Super Problem with Super Industry

The Australian superannuation industry is in for a shake-up.  The catalyst for reform will be the recent dismal returns and the flight of discretionary investors.

Superannuation funds are on track to report their third straight negative performance in 2002-03.  Average returns in calendar year 2002 were a depressing -7.3 per cent and median fund returns over the last three years has been a measly -2.7 per cent after inflation.  What is worse, these returns are before-tax and before-management fees.

Rationally, people are to the extent possible not putting their nest-eggs in super.  In 2001, investors placed into managed funds $16 billion in excess of mandatory contributions.  In 2002, the flow went into reverse, recording a net decline in discretionary investment of $5 billion.

Of course, when returns improve in the equity markets and as returns decline in housing and cash, funds will begin to flow back into super.  But the inflow is unlikely to match expectations, unless the super industry's reputation "as a gravy train feeding off the $20 billion-plus per annum compulsory superannuation scheme" is changed

The flight from super has a number of serious ramifications.  First, it will undermine the government's ability to ween people from the pension.  Super funds are the key replacement for the pension.  While non-super assets may yield good returns, they allow too many avenues for double dipping, i.e.  owning assets while drawing the pension.  Moreover, all the evidence shows that a 9 per cent mandatory contribution is not enough to meet most people's aspirations for retirement income.  Second, it will reduce national savings.  As illustrated this year, a portion of the funds that would otherwise be invested in super will be consumed and not saved.

While the government can not do much about returns in the equity market, there are a host of reforms available that would go a long way to improving the reputation and performance of the industry.

First, it could greatly simplify the regulatory burden that is driving up management costs and protecting inefficient providers.  It could start with replacing the Financial Services Reform Act passed in September 2002.

Second, it could give more power to individual policy holders such as allowing choice of fund and full portability.  To be fair the Government has repeatedly tried to achieve these changes over the last six years, but have been thwarted by the industry super funds using their political muscle among the ALP and minor parties to protect their gravy train.

Finally, they should simplify and reduce the tax burden.  Australia is the only country which taxes super three times:  on receipt, on earnings and on payments.  And the tax arrangements do not provide enough incentive to people to lock-away savings in a vehicle that is subject to vagaries of government control.

One thing, the government should be wary of increasing the mandatory contribution requirement.  While the current mandatory contribution rate is insufficient to cover future needs, the problem lies with the over-regulation and taxation of super and a reluctance to save.  Free choice rather than force is the best way to improve savings.

ADVERTISEMENT