentiments.

      The pond scum do tend to those that originate from the “life” industry.

      Little to no entry requirements in terms of vocational or tertiary education and remuneration based on volume of product, thus the bias towards selling and churning.

      Those from an accounting background, where accounting itself, while I admit far from flawless, does have high(er) educational requirements, and vocational bodies steeped in tradition, ethics and conduct.

      Two changes I see can make a big change. The proposed changes, I think from the Ripoll review, in terms of increased educational requirements for practitioners.

      It should rationalise the industry.

      AFSL for real estate agents.

      A major problem here is that this still is a major avenue for investment, and while RE agents can make all sort of claims, game theory explains how Financial Planners will sink to their levels.

    • I agree that the industry is slowly getting better but only in some respects, sure, the new graduates have a greater focus on client service, honesty etc etc. but ultimately they are still ‘trained’ by the same machine, and the vast majority of investors will still walk away with the same products and strategies that they always have, they will just be delivered to them with greater transparency and a bigger smile…….. not quite my definition of progress but hey, what can you do.
      I have been a keen follower (and commenter) of anyone willing to challenge the status quo in this industry, so I’m very much looking forward to this series by The Prince (especially investment risk management, boy do we get that wrong),
      In fact I will hazard a guess that putting together the final collection of the Princes work along with similar no fuss examinations of financial planning areas by industry professionals would result a backyard education class capable of rivalling the vast majority f formal financial planning education out there!

  8. A lot of financial planners and tax agents are reliying on older models and strategies and fail to think of the problems that the more recent changes have brought in. As an example- Whacked’s point on waiting till after 50 to make significant conts will be considerably constrained by the contribution caps- which will start to encourage (in the Government’s eyes) a lifetime strategy. Waiting until 50 and then trying to dump a large amount in doesn’t work so well when there are $25k and $150k annual caps.(and the “bring forward $450k)
    I have also seen a tax advisor that still considers significant recontribution strategies an advantage- much of the advantage disappeared with the introduction of “better/simpler” super.

    • Kylie,

      I did put down a big phat disclaimer.

      I was basically speaking from experience here. On a wage / salary, mortgage, 3 kids, education, extra curricular activities, all of the available surplus capital was utilised to ensure that the my family lived life, enjoyed education and enjoyed one another.

      It costs far more than one realises.

      At the end of the day different philosophies will demand different wants and needs.

      Each to their own.

      Hence phat disclaimers because I hate getting rear ended over generalised comments!

      • Not saying that it isn’t a valid strategy- but it is not for everyone- and I think that is where certain fin planning firms and accountants run into trouble. For me, that stategy isn’t going to work- but I dumped money into super in my 20s and was able to know that i averaged out my non super years with early contributions and the returns on htem- I will still be funding teens in my 50s- not funneling money into super. And the first planner who makes the mistake of suggesting that as personal advice (not as a general or theoretical) is going to be asked to explain why they aren’t considering my circumstances.
        I used to (many years ago) work in benefits and noticed that all of the clients of a particular planning agency all transferred their money to the same (retail ) income stream. No one else did. They all used exactly the same strategies (take out what was then post-83 monies, recontribute and then withdraw a combination of pre and undeducted to nil out their taxes.) It was a reasonable strategy but it didn’t always add value.
        The planning agency are still at their commission seeking ways, they are now in strife with another fund I work with for their recomendations.

  9. Superannuation is simply a Government scheme to create capital through forced saving. For most Australians, it will not be enough to pay for a comfortable retirement entirely, so some additional Government support will be needed.

    The biggest issue I have with superannuation is the performance of the super fund management. A manager that cannot perform above the index should not be in the business, however there are plenty of those. After over 10 years of paying into super, my term deposit account has more money than my super!!

    If storage is not such an issue, I would invest it all in Helium. It an essential non-renewable resource, and in 30 years time it’ll be worth a fortune.

    • Ronin .. in reality it is a tax, which is taxed!

      Just that they separate it from the general pool of tax and allow others to hold, invest and spend it on your behalf. It spools a whole industry … and you are paying for it!

      • It isn’t a tax at all. This is a ridiculous business industry claim.

        It is a remuneration component where access is deferred. The premium given to this deferral is a reduction in tax.

        • “Superannuation Guarantee (SG) Levy” as introduced.

          Yes LEVY against the employer. Of course it is a business industry claim because the business industry has to pay it!!

          “The Superannuation Guarantee (SG), introduced in 1992, provides for a percentage of an eligible employee’s remuneration to be directed into a superannuation fund by means of a compulsory employer contribution. The motivation for the SG was twofold:
          to provide a mechanism through which employer contributions could be increased
          gradually, consistent with the Government’s retirement income policy objectives and the economy’s capacity to pay; and to extend superannuation coverage to a larger proportion of the population. The SG rate was phased up from 3 per cent to 9 per cent between 1992 and 2002. Superannuation coverage has broadened to about 90 per cent
          of employees under the Superannuation Guarantee. Although the rate of taxation is higher today than before the first suite of reforms were introduced in 1983,
          superannuation is still a highly concessional savings vehicle… ”

          P18

          When you finish accept the fact that this ‘levy’ is now included in the Payroll Tax calculations. Business industry claim? Fact!!

  10. I’m looking forward to your next piece on asset allocation. My impression is that the average Australian super fund has way too high an allocation to domestic stocks…

    • RA, that will be the first one of the queue – actually Chris Joye has written a very good post about this (although I disagree with his classical training vz. CAPM confusing volatility with risk), he has some good points.

      The so-called balanced option (which is usually the default) in super is not balanced at all – its high risk, for a number of reasons, chief amongst them is WAY too high allocation to Aussie stocks (and then in the wrong stocks to boot)

      • Cheers. Look forward to that, and I’ll check out the Chris Joye post in the meantime. Regarding the confusion of volatility with risk, have been doodling away at a post on that for ages now, perhaps it will be done by the time i retire…

      • Since the underlying purpose of Superannuation is to reduce the capital need of Australian businesses, it logically follows that most of it should be invested in Aussie stocks.

        • Erhhh, bad analogy.

          Super funds pretty much buy on the secondary market, which do not provide any extra capital for companies at all.

          It boosts executive remuneration sure, however with these fort of cash flows placing upward pressure on the underlying share price, it creatings pressure on the cost of extra capital raising with new share issuances.

          This all goes back to the improper pricing of cash via inflation targetting.

          If cash was priced correctly, then a lot more of super fund monies would(should) be deposited in cash products.

        • Well said Rusty – I agree. It is pretty clear that the cost of capital signals are not clear at all.

          If they were, we would have a much more mature debt and private equity market.

          Again, this is both a structural/monetary regulation problem and an asset allocation problem. (the former I won’t touch on – I’ll just say that RBA Inflation Targeting has been a complete and abject failure. Interest rates have always been too low and thus we have ridiculous secondary asset market bubbles as a result)

      • Interesting notion Ronin, but a tiny problem, which I’ll go into more detail in the article

        The “investment in Aussie stocks” goes almost wholly into the secondary market, not into a primary market, i.e on investment or IPO’s or private equity raisings, or into corporate debt issuance (the pathetic state of corporate debt in Australia is clear evidence of this)

        • Prince, corporate bonds are pathetic… pity etrade did not due the NZ bond market.

        • Money can enter the ‘system’ when a company does capital raising. More importantly, how much a company can borrow from the banks depend almost exclusively on their share price. It would be more efficient if the superfunds simply lend the business the money, but the Aussie banks have successfully prevented a bond market from developing in Australia via cumbersome government regulations.

          • Dave From Pakenham

            Ronin it is completely in reverse, it is the superannuation infatuation and equity based financial culture here that has prevented the bond market and given rise to the banking system you are familiar with here in australia not the other way around

        • Dave From Pakenham

          Hi Prince,
          I hope you do this topic justice. The reason for this blog and the compuction we all feel to contribute is the result of australia’s super annuation system it is the single most important factor affecting the australian economy, even society, without the mind numbing stupidity of the current system, we would never heard from DE or UE or The Lorax because there would be no housing bubble.

      • Bubblelicious

        Will be interesting to see the opinion on this. As someone within the industry, this is at the crux of some of the issues that need to be addressed.

        More broadly is the issue that the traditional balanced option caters for all walks of life, whether you are aged 25 or 55, have $20,000 or $200,000.

        Ultimately, personal circumstances matter a lot and depending on where you are, the shape of the distribution of returns to which you’re exposed can matter a hell of a lot.

  11. Yes, I’m looking to forward to this, as a lot of others are as well.

    One of the key activities setting up an SMSF is the establishment of the formal Investment Strategy. Disappointingly, most off-the-shelf strategies only really discussed “asset allocation percentages” as the strategy – like “80% stocks, 20% cash” was a sufficient well defined strategy (not).

    Perhaps “The Investment Strategy” could be part of the DIY/SMSF chapter?

  12. Great timing

    Looking at defensive super positions at the moment.Try and minimise the 2008 experience.
    The trouble is QE3.
    Super with a trailing stop loss…

    • Plenty of hedging options available, the easiest is called “Cash”.

      I would steer away from Fixed Interest “options” in any industry/retail fund – my investigations (which I will cover) show them to be EXTREMELY risky.

      Then there’s ETFs you can use to hedge against currency risk etc…

      More to follow – thanks everyone for comments so far, I will be incorporating some of these suggestions into the articles.

    • The Prince is so right.

      People do not realise that ‘cash’ is a position.

      Provided that it is invested correctly there is no reason that a reasonable return above the inflation rate cannot be returned.

      No heartache

      No stress

      No problems

      • How do you “invest” cash and get a return above the “inflation rate” when the RBA is printing at about 9 % year on year. I’m all ears 🙂

        • Inflation rate is different to the amount of money being printed.

          Currently we are in a deflationary spiral in certain assets and inflation in commodities.

          Good luck on getting 10% ROI with low risk. Remember that the Trustees Act rules.

          • “Inflation rate is different to the amount of money being printed.”

            Be careful trying to define inflation.. The historical and original definition of inflation was exactly “the amount of new money”.

            Nowadays, its more common usage is “rising CPI”.

            But, plenty of people still use the original definition – which leads to a lot of confusion about inflation.

            To mix the two definitions leads to “inflation causes inflation”.

        • The Australian CPI is a deeply flawed measure that depends on old data.

          What Zippo refers to is the printing of money. Money supply per se` covers a myriad of issues. I am making a presumption (as no references provided) that Zippo is talking about M1.

          M1 is an irrelevant statistic.

          M3 is more of a statistic to gauge broad money supply

          http://www.rba.gov.au/statistics/frequency/fin-agg/2006/fin-agg-0406-expl-note.html

          For inflation to emerge the banking system needs to create additional deposits (made up money).

          It is these deposits that expand the money supply and create inflation, not borrowings.

          Now if the money supply is actually contracting. (The Reserve’s monetary aggregates are always a couple of months behind.) This therefore could be termed deflation!

          So there you have it.. A good piece on Austrian Money Supply and more indepth discussion is provided here, Mish Shedlock’s blog site

          http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html

  13. Looking forward to this too. I’ve found that a lot of information around on “wealth creation” seems to be have a particular slant depending on the vested interests of the author. It will be very interesting to get the perspective of a former “insider”.

  14. As a self funded [BB] retiree I look forward to your prognostications.

    I look even forwarder to Gen XYZ fiz!

  15. Seeing you are talking about ‘The Trouble with Super’ thought that I would give this link.

    It IS the trouble with super.

    “The super funds all blame the global financial crisis but Long disputes that (and so do I). This underperformance is a long-standing problem for those who analyse the data.

    Long reports on a 2003 paper from APRA that concluded that “(a)djusted for risk, the average return on the profit-motivated retail superannuation funds was negative. Many of these funds delivered performance inferior to risk-free investments such as Treasury notes”.”

    http://bilbo.economicoutlook.net/blog/?p=8740

    http://www.abc.net.au/news/stories/2010/03/09/2840155.htm?site=thedrum

  16. Would be interesting at some point in the series to hear what your thoughts are on the lifecycle, or “target date” retirement funds that are taking the US defined contribution market by storm at the moment.

    Depending on their architecture (and this varies quite a bit), I think they are probably a better approach than the static approach to asset allocation of Australian super funds.

    Having said that, in my view they are still far too risky (too much equity exposure throughout most of the glide path. )

  17. I hope that all these articles do not get “lost” in the overall site.

    Perhaps they will be better written on a dedicated or related blog of its own.

    I look forward to reading these articles, especially as I am an individual who has money locked in the Australian super system having worked 3 years in Australia, and now not allowed to take it out.

    I am trying to invest it wisely, with the hope that when I am 65 (or whatever age they make retirement in the future) I will still be able to take out my own money, or even that my kids will get it if I die (I don’t trust the government not to confiscate it at some point).

    • Hope you are getting this a reply- unless you were a permanent resident of AUstralia (or a citizen) the Aus government has your money. They have started confiscating the money of those who worked here on work visas- you can get it back from the ATO but they won’t give you interest and they hit you up for tax around the 35-45% range.
      It’s sold as a benefit to the funds (get rid of those pesky overseas members) but everyone knows that it is a revenue grab by the ATO