Thoughts on the Productivity Commissions New Superannuation Proposals
This week the financial news is all about the Productivity Commission’s new superannuation proposals including a shake up to the superannuation industry.
The key elements most likely of interest to every day Australians include –
- Under performing super funds will be forced to close
- Employees will be shown a list of the top ten performing funds when they are asked to choose their super fund
We acknowledge we haven’t had the opportunity to review the entire report in detail, and given that the opposition to it appears likely to halt its path to legislation, we very well may not ever read it. But regardless, if we understand the two key ideas above correctly, on the face of it there seems to be some serious underlying flaws.
We can’t all over perform!
Not least of which is the simple reality that investing is at least in part a contest between two parties. One wants to sell because they don’t feel it is worth their while retaining the investment, they don’t believe the upcoming returns justify holding on. Another buys because they think the opposite, they think it is a good price and they believe it will go up and/or otherwise pay them a return on their investment. Most of the time, they can’t both be right. To an extent there will always be a winner and a loser.
Same applies to averages which is effectively what a “Benchmark” is and this is what the super funds will be (and already are) measured against.
So in order to have a Benchmark (an average) return you have to have investors above the line and investors below the line. Killing off the ones below, will just increase the average, it doesn’t stop some being below it.
Sure, this is a bit of a simplification of the funds management (and in particular the superannuation investment management) process, but its seems a logical flaw in the Commissions’ idea.
Effectively only 10 options
Further, if the lay-employee who has no real knowledge or understanding (or interest) in the investment and superannuation process is shown a list of the top 10 performing funds (and only those top 10) what do you think they are going to do? Firstly, they are 100% guaranteed to pick one of the 10 right? It is most likely they will pick number 1, or at least the one in the top 3 which has the most appealing name and logo. So now all other funds are effectively out of the running.
So you say “they should do better”. Well superannuation is all about money in and money out. Yes they have to choose their investments wisely, but they also have to managed the cash coming in (and the best time to invest it, because today is not always the best time to do so) and similarly, they need to manage how much cash they hold to allow withdrawals and/or they need to decide when best to sell in order to meet withdrawals. Either way, the flow of funds in and out plays a role in the returns of a fund.
If a fund is not in the top ten, and it sees cash flows in drop, or they see cash flows out increase, improving their investment returns gets a whole lot harder.
Now of course these issues exist now, and the flow of monies from fund to fund is already exacerbated each year when the media reports on industry performance.
But these new superannuation proposals are only going to take this issue to another level.
Less Competition has to be an outcome
Both of these ideas can only lead to one sure fire result … less super funds and therefore less competition. While all consumers have their own opinions on whether competition is a good thing, what we do know for sure is that product and service providers (those looking to make a profit from their customers) all agree, less competition is good (for them)!
Is there a limit to how much any Fund or Fund Manager can manage?
This potentially raises a further question … how much money is too much for a Fund or its Fund Managers to manage before they can no longer do so effectively.
Investing is all about choosing good assets to invest in. And the fact remains, there is a limited supply. Sure there are a lot of assets (ie. companies running businesses, etc) but only some will do really well into perpetuity, some will do well for a while then stop performing, some will do badly then all of a sudden hit their straps, some will fail. Yet someone has to invest in all of them otherwise they don’t exist, they don’t try, they don’t provide competition, they don’t test new ideas, they don’t employ people and they don’t take the risk of failure for the chance of one day succeeding.
Now if there is a Fund or a Fund Manage who is really good at picking the winners, so we all start giving them more and more of our super savings, eventually they are going to run out of good investments, they will run out of (good) places to put our money. And they will ultimately either start producing worse results (as monies stay invested in cash only) or they will start choosing bad investments just because they have to put their money somewhere.
Similar, if there aren’t other Funds or Fund Managers who maybe don’t do as well on a consistent basis, but nonetheless invest in businesses and companies and assets which to others may not look like a good idea, but which maybe they see something special, or which maybe just one day proves them all wrong, or maybe ends up changing the world, wouldn’t we all be poorer for that investment to have never been made and likely that business, company, asset never getting the chance to shine (even at the risk of falling short)?
We think you can see where all this is going.
How much Government intervention is the right amount?
No one knows for sure, and rarely will you get a consensus in any given collection of individuals, but … these new superannuation proposals sure seem like too much! (And the idea of the Government managed Future Fund taking responsibility for super takes things to another level, in fact isn’t that just in effect Social Security? All they need to do now is guarantee minimum fortnightly payments in retirement, wait … I think there is a name for that … the Aged Pension!)
Is it all academic? There will always be those that get ahead and then the rest, the key is to be one of those that gets ahead!
Again, a simplified view, but lets say the Productivity Commissions new superannuation proposals are implemented, and it actually works as they have suggested it will (which we doubt, but) and everyone (every Australian) will now retire with an extra $500,000 in their super. Does that actually mean everyone is better off to the same extent as a single individual would be today if you gave them an extra $500,000? No not likely, it just means the cost of everything they would all buy using that extra $500,000 will have gone up. At the end of the day, we can’t all become the 1%. The natural law of the haves and have nots will always continue. Sure the majority may have more zeros in their bank account, but they will still all be the majority.
In our view, if you want to get a head of the pack, you need to take personal ownership of your super and your wealth creation. You need to run your own race and be your own Santa Clause! If you allow your affairs to be managed along with the majority, then that is where you will stay.
Further reading –
- Business Owners & Investors Due Diligence Checklist: The 7 Critical Questions You MUST Ask Before Hiring an Accountant …
- Self-Assessment Quiz – Exactly Where is Your Business and Wealth Building At?
- Self-Managed Super – CapitalQ SMSF Specialists
- In Daily – Superannuation Industry Cool on Revamp Proposals (External Link)