Cracking the sads with the media, episode 426: The GFC and superannuation

Those who read this blog will know all about my thoughts on the media. Some of you will also be probably saying, “There’s been a GFC. Why have you been so silent?”

I admit to being busy with other stuff in meatspace, and I haven’t blogged in a little while, so shame on me. But finally, I’m going nuts again, and you can all shut up and read for all I care because there’s stuff that simply has to be said.

The media has been all over superannuation funds for quite some time. True, this is the biggest exposure Australians will ever have to volatile investment markets outside their own home. And yes, for those of you who like to read between the lines (you know who you are) there was a subtle dig buried in that sentence.

Part of the negative press aimed at super funds is simply unwarranted, and here’s the reason why: Chances are big that you need to shoulder what could potentially be the lion’s share of responsibility for that diminishing nest egg.

That’s right folks. You, or at least most of you who are reading, are almost fully culpable. Not your super fund. Possibly your financial adviser, if you have one, but this ain’t aimed at you if you have. That will be the subject of a different post, so if you have a financial adviser, you can consider yourself in the clear. At the moment.

For those of you who don’t use a financial adviser, I suspect that you are having a grand old time criticising your super fund for what is, for most of you, a year and a half of negative returns. Let’s face it; we love to have a go at stuff that shits us. As a nation, we love to stick it up the poms when they’re complaining, but to be frank; we’re a nation of whingers. Possibly even worse than the English.

We’re also a nation that hates to accept personal responsibility.

Put these two traits together, and you’re left with the kind of sensationalist reporting that sees the media (News in particular, but Fairfax is a close second) putting out tripe like this or this and Australians lapping it up like the sheep that that they are.

I’ve said it before and I’ll say it again: Australians are shithouse investors and it’s time that you were all told. As an investor, the chances are that if you’re reading this, you suck.

Permit me to now explain why you potentially suck.

Superannuation is not a type of investment. It’s a tax environment.

John Smith (not his real name) is 58 and recently retired. Naturally, he’s rather upset at his super fund’s return of -20% over the past year. And he’s only in the fund’s ‘balanced’ option.

He spots an ad for an online account in the newspaper paying 4.50% and thinks to himself, “At least this is positive.”

John empties his super fund and sticks the entire amount, lock, stock and barrel into this online account. John is, quite frankly, a goose.

On John’s current marginal rate of tax (30%), the rate of interest becomes less attractive at 3.15%, not including Medicare.

On top of this, John simply doesn’t want to know that he could have invested in a cash option in his super fund which is only taxed at a concessional rate of 15%. He’s that pissed off. In fact, the bank that offers this account also offers an identical account to self-managed super funds, thus yielding a superior return after tax of 3.825%.

And because John is not 60 yet, he’s going to be in for a fright at tax time when he finds himself hit with a tax bill in the tens of thousands of dollars on his lump sum super withdrawal.

Can it get any worse?

You bet. John also couldn’t care less that, had he switched to the pension phase of super, his assets aren’t even subject to tax on their earnings. Holding this online account within a self-managed super fund in the online phase would have yielded the full 4.50%.

Not only that, because John has withdrawn the amount from super he is going to have serious problems if he ever wants to start up a super pension, because he won’t be able to get the whole thing back into super if he tries. Amounts able to be contributed to super in a financial year are subject to contribution caps, which limits his flexibility in this regard.

John might be a retiree, but I have no sympathy for him.

Notice that I haven’t talked about John’s potential exit fees, John’s lost insurance coverage or the likelihood that he’ll miss a market upswing. Well I wasn’t going to, anyway.

You choose your investments (part 1)

Jo Phelps (not her real name) is 40 and a manager with an HR recruitment firm.

About a year and a half ago, she received her annual super statement from her fund. Jo was in the balanced option of her fund which had been performing quite respectably for the past four years posting regular returns of 15%.

Her balanced option is about 70% shares and property and 30% cash and fixed interest.

But when she saw the returns on the fund’s ‘high-growth’ option, her eyes lit up as it showed average returns of 25-30% regularly over the past 4 years. The high-growth option is predominantly shares with a smattering of property. There is about 3 or 4 % cash in the portfolio.

Jo rings up her fund and demands to have a switch form sent out. The staffer on the end of the line helpfully suggests to Jo that she speak to a financial adviser before going ahead with the switch.

Jo helpfully suggests to the staffer that she takes her offer of financial advice and sticks it where the sun doesn’t shine, because after all, all financial advisers only recommend stuff with kickbacks for them. “I don’t need a financial adviser,” she casually mentions, “please just post the form.”

The switch was processed and now Jo feels shell-shocked by negative returns of -35%.

Jo would like to know this:

1. Aren’t fund managers meant to see this sort of stuff coming and take action to stop it?
2. I mean, I know that there’s no such things as psychics, but couldn’t they have short-sold or something? and
3. Given that employers have to contribute into superannuation, how come the government can’t guarantee it like bank accounts? I mean really, all Australians should be protected from the downside, shouldn’t they? They guarantee bank accounts; superannuation funds aren’t really that different…

Jo had no idea that a high-growth option could go down as well as up. Mind you, if you’d told her a year and a half ago, I don’t think she would have given a stuff.

You choose your investments (part 2)

Brad Dawes (not his real name) works in a blue-collar job. He’s twenty-something.

When he started with his current employer, he couldn’t be bothered filling out the super forms. He did ask at the time, “So let me get this straight: I don’t have to fill this in. You’ll sort it out for me with this ‘default’ thingy?”

To which the answer was, “Yes”. Natch.

About the only form that Brad filled in correctly was the bank account details for where he wanted to be paid.

The super from Brad’s current job now goes, by default, into the balanced option of the default super fund offered by his employer. Brad doesn’t know how these funds are invested, and really couldn’t care.

Brad’s super is all over the place. All default funds provided by previous employers and all different.

All the negative press about super has Brad looking at the one or two statements (out of the six or so funds he’s ever joined) that he regularly gets. Brad now has the following criticisms of super:

1. I could invest my funds better than my super fund could;
2. What’s with all these fees coming out? This is a scam;
3. What do you mean, ‘Share prices have gone down?’ Isn’t super meant to be invested in property which never goes backwards? (This is Brad’s opinion, not mine)
4. I didn’t choose to have my super here. I shouldn’t suffer as a result.

About the only good thing you can say about Brad is that he’s finally shown some interest (even if only passing) in his super as a result of this.

But he’s dead wrong about not choosing to have his super where it is: He chose alright. He’s also not worthy of sympathy.

Retirees are not always worthy of extra sympathy

Let’s go back to John Smith again. Sorry John, but you’re particularly worthy of some stick.

About three years, John decided he’d retire when he turned 58.

John’s super was in the balanced option, which his super fund recommends for periods of 4-5 years or longer. That’s right: 4 to 5 years minimum.

John consciously chose to leave his super in the balanced option, because, “It’s doing pretty well there.” Unlike Jo, he looked at the more aggressive options and thought that they seemed pretty aggressive for him. That’s OK.

He looked at the less aggressive investment options and was put off by the lesser returns. And I’m sure you can see why.

But, looking at the recommended minimum timeframe on his balanced option, he thought, “Well it’s only a recommendation.”

Fast forward to a year and a half ago. John looked at his super fund again, and he thought the exact same thing.

That’s right. With a year and a half to go until retirement, John completely disregarded the recommended minimum investment periods and consciously chose an investment option suited to 4-5 years or longer.

John is now shitted off with his super fund when really, John should be shitted off with himself.

It’s probably worth mentioning that you should plan your exit strategy from the outset. John didn’t even do this with three years to go.

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So what can investors learn from this?

1. You choose your investments. Read the sodding disclosure statements – they may look like slickly produced marketing paraphernalia (and to be honest, most are) – but they have to contain stuff you need to make an informed decision.
2. The default option isn’t some kind of magical tool that posts excellent returns while protecting investors from market downturns.
3. Read the bits about how your funds are invested. Also read the bits about recommended minimum timeframes. If you don’t understand how an investment option works, ask an adviser, ask the fund and if they can’t tell you, steer the fuck clear of it.
4. No one is psychic. Especially not fund managers.
5. Have you switched to cash? You may learn the hard way that markets can rise violently as well as fall. Chances are you’ll miss out and by gee, won’t it be costly?
6. No one rings a bell to let you know that the market has bottomed out. Think of this if you’re attempting to time your way back in.
7. Super investments are taxed at 15 %. Non-super investments are taxed at your marginal rate. This should be a no-brainer but you would be surprised at the number of people who couldn’t give a shit about this.
8. When you next whinge about your super fund’s non-performance, compare it to something that vaguely resembles it. Comparing a balanced option with anything other than a balanced non-super managed fund is only going to make you look like a moron. Even that is pushing it. Do not compare a balanced super option with an online bank account – geez do I have to spell it out?
9. Good, fee-for-service financial advisers are there to help out people who know bugger all about investing. There is a very good chance that you form a subset of the latter half of the previous sentence.
10. I’ve heard people whinge about their super fund’s performance who are in defined benefit schemes. I’m not kidding. If you don’t know what investment option you’re in, or even the fund’s design, find out. Number 3 above should help you.

That’s it. I’ve had a gutful. You can all get stuffed.

Disclosure: This blogger works for a service company that services super funds. He also used to work as a financial planner. And he most likely posted bigger declines in his superannuation balance than the lot of you (if expressed in percentage terms).

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.

Scrapping Superannuation - An "Argument" For

Australian readers would know that compulsory superannuation exists for a reason.

For those of you reading from outside Australia, compulsory superannuation is an enforced savings regime for all employees with significant tax benefits attached to it.

At Deakin University's School of Law, two of the academics there, Mirko Bagaric and Rami Hanegbi, have suggested that it might be a good idea to scrap this system.

Mirko Bagaric, you might recall from early last year, was the sensitive soul who suggested that torture should be made legal.

Thanks to such flagwaving American propaganda as 24 and NCIS, we now have a population in Australia ready to embrace the no nonsense, "It'll never happen to me, only the bad guys," world of legalised torture.

I'll leave Bagaric's torture proclivities for another day.

Bagaric and Hanegbi (B&H) have moved in this recent stroke of genius that scrapping this will be the kind of thing that makes Australian society a much better place to live.

Let's look at their arguments one by one:

1. B&H contend that:

The superannuation juggernaut that was introduced in 1992 by the federal government against alarmist predictions that we can't afford to sustain an ageing population needs to be halted.

Let's look at this one right here. Hysterical use of words like "juggernaut" and "alarmist" are, well alarmist in the extreme. I so wish I had another word to use right now.

It works kinda like this - when one uses that term "juggernaut", the automatic vision is of a huge vehicle out of control and destroying everything in its path.

What's doubly ironic is that the authors then go on to use the word "alarmist" which implies that every word of warning related to this is exaggerated.

You can see the unintended consequence of having these two rippers of words in the same sentence.

Anyway, the word "alarmist" is used far too often these days - and usually only used by those with some agenda to push.

The most obvious example of this is the anti-Kyoto lobby.

Science has known for years that the Greenhouse effect is a legitimate environmental concern. Yet you chat to anyone who stands to be affected by applying some environmental standards and this quickly becomes "alarmist nonsense".

Anyway, our point with regards to this statement of B&H's (hmm, sounds suspiciously like a packet of cigarettes, doesn't it?) is that there is a hard sell at work here. For what reason that may be we'll have to see if we can nut it out.

2. B&H make the next rash statement:

The main winner from this meddling, coercive policy the superannuation industry which makes hundreds of millions of dollars annually charging us fees for money we are forced to hand over and public companies in whom fund managers are effectively forced to purchase shares due to an absence of other investment vehicles (thereby artificially driving up the value of stocks).

Whoa. Stop right there. B&H are literally accusing fund managers of paying over the top for investment assets.

If an investment that you or I see does not represent value for money, we don't invest in it, do we? A point that B&H appear to have not the slightest bit considered.

Fund managers do a similar thing. They leave their funds in cash. Of course, B&H won't be pointing this out.

It's here where B&H show their true colours. "Meddling, coercive policy," to appeal to free-marketers before bringing it home with a tirade against the fees that the superannuation industry charge.

I think I see where they're going with this.

3. The cards come out here:

The Government should cease the policy of compulsory superannuation and allow us to access the approximately $600 billion that we have been forced to hand over
during the past 14 years.
Provision should be made for our old age by
abolishing the erroneous notion of retirement and a providing a non-means-tested
pension to all Australians.

Here we are. Pensions for all. You mad, crazy, greedy schmucks.

What's the bet that they have parents in retirement with investment properties who are unable to draw a pension as a result of unfavourable means testing?

It's the old, "Let me at my super. After all, it's my money," combined with, "Can I have a pension? I swear I didn't just blow all my super at the races."

Towards the end of the middle bit, they just quote mindless statistics that don't necessarily defeat their argument. They don't, however, support their argument, either.

In fact, the use of these stats in the middle is so frighteningly inane, so bizarrely irrelevant, that I wonder how the hell these guys ended up as academics in the first place.

Have a read of this:

As a result of these new efficiencies [technical advances/workplace efficiencies], a government paper in 2003 projected that gross domestic product growth per capita in the next few decades to be between 1.5 per cent and 2 per cent. This will ensure that in the future, despite a smaller percentage of the population being in the workforce, total income per capita will remain similar to what it is today.

Or this:

Moreover, while in the foreseeable future there will be proportionality more dependent old people, the community will make enormous savings by not being required to fund the education of the proportionality fewer young people.

You get the idea? Yeah, me neither.

At no point do they address the original intentions of compulsory superannuation or means-tested social security pension. In fact, they appear to be absolutely oblivious as to why these things exist at all.

Lets' look at why they exist.

Compulsory superannuation exists to repair a situation that was identified in the 1980's. Our population is aging, and we aren't saving enough money.

So, as we are not going to have enough money to retire on comfortably, the Hawke/Keating governments legislated compulsory super into existence.

As we can't save properly, it is legislated that employers contribute an additional 9% of our salaries into super.

Not a bad solution as solutions go - It's only 9%.

And the pension - this is meant to be a safety net for those who cannot save for their retirement.

Why is it means tested?

This is so that only those who actually need it get it, and not those who don't.

Quite responsible, don't you think?

Anyway, B&H appear to think that this should all be abolished and replaced with non-means tested pensions for all. I smell the foul stench of Larouchians.

Here's a few good reasons why this should not even be thought about.

1. The government is about to venture into virgin territory as a saver. Prior to the creation of the concept of the Future Fund, it has mostly been a borrower. Given this appalling fact, the very thought that the federal government should be looking after our retirement savings is a little bit scary.

2. Financial Planners and, increasingly, Fund Managers are plugging diversification between different fund management styles. (I support this, as there is not a shred of evidence that one fund management style is best. I say this as an proud index trouser-wearer.) How is having just the one fund manager, the federal government, going to support this?

3. Why should we all receive the same benefit in retirement? Isn't this straightforward communism?

4. I find it fun managing my retirement savings. What is going to replace that?

5. You say that I don't have a life 'cause I'm into investment and personal finance. Yeah well, what are you into, stamp collecting or something?

6. B&H claim that quite a lot of families can't afford the extra amount that ends up going towards superannuation. Talk about an appeal to the lowest common denominator. Let's take a person earning $40,000 per annum. How in the name of FSM (may we all be touched by His noodly appendage) is an extra $69 per week going to do anything at all?

7. A Pension is meant to be a safety net. Given that under B&H's recommendations, everyone would be getting it, (pension that is) will we go on to complicate matters further by putting a saftey net under the safety net?

8. Speaking of safety net, how is the pension meant to operate as one if everyone gets it?

9. B&H plug a civil libertarian argument on compulsory super. Coming from someone who supports torture (Bagaric), I find this more than just a bit insulting.

10. They actually say this in the article:

Coercive laws are legitimate only where a government can demonstrate that it will encourage compliance with fundamental moral norms that affect the wellbeing of others or where they will promote the welfare of each individual. This test has not been satisfied in relation to compulsory superannuation.

We can all conclude from this that Sony's attempts to destroy Western civilization's braincells with their insidious Playstation are most certainly working.

B&H's recommendations are so far out there that they don't stand repeating. And it's not even creative out-thereness. This is purely reactionary propaganda spewed out by someone who is not disclosing a conflict of interest and arguing from authority.

B&H might be law academics - they're certainly not business ones. 1 star.