MArgaret Thatcher tried to turn Britain from a nation of traders into one of shareholders. Mandatory superannuation and low – until recently – rates on traditional bank deposits have turned most Australians into casual investors.
Starting in the 1980s, retirement arrangements changed from defined benefits (a pension indexed to inflation based on your final salary, paid by employers or the government in exchange for regular contributions) to defined contribution schemes (in pension you get your and your employer’s payments, plus investment returns).
Today, Australian retirement schemes are around 86% defined contribution, compared to 5% (indexed pension countries such as Japan or the Netherlands) to 64% (US) globally.
The move away from defined benefits reflected its costs and often immeasurable risk, such as longevity, to the provider.
For example, the Australia Future Fund was created to meet the unfunded liability of public sector indexed pensions. Marketed as an incremental choice, allowing portability and supported by generous change agreements and tax incentives, the responsibility and risk of investment was stealthily shifted to employees.
With approximately 48% of pension funds invested in equities (among the highest globally), it assumes a significant level of individual financial literacy.
Few mutual funds will register positive returns this year due to the decline in stock markets and other financial assets. Most pension funds will lose around 3-10% depending on their investments, albeit after recent strong gains.
Where funds show modestly positive returns, the gains are often from unlisted private assets (which now account for up to 10-15% of investments). Since prices are not easily observable, the estimates used are opaque, subjective and rare.
For example, Klarna, a Swedish buy-now-pay-later firm that several funds hold directly or indirectly, saw an 85% drop in value in a year based on its last fund-raising, compared to a decline general of 15-20% in the share. markets. The case is not isolated.
Excuses for poor results will rely on strange images – a “one in 10,000 year event”, “black swan event” or “perfect storm”. Adjectives like “unprecedented” will be redundant. Bromides offered may include “asset allocation inefficiencies”, “index weighting”, “correlation breakdowns”, “sector rotation” (translation: “we bought things that lost value”).
Unintelligible to read, the messages will not explain why highly paid professionals were caught unawares. The self-serving message is always: “buy more of what we are selling”, “please do not withdraw your funds” or “if you must, please replace with another offer of ours”.
High fees (running into the thousands of dollars) mean few investors have access to proper advice. The cost reflects the ban on advisers receiving commissions for recommended products to avoid conflicts of interest and increased regulation.
Advisors also understandably favor wealthier individuals with large portfolios. This has fueled DIY (do-it-yourself) investing and reliance, especially among younger groups, on “finfluencers” of uncertain provenance.
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 results will not become apparent until it is too late. And arrangements are expensive. On superannuation alone, Australians pay fees and costs of around $30 billion a year. The problems of unethical behavior, misrepresentation and fraud are well documented.
However well-intentioned, the current system binds ordinary people’s savings and financial security to often risky investment prices that they may not fully understand. While it does not guarantee a secure future for Australians, it creates an incredibly large financial sector and generates lucrative rewards for some in financial services.
It also promotes inequality.
Defined contribution schemes put women at a disadvantage because time out of the workforce reduces the accrued benefit. Tax concessions on pensions amount to around $38 billion a year, disproportionately benefiting high-income groups.
Underlying weaknesses have been masked by strong investment returns over the past few decades, which may now change. As the workforce declines and Australians begin to tap into these savings, many of the shortfalls will emerge.
Vague reform efforts – uncovering, naming and shaming underperforming 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 underground news sources.
In some countries, mostly European, workers need the simpler option of an improved state pension system, supplemented by a voluntary contributory component or private arrangements.
Investment risk must be reallocated away from households to employers, governments or financial institutions better equipped to bear and manage it. But despite the structure, the problem of affordability remains.
This requires realism on the minimum retirement age, benefits, means testing, appropriate contribution levels and appropriate taxation to ensure financial sustainability and fairness.
Unfortunately, bipartisan complacency about Australia’s “gold standard” superannuation scheme and resistance from current beneficiaries prevent needed changes.
