FINANCE: by Jeffry Babb News Weekly
Beware the superannuation pea-and-thimble trick
, September 1, 2012
Whoever controls Australia’s enormous superannuation savings wields great economic — and political — power.
At the end of 2011, total superannuation assets had reached $1.2 trillion, which is equivalent to Australia’s gross domestic product (GDP) — that is, the total value of all goods and services produced in Australia. In less than 30 years’ time, total superannuation assets are predicted to reach 150 percent of GDP.
Just who will control Australia’s superannuation savings is emerging as a major election issue. Senator Mathias Cormann (Liberal, WA), shadow minister for superannuation, has been leading the response to initiatives by Bill Shorten, Minister for Financial Services and Superannuation, to improve governance of superannuation funds.
As might be expected for someone with Shorten’s background, the aim of his “reforms” is to strengthen the hold of the union-dominated industry superannuation funds over the nation’s savings. The industry funds are governed by an unholy cabal of union and employer representatives.
The policy initiative by the Australian Prudential Regulation Authority (APRA), which supervises the finance sector, to ensure that one third of the trustees should be independent, would threaten this cosy union-employer arrangement.
It is quite fallacious to say that union trustees represent the interests of all employees. Only 13 percent of private sector workers are union members and only 18 percent of total workers are union members. Many public sector workers are in public sector funds which are not controlled by the unions. Private sector funds, however, will be under the control of the unions, even though, on average, over 80 percent of fund members are not union members.
The most controversial aspect of the battle for the nation’s financial heart is the role of default super funds. Under the so-called “modern awards”, which have been constructed by Fair Work Australia (an organisation having about the same nominal validity as the Ministry for Truth in George Orwell’s futuristic novel, Nineteen Eighty-Four), FWA can nominate a default superannuation fund. That is, FWA can nominate a super fund in which all employees who do not actively choose a super fund will be enrolled.
Now, as members of FWA will readily admit, their area of expertise is in industrial relations, not finance. They are not equipped, either by education, qualification or experience to adjudicate between the claims of competing superannuation funds.
FWA usually follows the lead of the advocates appearing before it, who push the case for the industry fund. What’s more, there is no apparent means by which the default option, once adopted, can be overturned.
The draft report by the Australian Government’s Productivity Commission, Default Superannuation Funds in Modern Awards (February 2012), comments that “the current system does not provide for full procedural fairness, with significant impediments for some funds to have their case to be listed as a default fund heard by FWA”.
The Productivity Commission recommends that default super decisions should be based on merit rather than precedent. The current system is based largely on precedent and the consent of industrial parties. The Productivity Commission recommends that a specialist panel be established to make decisions on default super options, comprised of members whose expertise is in finance, rather than industrial relations.
The amount of money involved is huge. It is estimated that at least $7 billion, and potentially more than $10.5 billion, in super contributions were made to default funds in 2010 for employees to whom the superannuation provisions in the modern awards apply, says the Productivity Commission. Some 44 percent of employees take no role in selecting their super, while a further 26 percent will select the default fund, meaning 70 percent of employees will be in the default fund.
Just how tricky the business of selecting a super fund can be is seen in using past performance as a guide to future performance. Advocates for union-based industry funds claim that industry funds outperform retail funds administered by private entities such as AMP and MLC.
However, as every super fund states in its promotional literature, “past performance is an unreliable predictor of performance over the medium to long term”. Indeed, this disclaimer is required by the Australian Securities and investments Commission (ASIC). The Productivity Commission points out that the Motor Trade Association of Australia (MTAA) fund was number one in 2004, and is now ranked as 59, while the Queensland Unions scheme was ranked five and is now 33.
What influences fund performance? Age of the members, the number of members moving between funds and the structure of the investment portfolio — all these can influence performance.
Certain companies listed on the ASX rise quickly and subside just as rapidly. Infrastructure projects and real estate investments, which form a significant part of some funds, can be difficult to value, as can investments in unlisted companies. Investments in wind farms and other alternative energy sources, if “marked to market” (i.e., their share value being reassessed day by day), could involve heavy — even catastrophic — losses.
The Productivity Commission warns that “a fund’s past performance should not be used in the selection and ongoing assessment of superannuation funds for listing as default funds”.