Let’s Continue the Superannuation Debate

The repeal of the mining tax means compulsory superannuation contributions remain frozen at 9.5% until 1 July 2021.

Industry superannuation funds, the Labor party, and employee groups are far from in favour of the government’s decision. Employers on the other hand love the freeze.

Various stats have been trotted out by the super funds to show how worse off the ‘average’ employee will be due to the contribution freeze.

Here’s a suggestion for the super funds: Show some goodwill and reduce your fees to partially offset the employees’ loss.

The following quotes from the recently released Murray Report suggest there’s scope for super funds to sharpen the pencil:

Operating costs and fees appear high by international standards.’

The evidence suggests there is scope to reduce costs and improve after-fee returns.’

The compounding effect of an extra 0.5% per annum (from reduced fees) over a 30-year period would be an enormous boost to their members. Perhaps the super funds could poll their members and ask:

  1. Do you want lower fees?


  2. Do you want us to continue buying TV advertisements and sponsoring sport teams with what could be your retirement money?

Alan Kohler weighed into the debate this week with a column in The Australian titled ‘Compound Returns Not So Super’.

Alan was the MC at our World War D conference earlier this year. He’s held in high regard by all of us at Port Phillip Publishing.

Alan’s article starts and finishes with comments aimed squarely at the super industry overcharging and underperforming:

Super funds are doing a lousy job.

The miserable returns that Australia’s super industry is producing in return for its excessive fees.’

Any member would agree with the sentiment of expecting more for less.

The Murray Inquiry has told us ‘there is scope to reduce costs’ so the ‘less’ part of the sentiment is achievable.

Alan tells us the average super fund return over the 10 years to 2013 was 6%. And best performing fund over the past 10 years pumped annual returns of 10.5%.

Alan’s premise is that with an extra 4.5% per annum on offer, you don’t need to raise the contribution level; you simply need to be in a better performing fund.

He argues that if super funds abandon ‘the stupidity known as asset allocation theory’ and invest your super entirely into shares, there are more rewards on offer.

He does, however, acknowledge the merits of a diversified portfolio:

In a way it’s fair enough because too much volatility in their returns would mean that some members might retire in the middle of a big downturn.

To support the notion of pure equities for your super funds, Alan points out:

  1. The 30-year annual compound return for All Ordinaries Accumulation Index has been 11.34%.
  2. A listed investment company like Wilson Asset Management has delivered 18% per annum over the past 15-years.
  3. If you had bought CSL at the float, the last twenty years would have delivered you 25% per annum.

These are impressive returns. There is no question if you had been entirely invested in one of these share related options, your superannuation fund would have a very healthy balance.

However, every PDS I have read has stated in fairly bold letters:

Past performance is not an indication of future performance.

What the market, investment companies or individual shares have delivered in the past is definitely not guaranteed to be repeated in the future.

ASIC’s Consultation Paper on ‘The use of past performance in investment advertising’states the following as their number one concern:

If marketing material makes misleading or imbalanced use of past performance information:

  1. (a)  Consumers may make inappropriate investment decisions, resulting in lower returns or unintended risks. In particular, both consumers and funds will suffer if consumers are encouraged to switch money to whichever sector or fund is “yesterday’s hero”.

ASIC also noted in another paper ‘A review of the research on the past performance of managed funds’:

Good past performance seems to be, at best, a weak and unreliable predictor of future good performance over the medium to long term. About half the studies found no correlation at all between good past and good future performance. Where persistence was found, this was more frequently in the shorter-term, (one to two years) than in the longer term. The longer-term comparison may be more relevant to the typical periods over which consumers hold managed funds.

Numerous studies highlight that the past is not necessarily a reflection of the future. In fact, the future can hold a complete reversal of recent experiences.

Over the past 30 years, the Australian share market has produced exceptional returns. However, there were some very strong tailwinds behind this period of outperformance

During this period interest rates fell from 15% to 2.5%.

Also, Australia nearly trebled its government and private debt to GDP ratio from 50% in 1980 to today’s 142%. This additional credit found its way into the economy and company revenues, especially our major banks.

The introduction and mass adoption of technology as provided a significant boost to corporate productivity and profitability.

Let’s not forget China’s massive infrastructure spending.

Are these highly positive influences likely to be repeated over the next 30 years? They are not.

Interest rates could follow the US, Europe and Japan to zero, and this would be an indication of an anemic economy.

We could treble our debt to GDP ratio to 420%; again, this is would not be a sign that all is well on the home front.

China could keep building more vacant cities. But they have to call it quits on this fraudulent economic activity sometime.

Absent any new major technological advancements, at best we may see further efficiencies at the margin rather than the broad based benefits of the past.

Share market history is one of advancement and retracement — the old ‘two steps forward, one step back’ routine.

Australia has had a massive period of advancement. In September 1982, the All Ordinaries was 500 points. We have risen 11-fold in 32-years.

In 2046, will the All Ords be 60,500 points? History is strongly against this happening.

The following chart shows the journey of the US share market (S&P 500 index adjusted for inflation) since 1871.

Superannuation S&P Historical Composite
The blue lines are periods of progression and the red lines are regression.

As you can see, these periods last for decades.

Yes, the market does worm its way higher over the long term. But there are distinct periods (secular bear markets) when being ‘all-in’ the market is the worst place to be.

Take the performance of the Nikkei 225 (Japanese index) since 1990. An ‘all-in’ share investment allocation would have been a recipe for disaster. The Nikkei 225 has lost 60% of its value over the past 24-years.

In my opinion, Alan’s strategy is ideal for those under 30 with minimal funds in superannuation. Plenty of time and dollar cost averaging via regular contributions should deliver superior long term results.

However, the more money you have and the closer you are to retirement the more you need to be mindful of being caught in a severe market downdraft. Which is why Alan gave this caveat:

‘In a way it’s fair enough because too much volatility in their returns would mean that some members might retire in the middle of a big downturn.

A 50%+ fall in the years leading up to retirement is far too daunting a prospect for most people.

My advice for those with mid-range risk profiles is to temper your expectations of future market returns. The regression phase of the market is not yet finished.

The Federal Reserve’s easy money has pushed valuation metrics (Shiller PE 10, Tobin Q ratio) to near historic levels. Falls from those heights are very painful.

When the stock market crashes and past performance figures are covered in red ink — that’s the time to go ‘all-in’.


Vern Gowdie+
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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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