No super for you (updated)

With the end of the calendar year approaching and with the market still oscillating around its lows, super funds are scrambling to put a good light on their meagre returns. The news today for non-self managed funds was foreboding:

Research firm Chant West estimates that the average fund will have shrunk in value by around 2 per cent by the end of calendar 2011.

By contrast in 2008, funds lost an average of 21.5 per cent, according to Chant West data.

Chant West investment research manager Mano Mohankumar said that even after a 15.1 per cent rise in 2009 and 4.7 per cent return in 2010, many funds “still have some ground to make up”.

The above data relates to a study of so-called “balanced” super funds, which comprise approx. 60% in equities, and are the default option for the majority of Australian superannuation members.

The estimates also conclude that retail funds lost 2.9% in 2011, as opposed to their industry (i.e employer/union based) brethren, which only lost 0.6% for the calender year.

This comes on the back of the September data released by competitor SuperRatings, which I covered late last month, now available here for the October returns, with the median balanced fund showing a 2.2% loss for the financial year to October.

This is inevitable, over the short term and long term, when you allocate too much of your savings to a volatile secondary asset market. As I’ve shown before, the average super fund has far too large an allocation to “growth” assets:

This is best highlighted by an MB commenter who said:

Advisors recommending buy and hold are happy to take fees while your savings evaporate. The Australian superannuation industry is a paradise for parasites and needs major overhaul.

www.twitter.com/ThePrinceMB

Update: I indeed had the inspiration for my other article on super, highlighting the possible, however improbable risk of confiscation of super by government, after reading the Barnaby is Right blog from earlier this year. This has obviously stuck with me and I did use that post title yesterday as pointed out at his blog today! Credit where credit is due, as always, if a little late.

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Comments

  1. Prince, any thoughts on the implications of this? In the long term basically not enough super for those who need it, ie bigger pension load, more taxes on a diminishing tax base? Most long-term forecasts assume self-sufficient retirees in the main. This is a train wreck with a 20 year time horizon.

    • Beyond my professional disgust with the returns of these “managers”, there are many implications, some of which I’ve covered here. A quick talk with relatives over the Xmas break so far has confirmed my fears that there is a surfeit of savings out there.

      My worry is they turn to the other secondary asset class ripe for further speculation – property. I’ll be doing some more work on super over the break Jackson. Suffice to say the assumptions of 6% to 8% a year are grossly over optimistic, when 3% per annum for the last 10 years has been the norm.

      I hate to see what the average will be over the coming decade given we are now in a secular bear market.

      • It may be that they don’t have the capacity to turn to property as an “investment”. I think it more likely they will be looking for liquidity, and many will start to list their investment properties, hastening the downward price spiral.
        It could be of necessity, rather than choice.
        The populace are spooked. Even the MSM is talking property down now. It’s the new black.

        • I think most BBers with investment properties won’t be so quick to list – not wanting to crystallise paper losses. I’d say houses would start to come on the market in 2 – 3 years time if the secular bear continues and cash impact starts to bite hard, along with increasing numbers of BBers moving to retirement.

  2. At a work Xmas party recently and I asked a few people about their super and how it’s done over the past few years (I recently changed my portfolio to a fairly basic Barbell like you have recommended). The answer in every case was basically a blank look.

    Most of them didn’t know how much they roughly had in super and they certainly didn’t know what kind of returns they had been getting. One guy said he doesn’t even open the super letters he gets, he just chucks them in the filing cabinet.

    When asked why it was basically a combination of “don’t care” (because they never see the money) and “too much effort to get involved/change my options”. They’re happy to let some fund manager get a nice slice of their savings without even knowing.

    Pretty amazing stuff really.

    • And I work for an engineering company with (presumably) smart and business-savvy colleagues who mostly have investments of their own from their discretionary income.

      I think because it’s mandatory employer contributions and that they don’t ever see the money (until it’s too late) that creates this apathy.

      • Mining BoganMEMBER

        I have said this before somewhere. Still stuns me.

        My fellow bogans are changing theirs to high risk mode. Think it is time to make a motza.

        So many people leave the mines with nothing. Such a waste.

        • Wow I didn’t talk to anyone that was that bullish, but people don’t seem to realise that it is supposed to be their fallback for their retirement.

          I’m quite young so I’m glad I got a reality check with TP’s articles now rather than later otherwise I very well could’ve been just like the rest.

          My only concern now is future potential for Government intervention in superannuation, screwing it up even more.

        • Well it’s money you never actually ‘see’, so I don’t think it really feels like your own money. Also you can’t access till retirement, nor do you have full control of how it can be used or invested, and most people end up with multiple accounts due to the creation of a new one with each new employer – would be better if the default setting was just one account for each person – so I think it’s no wonder so many don’t take ownership, and why it’s been a feeding frenzy for the sharks in the industry.

  3. “Advisors recommending buy and hold are happy to take fees while your savings evaporate. The Australian superannuation industry is a paradise for parasites and needs major overhaul”

    The real problem is advisers advocating Buy and Hold for clients who are basically retired, semi-retired, or about to retire, 55-60+. I’d have zero problems recommending a 40 year old to buy and hold in super today if their retirement age is 65.

    Buy and Hold is not “dead.” It’s only dead for baby boomers.

    Similarly to mining bogans bogan friends i would have no problem telling them to ramp up their risk at this time provided they do not touch their capital. It’s still a better option than a 70K ute, with a further 40K thrown in to mod the engine and get a bose sound system, jet skis, and $500 nights out on the town.

    • So you would advocate a savings portfolio that is volatile then?

      What happens if the market is in the toilet when you approach retirement age? You just take your 1million that could’ve been 1.5million?

      Do you trust fund managers to beat the ASX?

      I just don’t understand… your savings are supposed to be a fallback position, not an open position at the casino.

      • So you would advocate a savings portfolio that is volatile then?

        Volatility implies increased risk, thus increased reward. Longer term holders can be better placed to afford this risk.

        What happens if the market is in the toilet when you approach retirement age? You just take your 1million that could’ve been 1.5million?

        What if you only received $1.5 million instead of $3 million? No one has perfect foresight, that is what portfolios are compensating for.

        Do you trust fund managers to beat the ASX?

        No, but are you suggesting by this benchmark?

        <i?I just don’t understand… your savings are supposed to be a fallback position, not an open position at the casino.

        Equity holdings are a form of savings.

        • “Equity holdings are a form of savings.”

          If you are managing them and understand the risks, sure.

          But giving your money to some dupe who gets paid if he wins or loses would have more risk and less reward.

          • In the long term equities are safer than cash deposits or bonds. History has proven this over and over. In a time of deflation or inflation equties are still king.

        • my back testing using data since 1985 and my real life experience since 2008 has convinced me that

          i) higher risk does not mean higher returns (it just means higher risk)
          and
          ii) I can get higher returns with lower risk. (which means I can sleep at night)

          and No I do not trust my fund managers to look after me. I actively switch my super between 100% share fund and 100% cash.

    • Just to also add to my last questions, do you have no issues with fund managers still taking home large pay packets even when they perform poorly with your money?

    • JC, the problem with this is simple – at what age do you tell them to make the switch? 42? 56? 47? That’s what started me on this.

      If you run the numbers, the answer is simple – as soon as you are old enough to get paid to work, ie 15 years old.

      Prince’s idea below is so simple it’s ridiculous, but will lead to far less burden on the taxpayer in the long run.

      • Why a singular switch? Why not just gradually increase your exposure to income assets – maybe every year you could do a rebalance? Or every five years or whatever term you think is appropriate?

        I don’t quite see why not having a definitive answer on when to rebalance means that you can’t even consider the idea.

        • Fair enough point AB. What I’ve seen is people getting pressured to keep all their dollars in ‘growth’ so as not to ‘crystallise losses’ in the current environment. People being people, they will jump (if at all) based on a whim, not always for the better.

          So do you jump after the 5 best years ever in the stock market? No way, you’d be considered a nutcase. So you wait for the GFC to hit, then you keep it in ‘growth’ to try to claw back to where you were 5 years previously.

          My basic problem is what Jason has outlined, where the majority either doesn’t know or doesn’t care, which in the long run means a bigger tax burden on a diminishing tax base. It should be so much easier…

          • “What I’ve seen is people getting pressured to keep all their dollars in ‘growth’ so as not to ‘crystallise losses’ in the current environment. People being people, they will jump (if at all) based on a whim, not always for the better.”

            Yeah, agreed. What I’d like to see is something like the Vanguard Retirement funds in the US (I haven’t looked at their actual asset allocation but I like the concept) where you invest in a fund based on your target retirement date and the fund does all the rebalancing automatically for you. Vanguard are also usually very good at keeping fees and costs to a minimum.

    • Ridiculously simple?

      I prefer super is used for current investment (e.g infrastructure, research, development, business startup, education) than speculating.

      The very notion of retirement is outdated IMO. Superannuation should become a lifelong savings account – attaching it to the TFN makes sense, since you are stuck with that for life.

      • I prefer super is used for current investment (e.g infrastructure, research, development, business startup, education) than speculating.

        Then who makes the investment decision?

        The notion of superannuation retirement savings was to quarantine savings (investment) until the preservation age, enforcing forgone consumption.

        The idea it has been linked to individuals has more to do with more in, more out, rather than equal income streams.

        Under the latter method descrobed, investing in infrastructure, research, well technically that is government investment in infrastructure and the CSIRO, that would aid increased cash flows back into consolidated revenue.

        Now with what you propose, the government may as well run a unit trust that everyone adds their SGC to. This trust builds up infrastructure and research, puts tolls and IP/royalities to it and pays out distributions.

        The private sector really doesn’t have the foresight to run that long term.

        • Then who makes the investment decision?

          Good question. That used to be the purview of investment bankers who would allocate capital (savings) for prudent, if low and boring returns from a variety of value adding investments, usually at risk to their own capital and reputation.

          Instead they now buy third floor (h/t Sell on News weekend piece) derivatives off each other and they are neither risking their reputation nor their own capital.

          • Exactly, the IBs of old used to have to sell themselves and sell their judgement to get clients. Now you’ve got this massive enforced pool of money coming from people who would normally shop around IF THEY WANTED to invest with an IB. The result is lazy fund managers, and even lazier clients.

            With compulsory super in the current scheme, most people stick with the default option their company has, they don’t see the money as “foregone spendings” or “lifelong savings”.

            If they put it all in the high risk option (or the growth option) and lose it all, hell its not their problem that money was never in their pocket anyway, was it? And hell, she’ll be right, the guvmint will cover em’ anyway right?

            And now the government is trying to jump in and put more regulation on SMSF to protect an industry (industry managed super funds) that they themselves created.

      • Prince, I wasn’t having a crack, there is elegance in simplicity. Calling it your “retirement savings” account might be a good start (or twilight savings?), at least to get people to understand it’s purpose.

  4. Advice on Super, the blind leading the blind?
    The main issue I have is planners selling super as a product, instead of just a tax structure. If planners were forced to tell clients super is just a legislated tax structure and if they run their own fund they can basically leave their money in an ing at call account, people might be a lot better off. Super = fat cats, but thats not describing the clients, just the advisers

  5. No surprise that compulsory super is looking a bit wobbly at the end of the credit boom.

    But Expecting people to engage with the super industry, the regs or asset mixes is simply dreaming.

    For most people a specific deposit only bank account until age 65 would be the simplest approach to saving for old age. Compulsory contribs could be put in that account. 6-7% compounding would produce a nice nest egg for most people.

    Naturally, this would require some tinkering with the current daft taxation of income and capital and less manipulation of interest rates.

    If the great brains of finance want to borrow and pick winners in stock market they can do so but let them take the risk with money they have borrowed and are at personal risk to repay when they make bad calls on orange juice futures and pork bellies.

    Milking the super cow has to stop but trying to turn everyone into diary farmers is not the solution

    • Pfh007 – an idea I had once was when you get your TFN – Tax File Number, the government also opened a MySuper Account – which is attached directly to your TFN. That way it travels with you at all times – you just quote your TFN to your employer, and he already knows where to put your super contributions.

      The account would by default go to either government bonds or a nominated savings account/term deposit. You would have to APPLY to remove funds to use for other investments.

      This would swiftly cut the legs out of the funds industry and make them actually work for their money. It would also bring super to what it should be – a SAVINGS account. Not a brokerage account.

      • I like the sound of that!

        I suspect a lot more people will as time goes on and they realise how much of the reward they should be getting for the risk they are actually taking is being creamed off.

        Boom returns cover a lot of dead bodies.

        The difficulty is rebalancing tax incentives away from a debt fueled economy without inducing a mass hysteria campaign by the credit industry.

        • “The difficulty is rebalancing tax incentives away from a debt fueled economy without inducing a mass hysteria campaign by the credit industry.”

          Yep. I’d be happy to see default super payments go to the banks ONLY if we also see regulation or tax incentives to discourage them lending it for housing. Otherwise we’re just doubling-down on our fascination with borrowing from the future and selling houses to each other.

      • Prince, + 1 on that sort of idea. Make the default setting a single securely invested account.

        It’s totally arse about to the current system where you have to go out of your way to firstly consolidate your super, then put it into a secure low risk investment.

  6. A fund with 60% equities isn’t a balanced fund. Either is a fund with 40% equities IMO. When is the super/investmnent management industry going to change its defenitions to reflect reality.

    Also, try getting a handle on what international fixed interest your super fund invests in. My super fund has an international fixed interest exposure of 17%.

  7. I was forced into a wrap account when i moved back a few years ago. Hated the whole concept of paying some clownish firm +1% to only be able to buy the market. Limited products advised on by even more limited advisers.

    So i set up my SMSF and have done quite nicely, by having the freedom to use all products listed on the ASX, from stocks to futures, options, minis, etfs etc.

    I’m lucky to have worked in IB so i know just how leech-like the industry is, but it’s the staggeringly low quality of advice given out by managers, with every bit of “advice” focussing on the tax implications rather than the returns, than did my head in.

    Yes, it’s a bit difficult deciding when/how to invest, but it’s supposed to be! If it wasn’t excellent blogs like MB, Zero etc wouldn’t exist (and i’d have a very busy butler getting me drinks)…

  8. My employer forces you to put money into the “company” superannuation fund – and they lure you by offering an extra 3%.

    Therefore you get no choice as to which fund you go with. My previous employer was the same.

    A lot of companies offer ‘extra’ contributions, but only if you put it into the ‘company fund’.