Superannuation Overtakes Bank Deposits

Here’s a Monday alert for you to take very seriously. The locusts are coming. And they’re coming for your superannuation assets. The Sydney Morning Herald reports this morning that ‘Australia’s pool of retirement savings has overtaken the total value of Australian bank deposits, after superannuation assets swelled to $1.62 trillion in the year to June.’

A solid performance from stock markets and a boost to employer contributions saw the value of super assets jump 15.5% in the year to June 30. They now exceed the value of bank deposits for the first time, and will keep on growing, given the tax advantaged nature of superannuation and the mandated increases in employer super contributions over the next few years.

That’s assuming stock markets don’t fall off a cliff in the meantime. Which is a pretty big assumption given recent developments. More on that later. But the large allocation to equities in most people’s super funds means the value of the pool of super assets is very dependent on the performance of the stock market.

So why is it newsworthy that super assets have now surpassed the value of bank deposits? Well, it tells you that the nations’ savings are increasingly tied up in superannuation rather than just traditional bank deposits.

That makes sense. Superannuation is tax advantaged. If you can lower your tax bill by shifting assets into a different tax structure, then of course capital will flow in that direction. And baby boomers, Australia’s largest and wealthiest demographic, are moving into retirement phase, meaning they are building up their savings…before they run them down.

The interesting point to note here is that superannuation is not an asset class. It’s a tax structure created by government legislation designed to get people saving for their own retirement. It’s an attempt by the government to lower their future pension liabilities.

Conceptually, creating a tax advantaged environment for people to save for their retirement is a good thing. But what ends up happening is that the intent of the legislation becomes so successful that it encourages another round of legislation…bad legislation.

That is, the pool of assets becomes so large and enticing that more and more people will want a piece of it. The Treasury department reckons Australia’s super pool will grow to $6 trillion within 24 years.

That amount of ‘money’ just becomes too enticing for politicians and lobby groups to ignore.

The reason why super is so enticing for the locusts is because it’s not an asset class…it’s just a tax structure. Created by legislation, it can easily be altered by legislation. Within super the preferred asset class is equities. Vern Gowdie, our superannuation specialist and Family Wealth editor, reckons the average balanced fund consists of 60% in ‘growth assets’, code for equities — Aussie and international.

This preference for growth assets has created a huge industry over the past few decades. To invest in these growth assets you need advice…and asset allocators…and fund managers to manage the assets…and trustees to manage the managers…and sales people to get out there and hustle for funds flow. Superannuation is big business.

That’s why the big four banks bought up the major fund managers (and financial planning dealerships) at the start of the 2000s. They saw the long term trend away from saving for retirement in cash. They knew the nation’s savings would increasingly move away from bank deposits (cash) into superannuation (mostly equities).

Vern Gowdie, having been at the heart of the system for years (he was a financial planner) knows its many pitfalls. ‘What the big print giveth, the small print taketh away,’ is one of Vern’s familiar sayings. You’ll be able to see what else Vern has to say about the whole super ‘small print’ set up soon. We’re launching Gowdie Family Wealth this weekend. Stay tuned for details.

With the super pool getting so big, expect to see more and more helpful suggestions about how to ‘best’ direct the flow of assets. You’ll get politicians wanting to get more super into infrastructure investments (arguing that the allocation to equities is too high). Let’s just hope it’s not something like the national broadband network they want to finance. That would redefine long term returns.

And you’ll also see more helpful reports, like the one in the Weekend Financial Review by CPA Australia, telling the nation how it’s squandered its retirement savings. These ‘special reports’ really wind us up. What are ‘Certified Practising Accountants’ doing telling us how to spend or save our money? If you save for your retirement, it’s yours to squander if you want to. And if you do squander it and have to resort to the aged pension, well then that’s your fault and you’ll have to live with the consequences.

Perhaps it then might trigger a bit of inter-generational financial advice. A few words of wisdom passed on from the older generation about the dos and don’ts of retirement planning.

Like don’t have such a large proportion of your assets in the stock market as you near retirement. Because a crash at the wrong time could leave your nest egg badly damaged. This is a key tenet of Vern’s writing. He reckons it’s crazy that ‘balanced’ accounts have such a high exposure to growth assets in such a high risk market.

And we would agree. In fact, we think a crash is nearer than most people realise. This whole ‘tapering because the economy is improving’ talk is nonsense. Something else is going on. US bonds yields are spiking. That’s poison for an economy that is utterly dependent on the continuation of cheap money. And it’s certainly not a part of the Fed’s game plan.

On Friday in the US, the Census Bureau reported that new home sales fell 13.4% in July and they also revised June sales numbers lower. Higher market interest rates are starting to bite. Will the Fed continue with its taper rhetoric in such an environment?

The market doesn’t really think so. Gold surged on the news and the equity market remained well bid. Equities clearly see more QE. But we think gold sees things a little more deeply. That is, it sees trouble for the dollar in an environment where foreigners are no longer buyers of US assets, and the Fed could soon be the buyer of first and last resort for US government debt.

That would not be a good thing. More on that tomorrow…

Greg Canavan+
for Markets and Money


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From the Archives…

Moving through the US Dollar
24-08-2013 – Greg Canavan

Boots On the Ground Politics
23-08-2013 – Nick Hubble

Bankers Profit at the Expense of the Broader Community
21-08-2013 – Vern Gowdie

An Investable Turnaround in Oil
20-08-2013 – Byron King

Australia’s Economy: Complex, Fragile or Centralised?
19-08-2013 – Nick Hubble

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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