Updated

July 23, 2018 09:38:25

Even as the champagne corks were popping, a sense of foreboding hung over the celebrations.

For the tribe handling the $2.6 trillion in Australian superannuation savings, the financial year just ended has been an absolute ripper with returns from the best performing funds soaring back into double digits.

For the most part, however, it was a performance driven by booming financial markets, now in their 10th year of a bull run, the second longest in history.

How much longer it can continue, however, is increasingly being questioned. Each day brings fresh forecasts of catastrophe and contagion, even among the more sober financial analysts.

There’s no shortage of potential triggers for a looming Armageddon.

Trade conflicts between the US and almost everyone, friend and foe, political instability in Europe as the UK tears itself apart over how to exit the European Union, an economic slowdown in China and speculation of another European banking crisis take regular turns as the likely culprit.

Underlying it all is a colossal build-up of debt, hoisted upon the global economy in the past decade by central banks as they desperately attempted to stave off a debt-fuelled financial crisis. Zero and negative interest rates boosted asset prices, including stocks, bonds and real estate.

With rates now on the rise, the pendulum may well reverse.

While there is no agreement on the timing of a correction, or indeed whether one will occur, consensus gradually is moving towards the inevitability of much greater volatility.

That poses a real challenge for our superannuation savings. After the drubbing they received in the Global Financial Crisis, how are they placed now to weather a storm?

Banks raising the white flag on super — what it means

There have been some dramatic shifts in Australian superannuation in the past decade. The biggest is that the battle between industry funds and bank-run retail funds rapidly is coming to an end.

A quarter of a century of underperformance from retail funds, primarily due to exorbitant fees, finally has tipped the balance. Australians are voting with their feet and leaving the banks behind.

Data compiled by research group Rainmaker shows that industry funds are growing rapidly while retail funds’ share of the market is sinking.

While the Royal Commission into bank misconduct clearly is a driver, it is possible one reason our major banks have decided to get out of superannuation, is that they have realised a profit making business simply can’t compete in a sector dominated by not-for-profit industry funds.

To a large extent, it was the evolution of the MySuper default funds that tipped the balance. Introduced as a low cost, no-frills option for workers who couldn’t be bothered selecting a fund, they were allocated as part of the awards process by Fair Work Australia.

Overwhelmingly, industry funds were awarded these mandates. No-frills, they may be, but their performance hasn’t been at all shabby. Four MySuper accounts run by not-for-profit industry funds were among the 10 best performing super funds last financial year.

Remarkably, not one bank run fund made the top 10 last year and collectively, they have failed to outshine industry funds on three, five, and 10 year timeframes.

Retail super funds — higher risk, lower returns

It’s not just lower fees that differentiates industry funds from their bank run rivals. They also have a different investment philosophy. And that may just help limit the damage in the event of another financial market crash.

The difference gets down to this — bank-run funds prefer to put client money into investments they can easily escape from. That means investment mostly in shares, bonds and other assets that can be liquidated by pressing a button or making a phone call.

Industry funds, on the other hand, prefer what is known as alternative investments. While they have some exposure to stocks and bonds, they go after infrastructure projects; tollroads, tunnels, airports, ports. They also put their money directly into property, hedge-funds and private equity funds.

That doesn’t make them immune from a crash. When asset prices collapse, everything is affected. But infrastructure earnings are likely to be less affected than other earnings because, by their nature, they are necessities and often monopolies.

There are legitimate criticisms that because alternative investments are not easily liquidated, it is not always easy to get a true valuation, providing an avenue for less scrupulous money managers to artificially inflate their worth.

Just the same, a big reason so many Australians lost so much of their superannuation in the global financial crisis a decade ago was because those running the funds had far too much riding on the stock market.

Another glaring indictment of bank-run retail funds is this; with financial markets running hot in the past few years, they should have trounced industry funds on performance. Instead, they’ve lagged.

How superannuation failed us

For all the fees that have been siphoned out of our superannuation during the past quarter of a century, you have to question whether Australia would have been better off sticking with the Government-funded pension.

Alternatively, it could have been run through a government-mandated Sovereign Wealth Fund like similar schemes offshore. That may not have improved investment performance but it at least would have kept a check on the unbridled greed that has been rampant within our system.

One of the great ironies of our super system is that while Labor Prime Minister Paul Keating opened up superannuation management to the private sector, in the belief that private sector competition would ensure efficiency, Coalition Treasurer Peter Costello created a government overseen wealth fund, the Future Fund, to manage public sector superannuation.

A recent study by University of NSW economist Nicholas Morris found the financial industry had extracted total fees of around $700 billion since compulsory super was introduced in 1992.

Australian superannuation has been run for the benefit of those running the system rather than Australian workers.

Those days appear to be drawing to a close. As industry funds continue to muscle out bank run retail funds, hopefully, the trend towards better performance and less volatility will continue, even if we are plunged into another crisis.

Topics:

superannuation,

business-economics-and-finance,

banking,

australia

First posted

July 23, 2018 05:02:44

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