Australian super is in a marvellous spot right now. It’s now a $2.3 trillion industry and is expected to reach $3 trillion in three years’ time. Chief executive of the Association of Superannuation Funds of Australia (ASFA), Martin Fahy summarises it nicely,
‘Let’s put it this way – we are third ranked in the world in superannuation and retirement savings behind the Dutch and the Danish,
‘The reason we are ranked three is because of the adequacy of the system.’
That system is the super guarantee. Introduced by Paul Keating in 1992, it made super contributions by employers mandatory. A forced savings scheme that ensured 9.5% of your pay was going towards your retirement.
And for all intents and purposes, it seems to have paid off splendidly. Even today, with all the uncertainty, super funds are looking for more investment opportunities, not less.
Aussie shares are obviously the most popular. They haven’t done anything exceptional recently, but nor have they imploded. Nevertheless, our super funds may be too heavily weighted towards equities. As Visy’s Anthony Pratt notes,
‘Over half of Australian super fund money is invested in the sharemarket as equities, whereas in some other [developed world] countries super funds only invest 10 per cent in the sharemarket.’
Around two years ago, super funds entertained the idea of venture capital. A move that was again, extremely successful. And recent rumblings indicate that fund managers are exploring opportunities for corporate lending.
It seems as if super is unstoppable.
But, ASFA’s Martin Fahy is still troubled. Despite all the success and the rosy outlook, he’s worried.
The Hypothetical Apocalypse for Superannuation
The big unknown in all of this is politics. Especially with a recent surge of populist figureheads showing up around the world.
People like Nigel Farage, who spearheaded the Brexit campaign. Or Marie Le Pen, who almost stole the French Presidency. And of course, the media’s favourite populist figurehead — Donald Trump.
They’ve seemingly come out of nowhere and rallied a large following behind them. It was political uprising that caught the media unaware.
So the logical question is: How long before Australia sees its first populist prime minister?
No one knows when, or even if, it will happen. And no one knows just how that outcome would play out. It’s an X-factor, a black swan even. One that the AFR says could result in a superannuation ‘doomsday scenario’,
‘The scenario goes something like this: a populist politician gets elected sometime in the 2020s on the back of a promise to end the super guarantee levy. This simplistic, backwards policy option hands every Australian an instant cash bonus each week equal to 9.5 per cent of their pay, less tax.’
It’s easy to see why people would support such a policy. No one’s going to turn down more cash in hand at the end of the day. Especially if wage growth remains as stagnant as it is currently.
For super funds though, it would be disastrous. And long-term it would likely lead to a huge burden on our already struggling pension system.
Now obviously it’s all hypothetical at this point, but Canberra definitely has super in its sights. Currently, politicians are weighing up another inquiry into the super industry.
That’s despite an already ongoing inquiry from the Productivity Commission and another by ASIC. Fahy believes another inquiry would just do more harm than good.
‘It could drive a herd mentality around pure performance and therefore the success we have had around infrastructure investment, international investments and the illiquids and the outperformance we get in the system in Australia could actually be lost.’
It could create an entire generation of people retiring without savings. A recipe for economic disaster, let alone the super industry. Leaving potentially millions of retirees helpless without enough money to survive.
Fortunately, there are ways to maximise your pension benefits. Make sure you can retire comfortably with these handy tips.
Junior Analyst, Markets & Money