Labor admits superannuation is a Ponzi scheme (plus an apology)

Labor’s shadow Treasurer, Jim Chalmers, has penned a letter calling on the Reserve Bank of Australia (RBA) to provide a liquidity backstop for cash-strapped superannuation funds so that they can meet member’s redemption requests. Chalmers’ request has arisen following the Morrison Government’s announcement that it would permit Australians to access up to $20,000 in savings from their superannuation so that they can weather the coronavirus storm:

“Labor is committed to continuing to work with the government so that this scheme is a success, but we fear that the government’s decision to drastically expand the conditions for early release of superannuation could cause liquidity issues that threaten the integrity of our super system for all Australians if they are not addressed”… “While some self-managed super funds may have large cash holdings, many other funds do not have large cash holdings”… As millions of Australians lose their job or a portion of their income, super funds would be receiving less incoming cash and this could leave them having to sell equity holdings to pay for the scheme, they warn, saying a “wait and see approach” was not appropriate as funds need to act immediately.

Labor has tacitly admitted that Australia’s superannuation system is a giant Ponzi scheme whose “integrity” is reliant on ever growing fund inflows via the mandated 9.5% superannuation guarantee. Unless the amount of money coming in from new investors is enough to cover the redemptions of previous investors, Australia’s superannuation system will implode. This is because the level of one’s retirement income is dependent not just on the performance of the superannuation fund’s underlying investments, but also on whether they withdraw their savings while the “bubble” is still inflating with net inflows of new money. These ponzi dynamics help to explain why Labor so strongly supports lifting the superannuation guarantee to 12%, since this will ensure that net superannuation inflows continue to rise even as more baby boomers retire and withdraw their savings. Without the increase in the superannuation guarantee to 12%, fund outflows could exceed inflows, pulling money out of the system, deflating the bubble, and lowering everyone’s retirement nest eggs. 

Thankfully, the chair of the Financial System Inquiry, David Murray, has warned the Morrison Government against bailing out the superannuation industry, claiming it would open up a ‘moral hazard’ and encourage funds to misbehave and take excessive risks with members’ money:

“Were they [the RBA] to provide liquidity they create a moral hazard in super system for the future and therefore they would have to consider whether the terms are suitably tough,” Mr Murray told The Australian. “Where trustees accept as precedent that in certain circumstances they can have access to this support, that in turn would lead them to make risk management decisions which are likely to be counter to members’ interests,” he added…

Clearly, a business that is based upon the mandated flow of every member’s pay should not:

  1. refuse to give it back;
  2. refuse to keep the lion’s share in liquid assets; and/or
  3. run out of money.

The fact that we have arrived at this point is illustrative of both gross mismanagement and system failure. Moreover, if some funds have gotten over-leveraged or invested too much in illiquid assets, then they should bite the bullet, sell assets, crystallise losses and fess up to members who will then judge them on their performance. David Murray is 100% correct. Giving superannuation funds access to the RBA emergency liquidity support does not make sense and will encourage ongoing reckless behaviour. Superannuation funds are not systemically important institutions. They are merely investment funds, some of whom misread the business cycle and regulatory risk, and over-extended themselves to feed fat bonuses. Let market forces sort the wheat from the chaff and dictate where members place their money in the future.


Apology and clarification.

An early version of this post made reference to industry super fund, Hostplus, freezing member redemptions, as well as an article in the AFR about recent changes to Hostplus terms and conditions that may result in a freezing of member redemptions. 

The first assertion was factually wrong. Hostplus has not frozen any member redemptions. 

Moreover, Hostplus has contested the content of the original AFR story as well:

Media reports published earlier this morning concerning Hostplus are misinformed and contain a number of incorrect statements.

Hostplus recently updated its Product Disclosure Statements in accordance with our program. This ensures alignment and uniformity (where appropriate) between Hostplus’ core disclosure documents.

Hostplus confirms that no amendment to the governing rules of the product has been made.

Alongside other superannuation funds Hostplus’ Trust Deed prudently (like others) empowers its Trustee with a broad discretion to suspend or delay unit pricing in extraordinary situations to ensure equity, fairness and balance in investment pricing and transactions in the best interests of all members.

In Hostplus’ case, this trustee power is not new. It is not unique. It is not exceptional. As part of its recent update, Hostplus highlighted elements of the Fund’s long-standing governing rules and discretions as these relate to investment pricing and transactions.

These are challenging times for our members. Misinformed media speculation unnecessarily concerns our members and it is both regrettable and misplaced.

The Fund remains committed to supporting the Federal Government’s Policy to allow members to access up to a total of $20,000 from their superannuation accounts over the course of the current and next financial year, to assist them

through the current crisis and has ample liquidity available to support members undergoing financial hardship.

MB apologises to both Hostplus and readers for mischaracterising the issue. 

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. Well the whole global economy is 1 big fat Ponzi if you ask me. So this is hardly a surprise. Go long hard assets. Short fiat and Ponzi finance schemes.

      • OO is a roof over your head, a place to rest your weary legs after a hard day’s work. IPs are speculative, like any investment, especially as they are an integral part of the money expansion rort (credit boom). Of course OOs are not exempt from mark-to-market risk in all this, however, as long as you haven’t over-extended yourself that shouldn’t matter.

  2. Of course super is one big ponzi. The government will underwrite it though. Nothing to fear

    • Ponzi schemes as far as the eye can see.

      With the Fed now buying junk bonds you know the game is up. So much for capitalism and creative destruction. Now it’s socialism for the rich and communism for the rest

      • $$$ MR INFINITY $$$ QUANTITATIVE EASE ME

        Yes to many Kings and Queens not a enough surfs. Capitalism only works with war. Social democracy is here. Without War this is we’re we are.

        • Superannuation literally promotes war. It has to as long term growth is fundamental to pension funds. Old people send the young to war, old people retire and also govern. History says war or slavery are fundamental to achieving growth, modern slavery being Asian sweatshops with suicide nets.

          Capitalism mixed with socialism and changing to a new format that does not require growth is the next stage in our evolution. Elitism must also die and a new version of democracy created. Such as a democracy that does not allow anyone over 50 to stand for parliament or vote.

      • +1
        Beginning to lose count.

        I’m not blaming one government over another but between them they’ve had numerous Ponzi schemes spring up on their watch – through negligence or design, I don’t know.

        • Maybe it’s not always easy to see as it’s all Designed around exploiting our Greed factor. Also a hideous amount of gravy train for just kicking up a lot of dust to obscure. Easy supply of Usury, a good multichannel saturation Bernaysing to make it all “Sexy” & away it goes, just repackaged with fancier schemes & fancier words each time – Still Old as Babylon & we never learn, or are never allowed to for long…….

  3. when someone requests super to being moved to cash shouldn’t fund immediately sell assets hel in the name of that member or cancel a purchase of the same mix of assets?

    • The issue here is the difference between collective schemes and those that mange members’ money in individual accounts. Someone correct me if that’s wrong.

  4. It’s now time to look again at the Canadian Tax Free Savings Account and how this could be of benefit to compliment Australia’s Superannuation system.

    TFSA Explainer – – – > https://youtu.be/e3Iu1JrhaMY

    I think this is generally a good thing to introduce in Oz.
    Instead of changing the conditions of release we could create TFSA’s within our existing super accounts and permit the transfer of an initial deposit of $10k in the current financial year and another $10k in the next financial year taken from your existing super balance.

    This would achieve the same outcome as the LNP have proposed. Longer term it will create greater personal responsibility and financial literacy as individuals use the account to save for life events like the birth of children, education /retraining, divorce expenses etc.

    What do you think?

    • I seem to recall Singapore has something similar – contribute to ONE social security account in your name via PAYE and if you need ,say, unemployment support at some stage; first home deposit, you draw down on it; ditto higher education fees etc. and what you have left at the end is your superannuation balance. It encourages individuals to look at how they utilize their funds throughout life and make responsible decisions based on their view of the future.
      Regardless, it seems to be the way to go – We all already have an ATO number, so why not give us all One account to go with it and save via that mechanism? ( the bonus being the Government gets to use the funds directly for national building – hopefully!)

    • Mining BoganMEMBER

      Yes, have been interested in this for years are seeing Garth Turner continuously bang on about it. I’m not sure on how it can be rorted Australian style though.

  5. I suspect you will only be able to get your money if you can prove its going into property, either rent or mortgage (OO or IP)

  6. PlanetraderMEMBER

    David Murray

    CEO at CBA – moral hazard ok
    Chairman AMP – moral hazard not ok

    Please note past performance is no indicator of future performance. Future outcomes not guaranteed.

  7. Murray probably realised many decades ago that “If I don’t do it, someone else will, so it may as well be me!”
    How many of us now look back on a life lived “according to the rules” and wish we had the same wisdom? The mantra of today seems to be “Whatever it takes, and you’ve only done something wrong if you get caught!”

  8. How good is Keating’s Australia.
    A private savings/ pension scheme which can’t be drawn down when people need it most, heavily gouged, invested in risky illiquid assets whose value also collapses when people need it most.
    Imagine if the 9% had of been paid as PAYG and earmarked for the states to spend on first class hospitals and public health and other infra whose required rate of return is the long term bond rate.
    Would we be a wealthier country? Would their be a liquidity issue? What would we be the breakup of work from home financial planners v health workers during a pandemic?

    • first class hospitals and public health and other infra whose required rate of return is the long term bond rate

      I thought the required rate of return from a hospital would be healthier people. What’s this about dollars?

  9. I find these two articles from Wolf Street interesting, It seems like many of the large Super funds are akin to open-end ETFs with large illiquid assets resulting in liquidity mismatch during times of redemption. As a financial industry outsider it these give a great insight into how the plumbing and mechanics of these complex instruments screw the little guy.

    “Run on the Fund”: The Big Risk of Bond Mutual Funds. What to Look For and What to Do
    https://wolfstreet.com/2019/10/28/first-mover-advantage-run-on-the-fund-liquidity-mismatch-big-risk-of-bond-loan-mutual-funds-what-smart-investors-do/

    Lockdown Hits UK Commercial Real Estate, Retail Landlords & Their Investors: Most Property Mutual Funds Suddenly “Gated”
    https://wolfstreet.com/2020/04/05/lockdown-hits-uk-commercial-real-estate-retail-landlords-their-investors-most-property-mutual-funds-suddenly-gated/

    Kid Dynamite also has an old suite of articles on liquidity issues with various ETFs. Not well structured as a blog, but with some in-depth reading and following his various posts you get to see his perspective as a trader who arbitraged retail ETFs for profits with mis-pricing.
    http://kiddynamitesworld.com/

  10. So why have these guys been taking fees?
    Aren’t we being forced to pay these “experts” because they are the best in the country at managing liquidity mismatch?

    • IMHO we should all be able to manage and invest our super however we like. I’d park it in the S&P500 index or similar and just set / forget until I was close to retirement and then start moving to cash say 5 years out..

        • SMSF right? For some reason I was told you need at least $200k in there to make it worth the hassle.

          • You SHOULD be able to do it in one of the funds with a direct option, but they limit international shares.
            At Aussie Super you can have 100% in an ASX 20 fund, yet you can only have 30% in Vanguard US Total Market.

  11. Even StevenMEMBER

    Hardly a balanced article I think, Leith. There are one or two superfunds that are having a liquidity issue due to unprecedented drawdown resulting from an unprecedented Government decision to allow people access to $20,000. I’d suggest that couldn’t have been readily anticipated. This doesn’t make it a ponzi scheme. And no, I don’t work for a superfund.

    My main concern is not illiquidity per se, but rather whether they have sufficiently accurate valuations around their unlisted asset exposures.

    And for the record I’d advocate replacing all superfunds with a single government run superfund ( a la Future Fund) because it is more efficient / less wasteful. But not because it’s a Ponzi. That’s absurd and an incorrect usage of ‘ponzi’.

    • it may not be a ponzi in textbook sense. However it is bad management. There shouldn’t be any reason why if the assets are managed well some members shouldn’t be able to withdraw 20% of their account. The funds liabilities aren’t fixed so it’s purely an asset allocation issue. So why are they taking fees?

  12. Well, looks like guys invested in the ponzi economy are getting worried and starting to talk about it being better to sacrifice lives than let the ponzi die.

    https://www.news.com.au/world/coronavirus/closures/coronavirus-australia-why-australias-lockdown-restrictions-could-last-for-months/news-story/9e3ef9a06401a3fd811ee8b88594e20d

    Downer is trying to couch it in disaster terms. These people are such aholes.

    “Former Australian foreign minister Alexander Downer summed up the growing debate earlier this week in a tweet: “We either save avoidable deaths & destroy society OR accept avoidable deaths & save society. The moral dilemma of our time.””

    You and your mates a bit too invested in the ponzi, Alex? Should have got out while you had the chance. These people would have fit right in with the whole ritual human sacrifice crowd in times gone past.

    • Mining BoganMEMBER

      “Should have got out while you had the chance. These people would have fit right in with the whole ritual human sacrifice crowd in times gone past.”

      Meh…the Downer family is still getting over the blackfella shooting ban. They take a while to catch up with the real world.

      • Part of me thinks (hopes) that this whole situation will really bring out these characters into the light and show them for who they are.

    • billygoatMEMBER

      Scomo “If we have to smash the economy to smash the vira$$ then we will” On live TV..as good as his word. #Imnotworriedaboutdata #imnotworriedaboutmysharona

  13. “some of whom misread the business cycle and regulatory risk, and over-extended themselves to feed fat bonuses”

    When you say “some”, I assume you mean nearly all of them?

  14. Leith, this article is surprising for rhetoric outweighing logic. Almost sounds like you’re suggesting super trustees should have considered the accounts they manage to be at-call for all. I’m not saying the point you’re trying to make is wrong but how you get there means I’ve got to dismiss your argument.

    • being able to redeem up to $20K on *some* members accounts is not the same as all accounts being at call.

    • Even StevenMEMBER

      Yes. I have utmost respect for Leith, but this is not one of his better articles. Leith: you call out poorly written/justified work by other commentators in the financial press, so presume you don’t mind being subject to the same.

      There is such a thing as an “Illiquidity Premium” so it is reasonable for superfunds to try trading off returns against their liquidity needs in order to maximise returns for members.

      Saying “there is a liquidity problem, therefore they must have mis-managed” is lazy logic.

      • So then why not maximise the illiquidity premium in high yield corporate debt, sub-prime mortgages, unlisted start-ups, aircraft leasing, emerging market debt…

  15. Seriously, macrobusiness is throwing a lot of its credibility on the fire during this crisis, which is a shame because we need a counterpoint to the thinly disguised business group lobbying over at the AFR.

    Your bias against superannuation is already apparent, but it really does you no good to suggest superannuation is a ponzi scheme.

    If you want to be taken seriously as an analyst and writer on the economy and business, then you have to take a deeper dive into what is going on here and try and be a little more objective.

    The senior investment personnel and Board at a super fund make decisions within the legal framework and risk parameters of their business and members. Superannuation has been long established and legislated as a long-term investment, with access limited to a preservation age or under special circumstances. There are certain assumptions made around churn of members, and it really shouldn’t be surprising that Boards did not factor in an increase in churn related to government legislating an entirely new framework, almost literally overnight. Just as banks do not prepared for a pandemic and a rush on liquidity (hence the RBA’s emergency facility) nor do super funds. It is just immature and unreasonable to expect otherwise.

    But what this all plainly reveals is the biases of those who are now fomenting all of this phoney outrage about super funds being unprepared. These are largely interest groups that have always been antipathetic towards the concept and design of superannuation. And these people are clearly using this crisis as a catalyst for breaking down an otherwise sensible system of compulsory national savings.

    I don’t hear anyone calling for banks to fail because they haven’t reserved enough capital or allocated too much of their clients’ liabilities to long-term loans.

    • ErmingtonPlumbingMEMBER

      “I don’t hear anyone calling for banks to fail”

      People who believe in REAL markets and capitalism certainly have been calling for Government to allow Banks to fail rather than socialise their losses through taxpayer bailouts.

      As for Left of Centre types like me Im all for prudent saving for retirement but find the lower tax rates for investment income totally outrageous and unacceptable.
      ALL INCOME SHOULD BE TAXED AT EXACTLY THE SAME MARGINAL RATE.

      That these old retired cnvts can “earn” $160,000 sitting on their ar$es doing fvck all completely tax free while I have to work my ar$seof for the same amount, risking all kinds of injuries and illnesses and pay a third of that in tax shytes me to death!

      Who the fk do you old pr!cks think you are!

      • I’ll be clearer – I don’t hear the thinly veiled vested interests who are calling for super funds to bear the pain of taking too much risk, also calling for the RBA to cease providing emergency liquidity to banks who are up to their necks in illiquid assets.

        There’s no such thing as real markets in times like these, it only serves to amplify the suspension of disbelief required during normally operating markets. If people want to get all manlier and real market-ier than thou and start bragging about what a real market looks like, then they should call for the government to step aside completely and just let this thing rip.

        And there are more than a few morally and fiscally erect nutbags out there who would find that approach very satisfying. I doubt any one on the centre left with a semblance of a social conscience would countenance that.

        • $$$ MR INFINITY $$$ QUANTITATIVE EASE ME

          No Worrys Ray D should be hung by neck until dead. He’s ideas man mental ill trash persuaded every 1 to give up tec to monkeys so he made money that eat shat fuk of Ray go and have some Chinese