Margaret Thatcher sought to convert Britain from a nation of shopkeepers to one of shareholders. Compulsory superannuation and low rates – until recently – on traditional bank deposits have converted most Australians into accidental investors.
Beginning in the 1980s, retirement arrangements changed from defined benefits (an inflation-indexed pension based on your final salary, paid by employers or government in return for regular contributions) to defined contribution schemes (at retirement you receive your and the employer’s payments, plus investment returns).
Today, Australian retirement schemes are about 86% defined contribution, compared with 5% (countries with indexed pensions, like Japan or the Netherlands) to 64% (the US) globally.
The move away from defined benefits reflected its expense and often unquantifiable risk, such as longevity, for the provider.
For example, Australia’s Future Fund was established to meet unfunded liabilities of public sector indexed pensions. Marketed as increasing choice, allowing portability and supported by generous changeover arrangements and tax incentives, the responsibility and investment risk was covertly shifted on to employees.
With roughly 48% of superannuation funds invested in shares (among the highest globally), it assumes a significant level of individual financial literacy.
Few investment funds will record positive returns this year due to falls in share markets and other financial assets. Most superannuation funds will lose around 3-10% depending on their investments, albeit after recent strong rises.
Where funds show modest positive returns, gains are often from unlisted private assets (which now make up to 10-15% of investments). As prices are not easily observable, the valuations used are opaque, subjective and infrequent.
For example, Klarna, a Swedish buy-now-pay-later firm which some funds directly or indirectly hold, suffered a 85% slide in value in one year based on its latest fundraising, compared to a 15-20% overall decline in share markets. The case is not isolated.
Excuses for poor results will rely on portentous imagery – a “one in 10,000 year event”, “black swan event”, or “perfect storm”. Adjectives like “unprecedented” will be overworked. Bromides offered may include “asset allocation inefficiencies”, “index weighting”, “correlation breakdowns”, “sector rotation” (translation: “we bought things that lost value”).
Incomprehensible if read, the missives will not explain why highly paid professionals were caught unawares. The self-serving message is always: “buy more of what we are selling”, “please don’t withdraw your funds” or “if you must do please replace with another of our offerings”.
High fees (running into thousands of dollars) mean few investors access proper advice. The cost reflects the banning of advisers receiving commissions on recommended products to avoid conflicts of interest and increased regulation.
Advisers also favour, understandably, wealthier individuals with large portfolios. This has driven DIY (do-it-yourself) investing and reliance, especially among younger cohorts, on “finfluencers” of uncertain pedigree.
In any case, information asymmetry – the inability to distinguish between good and bad guidance – makes informed choices difficult.
Financial advice is also a service whose true outcomes will not become apparent until it is too late. And the arrangements are expensive. For superannuation alone, Australians pay fees and costs of around $30bn annually. The problems of unethical behaviour, misrepresentation and fraud are well documented.
However well intentioned, the current system links the savings and financial security of ordinary people to the prices of often risky investments which they may not fully understand. While not guaranteeing a secure future for Australians, it creates an overly large financial sector and generates lucrative rewards for a few in financial services.
It also foments inequality.
Defined contribution schemes disadvantage women, because time out of the workforce reduces the accumulated benefit. Superannuation tax concessions total around $38bn annually, disproportionately benefiting high income groups.
The underlying weaknesses have been hidden by strong investment returns over the last few decades, which may now be changing. As the workforce falls and Australians start to draw on these savings many of the shortcomings will emerge.
Turgid attempts at reform – disclosure, naming and shaming poorly performing funds, more regulation – do not address the real issues.
Improving financial literacy may be unrealistic in a world where few read newspapers and most get their information from Twitter or cryptic news feeds.
In some countries, mainly European, workers need the simpler option of an improved state pension system, supplemented by a voluntary contributory component or private arrangements.
Investment risk needs to be reallocated away from households back to employers, governments or financial institutions better equipped to bear and manage it. But irrespective of structure, the problem of affordability remains.
That requires realism on minimum retirement age, benefits, means testing of entitlements, adequate contribution levels and appropriate taxation to ensure financially sustainability and fairness.
Unfortunately, bipartisan complacency about Australia’s “gold standard” retirement scheme and resistance from current beneficiaries prevent necessary change.