Superannuation has benefitted millions of Aussie retirees since it became compulsory in 1992. Since then, it’s gone on to create a new army of middle class millionaires. The number of households worth more than $1 million has increased by 18% in the past year alone. In total, 215,000 households now count themselves as part of this growing class.
It may surprise you to learn that the bulk of this growth in millionaires stems from the rising influence of superannuation funds.
According to Boston Consulting Group, Australian private wealth grew by 16% last year. That was 4% larger than the global average of 12%. Superannuation savings were largely to thank for this. In fact, Australia is home to the fastest growing super balances in the world.
The reason for this is that we’re currently in the middle of a mass baby-boomer transition to retirement. The number of people accessing their funds is growing by the day. These funds have been growing for the past decade in line with Australia’s strong economic growth.
But changes are afoot. While baby-boomers continue to retire, Australia’s economy is beginning to stutter. Worryingly, the timing of these two trends has the potential to wipe out many retirees. Let me explain why.
Why market manipulation threatens your super balance
This broader transition to retirement among baby-boomers could present new problems for Aussie super funds. Here’s John Abernethy, CIO at Clime Asset Management, on this:
‘The amount of funds that have to be invested in Australian equities is swamping the amount of available opportunities.
‘The economy is not growing enough for the growth in the super system. Wealth will be destroyed if there is nowhere to invest it’.
Basically, the growing number of funds makes gains in stocks increasingly out of reach.
But another trend emerging relates to asset management mandates. This simply describes changes to a fund’s investment strategy. Mandate changes take place when ‘transition’ fund managers come on board.
What we’re seeing now is a rush among transition managers to move their funds out of stocks. The problem is that these moves often affect illiquid (hard to sell) stocks. We saw an example of this last week.
On Friday, Aussie markets saw a series of strange movements just prior to close of trade. Take the Reject Shop [ASX:TRS] for instance. Shares in the retailer rose 3.7% before falling by 5.7% only minutes leading up to close. Observers raised concerns that this was market manipulation on full display. Abernethy explains:
‘These moves in stocks are just going to get worse as funds resort to hedging and market manipulation to move indices. [That aims to] give a false impression of returns.
‘This goes right across the market from small caps to big caps. It’s related to what index is relevant for the [fund manager’s] performance and bonuses’.
Abernethy points out that this kind of market manipulation will become common in the future. That poses a big problem for super funds, many which stands to lose out from such sly tactics.
However, that’s only one issue facing Aussie super funds. The other, more commonly known one, is a sweeping change to the system itself.
Inequality — the other problem with superannuation
The BCG, in their assessment of the Aussie super industry, argues for a systemic change to superannuation. They believe the system will need to adapt amid growing concerns over rising income inequality.
‘Our super system is working well at safeguarding some of people’s wealth for retirement. But there is definitely scope for the system to be further strengthened’.
What do they mean by this? Simply, they want to see measures brought in to encourage people to spend their super. The fear is that too many retirees are sitting on their nest eggs and passing it on to their children. Is that such a concern though?
There are two ways to look at this issue.
Most Aussie retirees don’t want to be told what to do with their super. They’ve spent their whole working lives being told that superannuation is for their own benefit. Rightly or wrongly, many feel entitled to spend (or not) that money as they see fit.
The government, on the other hand, argues that’s not what super was created for. They’d probably tell you that it was designed as a reliable stream of income during retirement. One that would be used in a similar way to pensions, but one the government wouldn’t have to pay for. And the BCG seem to agree with this.
In my view, both arguments have merit. That’s why the issue of superannuation is such a point of contention today.
Recently, we’ve seen new proposals aimed at overhauling the system. The biggest change suggested revolves around the age pension asset test. Under this proposal, wealthier Aussies would find it harder to qualify for age pensions. That would ensure that many retirees lost out on age pension entitlements. It would also mean they’d need to draw from their super to provide a steady source of income.
With Australian super funds growing faster than any other in the world, don’t bet against this happening. With increasing uncertainty over the economy, the government will be seeking to cut back on expenditures… and age pensions are likely to remain on the chopping block.
Contributor, Markets and Money
PS: Fund managers manipulating your super is nothing new. They’ve been creative in figuring out new ways to take more and give less. So why not take the reins yourself?
In a brand new Markets and Money report, wealth manager Vern Gowdie will talk you through what’s good and bad about self-managed superannuation funds, to help you decide whether an SMSF is the right option for you.
He’ll introduce you to concepts ranging from tax benefits to minimum investments; and from legal considerations to management fees. He’ll show you what you need to do to set up a self-managed super fund. What’s more, he’ll teach you which investments are worth holding as part of your SMSF portfolio…and which aren’t.
To find out how to download Vern’s free report ‘How To Know if a Self-Managed Super Fund is Right For You’, click here.