Peter Martin, Crawford School of Public Policy, Australian National UniversityHave you ever wondered why your super fund rarely sends you mail?
It could be because it is one of the 36 funds that perform badly, or one of the six funds that perform extraordinarily badly. As of mid last year those six funds managed the retirement savings of 900,000 Australians.
Not that you would know it from their communications. The wonder of a system that pours a fresh 9.5% of your salary into super each year is that your fund is able to show an upward graph of the amount you’ve got saved even if it is managing those savings badly. You might think it was performing well.
Or your fund might have a more straightforward reason for avoiding mail.
The head of Australia’s biggest super fund, Australian Super with 2.4 million members, spelled it out in an appearance before the banking royal commission.
He said “a direct mail-out – a one-off direct mail-out to Australian Super’s members — costs $2.3 million”.
Chief executive Ian Silk was trying to put into context the $2 million Australian Super threw at the startup news site New Daily throughout 2012 and 2013. He said the $2 million (long gone) wasn’t an investment in the financial sense of the term, but an investment in communications, “a tool to enhance the fund’s engagement with members”.
It’s an investment that will be illegal from July under the government’s proposed Your Future, Your Super law, along with those rather odd TV advertisements implying improbably that unless the government lifts compulsory super contributions, people might lose their houses.
It will be illegal for funds to spend money on these things even if they route the payments through a third party such as the super-fund-owned Industry Super Australia, as they now are.
The new laws, which flow from the royal commission and a Productivity Commission inquiry, will require every cent of super fund spending (without “any materiality threshold”) to be directed to the best financial interests of members.
What’s different is the addition of the word “financial”. Previously funds were only required to act in the “best interests” of the members.
Until now (and this is an example used in the explanatory memorandum) it might have been OK for a fund to spend member contributions on “well-being and counselling services, due to its preference for providing beneficiaries with a holistic retirement experience”.
It won’t be legal after July. Spending will have to be in the best “financial” interests of members.
And the onus of proof will be reversed. If challenged, funds will have to demonstrate that their decisions were indeed in the best financial interests of their members, rather than regulators demonstrating that they were not.
Which it should be. It’s our (mainly conscripted) money that they are spending. If they can’t make out a case for the way they are spending it, they might be acting as if it’s their own.
Shockingly, when in 2017 the Productivity Commission inquiry into super asked all 208 funds regulated by the Prudential Regulation Authority for information about their spending and net returns and fees by asset class, 94 didn’t respond.
Of the 114 funds that did respond, 26 left blank all of the bits of the form that asked about assets, net returns and investment management costs.
When the commission tried again the following year, 13 of the 136 funds that responded provided no information about expenses at all. It was as if they either didn’t know about their expenses, or felt it was their business and no one else’s.
Time and time again the commission heard about bank-operated funds buying products from other parts of the bank at high prices.
The banking royal commission heard of hundreds of thousands of dollars spent by just one (industry) fund on corporate hospitality at the Australian Open.
It heard of directors of a retail fund who decided against putting their members into lower-priced products when they became available, overruling a lone director who protested, using capital letters
in what circumstances would it NOT be in a client’s best interest to transfer to the new pricing if it was lower than their existing pricing?
Spending on advertising would still be permitted under the draft legislation, but only where it was in the best financial interests of members. If it was aimed at grabbing members from other funds it probably would pass the test, because when funds get bigger the costs per member can shrink.
But the guidance note makes it clear that the costs per member would need to actually shrink, along with the charges to members, or there would need to be a documented case prepared as to why they should have shrunk.
And nor will indifferent performance. The law will require the Prudential Regulation Authority to annually test the performance of funds against objective,
consistently-applied benchmarks, different benchmarks for different stated investment strategies.
Early MySuper test results
Funds that fail the test will be required to notify their members in writing. Funds that fail two years in a row will be closed to new members.
Most of us probably have no idea that we spend more on super investment and administration fees each year than we do on gas and electricity combined.
And when the performance is lousy (the difference between a good and bad fund can be $660,000 in retirement) we often don’t find out until it’s too late.
Our funds are about to have to work for us first, and no-one else.
Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
It’s almost unimaginable: an Australian government proposes a law that would wipe out billions of dollars of employers’ entitlements.
Even more unimaginable: it does so on the basis of mistakes made by employees.
Yet right now a “Black Mirror” scenario lies before Australia’s federal parliament, in the form of the Morrison government’s “ominbus” industrial relations bill.
It proposes to extinguish entitlements owed to workers due to the mistakes made by employers. If passed, thousands of low-paid workers stand to lose billions of dollars in entitlements.
But that’s not even the worst thing that can be said of the bill. Worse still is the cynicism of its premise, the need to “fix” a problem that does not really exist.
To appreciate the depth of that cynicism, let’s recap the smoke and mirrors that have made “double-dipping” – the “horror scenario” of paying workers misclassified as casual employees both a 25% casual loading and paid leave entitlements – a hot-button issue.
Action is needed, the government claims, to address the “uncertainty” over employers incurring up to A$39 billion liabilities because of a Federal Court decision in May 2020.
Known as Rossato v Workpac, the case was unusual because the defendant, labour-hire company WorkPac – with the federal government’s support – funded the legal action against it by former mine worker Robert Rossato.
Rossato argued Workpac should have employed him as a permanent worker, rather than a casual worker, given his regular work roster. Workpac wanted the Federal Court to hear the case so its lawyers could try some arguments not used in Workpac’s unsuccessful defence of a 2018 court case (involving similar claims by fly-in-fly-out worker Paul Skene).
One of Workpac’s new defences was that Rossato (and workers in similar situations), even if misclassified as casual employees, had been paid a casual loading that should be “set off” against leave entitlements now accrued to them.
As Andrew Stewart summarised at the time: “In other words, if he was entitled to the benefits he claimed, he had already been paid for them.”
The Federal Court rejected this argument comprehensively.
In finding for Rossato, it ruled the casual loading paid any worker wrongly classified as a “casual employee” did not offset their separate entitlement to paid leave, as guaranteed to all permanent employees under the Fair Work Act.
Presumably the Federal Court must have had its reasons – and indeed it did. It laid them out in terms so clear it is hard to see where uncertainty arises.
The key distinction, said the court, was that casual loading and paid leave are two different kinds of entitlements.
The casual loading is a monetary entitlement supposed to compensate casual employees for the downsides of being casuals. Casual employees are meant to get 25% more than what a permanent employee would be paid, though research suggests in reality the loading is often neglible.
Does the loading cover casual employees not accruing annual and other leave? That is a matter of confusion, with differing approaches taken by courts and industrial tribunals. It some cases, the casual loading might be framed as compensating for the disadvantages of casual employment. Sometimes the loading might simply be paid due to prevailing “market rates”, as a wage premium to attract workers to jobs with few other benefits.
Whatever the circumstances, the Federal Court stressed that paid leave was not just another monetary entitlement when it came to permanent employees (including those wrongly classified as casuals).
As the judges put in their Rossato ruling, there is a “temporal dimension” to paid leave.
That is, it was an entitlement to an absence from work “in order to facilitate rest and recreation”. This made it qualitatively different to a cash entitlement.
So the Federal Court’s ruling was clear. There was no uncertainty. It saw no double-dipping. Its ruling did not require employers to pay twice. It required them to honour different types of employee entitlements.
Now the federal government is arguing what WorkPac (with the government’s backing) argued unsuccessfully to the court. Its industrial relations bill proposes making that losing argument the law.
If passed, courts will be required to deduct the value of any casual loading paid to misclassified casual employees from any claim they now have to compensation for not being being given the leave entitlements owed to permanent employees.
It creates a “back door” for employers to cash out paid leave obligations, leaving even more workers in the “employees without leave entitlement” category.
In doing so, the bill doesn’t just strip rights from wrongly classified casual workers. It undermines a fundamental principle in Australia’s national employment standards – reflected by the Fair Work Act having limits on cashing out paid leave.
These limits recognise leave entitlements aren’t just a personal benefit. The the whole community benefits; and 2020 has shown the community costs of failing to ensure all workers have paid leave entitlements.
Workers in risky jobs – such as aged care and meat processing – without sick leave or other entitlements have been clear transmission vectors for COVID-19 outbreaks such as that which enveloped Melbourne.
These limits have safeguarded low-paid workers signing away these rights out of financial need in lop-sided bargains.
If there’s only lesson one to be learned in the months since the Federal Court handed down its ruling, it’s this. Further impoverishing the value of leave entitlements is just about the last thing any COVID-inspired industrial relations reform should being doing.
It would be a waste if the Friday’s mammoth Retirement Incomes Review was remembered only for its finding that increases in employers compulsory superannuation contributions come at the expense of wages.
Compulsory super contributions are set to increase in five annual steps of 0.5% of salary between 2021 and 2025.
These are much bigger increases than the earlier two of 0.25% in 2012 and 2013.
And the wage rises they will be taken from will be much lower. The latest figures released on Wednesday point to shockingly low annual wage growth of 1.4%.
Should each of the scheduled increases in employers compulsory super knock 0.4 points off wage growth (which is what the review expects) annual wage growth would sink from 1.4% to 1%.
Private sector wage would sink from 1.2% to 0.8%, in the absence of something to push it back up.
Because inflation will almost certainly be higher than 1%, it means the buying power of wages would go backwards, all for the sake of a better life in retirement.
The review presents the finding starkly. Lifting compulsory super contributions from 9.5% of salary to 12% will cut working-life incomes by about 2%.
And for what? It’s a question the review spends a lot of time examining.
The review dispenses with the argument that the goal of a retirement income system should be “aspirational”, or to provide people with higher income in retirement than they had in their working lives.
It finds that for retirees presently aged 65-74 the replacement rates for middle to higher income earners are generally adequate.
Many lower-income earners get more per year in retirement than they got while working.
If the increases in compulsory super proceed as planned, this will extend to the bottom 60% of the income distribution.
They’ll enjoy a higher standard of living in retirement than while working (and will enjoy a lower standard of living while working than they would have).
Most retirees die with most of what they had when they retired, leaving it as a bequest. They are reluctant to “eat into” their super and other savings because of concerns about possible future health and aged care costs, and concerns about outliving savings.
The review quite reasonably sees this as a betrayal of the purpose of government-supported super, saying
superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation
The pension does what super cannot. It provides a buffer for retirees whose income and savings fall due to market volatility, and for those who outlive their savings. 71% of people of age pension age get it or a similar payment. More than 60% of them get the full pension.
If there’s one key message of the review, it is this: it is the pension rather than super that matters for maintaining living standards in retirement, which is what the review was asked to consider.
It is also cost-effective compared to the growing budgetary cost of the super tax concessions.
The age pension costs 2.5% of GDP and is set to fall to 2.3% of GDP over the next 40 years as the super system matures and tighter means tests bite.
Treasury modelling prepared for the review shows that if more money is directed into super and away from wages as scheduled, the annual budgetary cost of the super tax concessions will exceed the cost of the pension by 2050.
A substantial proportion of Australians, about 30%, are financially worse off in retirement than while working, and they are people neither super nor the pension can help.
Mostly they are older Australians who have lost their jobs and cannot get new ones before they before eligible for the age pension or become old enough to get access to their super. Often they’ve left the workforce due to ill health or to care for others and are forced to rely on JobSeeker, which is well below the poverty line.
It’s much worse if they rent privately. About one quarter of retirees who rent privately are in financial stress, so much so that the review finds even a 40%
increase in the maximum Commonwealth Rent Assistance payment wouldn’t be enough to get them a decent standard of living in retirement.
The review was not asked to produce recommendations. Instead, while noting that much of the system works well, it has pointed to things that need urgent attention.
It finds that pouring a greater proportion of each pay packet into the hands of super funds is not the sort of attention needed, and in the present unusual circumstances could cost jobs as employers who can’t take the extra cost out of wages take it out of headcount.
The government will make a decision about whether to proceed with the legislated increase in compulsory super in its May budget, just before the first of the five increases due in July.
Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
If you’re in a super fund, then, like it or not, you’ve got ethical decisions to make.
More than 10 million Australians have a superannuation account. Which means, effectively, more than 10 million of us are mini-shareholders with the capacity to influence future business decisions.
With that power, however small, comes responsibility. And nowhere more apparent than in relation to climate change.
Last month, the world’s biggest asset manager, BlackRock, surprised Australia’s biggest electricity producer and carbon dioxide emitter, AGL, by backing a motion that would have forced it to close its coal-fired plants earlier than planned.
The resolution at AGL’s annual general meeting failed, but when a global firm managing more than US$7 trillion in investors’ savings says it’s time to accelerate the exit from coal, it’s wise sit up and take notice.
Interestingly though, some of Australia’s biggest industry super funds, among them Cbus, Hesta and Aware, refused to support the motion, which was put forward by the Australasian Centre for Corporate Responsibility.
It’s been a pattern with industry super funds.
Rather than using their overt voting power to try to change corporate behaviour, or divest from companies altogether, they say they prefer to exert influence behind the scenes, through conversations in board rooms and executive suites.
Take, UniSuper, to which I contribute. It says it engages with companies “to encourage rapid decarbonisation of their operations and supply chains”.
UniSuper is one of only three industry funds to commit to achieving net zero carbon emissions across its portfolio by 2050 — the others are Cbus and HESTA.
UniSuper has joined eight other funds in divesting from companies that predominantly make their money from producing coal for electricity generation.
Yet if your retirement savings are in UniSuper’ default balanced option, then they are partly invested in Woodside, a company seeking to build a huge new gas hub on the Burrup Peninsula in Western Australia.
Woodside says the hub, which will operate for “decades into the future”, could process more gas than the entire volume extracted so far from another of its resource projects, the North West Shelf which began operations 36 years ago.
UniSuper’s annual report on climate risk also reveals smaller investments in gas producers Origin and Oil Search.
Experts say worldwide gas use needs to peak before 2030 in order to keep global warming below agreed levels.
It means UniSuper, and other big funds, are investing our collective retirement savings in firms whose corporate strategies threaten our collective future.
UniSuper cites AGL as an example why it stays with polluting companies. While it runs power stations fuelled by coal and gas, it also invests in renewable technology.
It says, if it were to divest, its AGL shares might be acquired by investors with less concern for the environment.
it can be in the best interests of the environment and society for the assets to be held by a responsible and reputable entity.
It’s a justification that could equally be used to defend running a gambling venue — if I didn’t install poker machines, someone else would, and at least I care for my customers.
(As it happens, UniSuper’s “balanced” option includes shares in Aristocrat Leisure, a leading maker of gaming machines.)
The justification sidesteps the question of whether the investment itself is defensible.
And it ignores the opposing argument — that divestment by a leading super fund can send a powerful signal to the market that a company is not properly addressing climate risk or developing an appropriate strategies for a carbon-constrained world.
Any company not doing these things is putting our savings at risk.
According to expert legal opinion, its directors might be breaching their obligations under the Corporations Act.
There are legitimate arguments to be had about the best way for super funds to push businesses to act more urgently on climate change, but as fund members, and the ultimate owners of our money, we need to make up our own minds and act accordingly.
To sit back and let others do it on our behalf is an abrogation of responsibility.
Superannuation may be compulsory, but we still have choices.
We can find out which companies our retirement savings are invested in, and swap to a more sustainable option in the same fund.
This can take some digging around, but as with UniSuper, some the information is available on the fund’s website or can be obtained by asking questions.
Or we can consider switching to a different fund altogether. There are websites that track and compare superannuation investments in fossil fuels.
For a range of reasons, it’s more difficult to switch to a new fund for UniSuper members.
But even where it isn’t possible, we can write to our funds, urging them to engage more actively on climate change. It’s easy to find the addresses. They are forever sending us emails.
It’s what they say they do with fossil fuel companies — engage them in conversations. We can tell them where we want our savings invested and how we want them to use their clout to influence company decisions and vote at shareholder meetings.
We can do this as individuals, and we can band together with like-minded fund members to speak with one voice.
With a combined A$2.9 trillion in assets, one fifth of which are invested in Australian companies listed on the stock exchange, super funds own a fair chunk of Australia’s most important companies.
It would be wrong for them not to take that responsibly seriously, just as it would be wrong of us not to take seriously what our savings are being used for.
The five consecutive hikes in compulsory super contributions due to start next July should be deferred or abandoned in the view of the overwhelming majority of the leading Australian economists surveyed by the Economic Society of Australia and The Conversation.
Two thirds – 29 of the 44 surveyed – want the increases deferred or abandoned. Only 13 think they should proceed as planned.
An even larger majority, including some economists who want the increases to proceed, believe they will hit wage growth. Several are concerned they will hit employment.
Compulsory superannuation contributions are paid by employers.
But ahead of the most recent increase in compulsory super, from 9% of salaries to 9.5% in 2013 and 2014, the then Labor superannuation minister Bill Shorten said the increase would cost employers nothing because it would be taken from wage rises.
“A portion of what would have been employees’ increases will go into compulsory savings,” he said.
The two most recent increases in compulsory superannuation in 2013 and 2014 were small by design – 0.25% of salary each.
The next five increases, originally due to due to begin in 2015 but postponed to start in July 2021, are much bigger – 0.5% of salary each – at a time when wage growth is much smaller.
In 2012 Shorten was expecting wage increases of 3-4% and “assuming that a quarter of a per cent of that 3% to 4% may well go into your compulsory savings”.
Wage growth has since slipped to 1.8%, the lowest on record. If the best part of 0.5% is taken out of that each year for the next five years it is unlikely to climb.
Wage growth has slipped to 1.8%
The 44 members of the Economic Society’s 57-member panel who responded include Australia’s preeminent experts in the fields of microeconomics, macroeconomics economic modelling, labour markets and public policy.
Among them are former and current government advisers and a former head of the Australian Fair Pay Commission and member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.
Each was asked whether the legislated increases in compulsory super contributions should proceed as planned, be deferred or be abandoned.
Only 13 of the 44 thought the increases should proceed as planned. 29 thought they should be deferred or abandoned, nine of them preferring they be abandoned altogether.
Those who thought they should be deferred argued that now is “not a time to encourage saving”. In the current circumstances we should be “far more worried about spending power today than in the golden years of present-day workers”.
Economist Saul Eslake said he had changed his mind. The latest evidence (which will be updated in the retirement income review) suggests that the current 9.5% so-called super guarantee will be enough to provide most people with an adequate income in retirement .
“In saying that I acknowledge that there is still a significant problem with regard to the adequacy of superannuation savings for women relative to men, but I don’t see how raising the super rate for everyone to 12% solves that problem,” he said.
Economic modeller Janine Dixon said it was not clear that the optimal contribution was 12% rather than 9.5%. The increase would force some households into greater debt. While this would pose a risk to economic stability at any time, Australia could “not afford to let the household sector weaken further at present”.
Economist Geoffrey Kingston said anyone who felt 9.5% was not enough remained “free to make voluntary contributions”.
Among those believing the increases should proceed as planned were two former politicians, Labor’s Craig Emerson and former Liberal leader John Hewson.
Emerson said 9.5% was “considered inadequate by the burgeoning retiree population”. Without an increase, that population “would successfully demand increased pension levels from the Commonwealth”.
Hewson said compulsory super had become a fundamental part of an effective retirement incomes strategy and, COVID and economic collapse notwithstanding, we should “finish the job”.
Sue Richardson, a former member of the Fair Work Commission’s wage panel, believed any deferral might lead to another deferral and be “hard to recoup”.
The economists were asked to rate their confidence in their responses on a scale of 1 to 10.
Unweighted for confidence, 20.5% of those surveyed wanted to abandon the increases altogether. When weighted for confidence, that proportion climbed to 21.6%. The proportion that wanted the increases either deferred or abandoned climbed to 67.1%
Asked whether the increases were likely to be largely paid for via slower wage growth than otherwise, 30 of the 44 economists agreed. Only eight disagreed.
Economist Nigel Stapledon said this “should not be controversial”.
Private sector economist Michael Knox said: “unless one lives in an unreal world, increases in superannuation guarantees are funded by employers out of the total wage the worker might otherwise receive”.
Several enterprise bargains explicitly make a trade-off between wages and superannuation, providing for wage increases that will be 0.5 points higher should compulsory super contributions not climb by 0.5 points.
Economist Alison Booth said if employers weren’t able to trim wage rises to pay for the scheduled increases in super contributions, they might “attempt to adjust on other margins”.
In a recession, when workers lack bargaining strength, “employers could coerce them to accept other adjustments to their contracts”.
Two of the eight economists who disagreed with the proposition that the increases in compulsory super would come at the expense of wages thought that employers wouldn’t grant wage rises anyway. Increases in super contributions might be one way for employees to get something.
A concern among both those who agreed and disagreed was that if the increase didn’t come at the expense of wages, it would push up the cost of hiring and come at the expense of jobs.
“Inflation is very likely to be very, very low and wages to be sticky,” said government advisor Matthew Butlin.
“Higher superannuation payments in an environment where wages are unlikely to rise and cannot fall will raise real labour costs and reduce the incentive to employ.”
Economic modeller Janine Dixon said that while over time the increase in contributions would probably come from wages, the immediate impact would be to increase the cost of hiring, “which is an unacceptably large risk in the present climate”.
When adjusted for confidence, the proportion of those surveyed expecting the increases to largely paid for via slower wage growth climbed from 68.2% to 71%. The proportion disagreeing fell from 18.2% to 17.8%.
Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
A big part of the Morrison government’s response to COVID-19 has been allowing people early access to their superannuation.
Australians who have claimed hardship have applied for A$30.7 billion to date.
This has been happening in an environment in which compulsory super contributions are set to climb from 9.5% of wages to 12% over the next five years starting in July next year.
Many in the super industry and former prime minister Paul Keating argue that these scheduled increases have to go ahead in order to repair the damage done to the super balances of Australians who withdrew super.
However, new Grattan Institute modelling shows most Australians will have a comfortable retirement even if they have spent some of their super early.
Under the government’s scheme, people who have lost their job or had their hours cut or trading income cut by 20% or more were allowed to withdraw up to $10,000 from their super between April and June, and up to another $10,000 between July and December.
Retirement incomes will fall for workers who withdraw their super, but not by as much as might be thought.
The pension means test means that the government, via higher pension payments, makes up much of what’s lost.
The result is that a typical (median income) 35 year old who takes the full $20,000 would see their retirement balance fall by around $58,000 but would see their actual income over retirement would fall by only $24,000.
Put another way, in retirement that worker would earn 88% of their pre-retirement income instead of 89%.
Both are well above the 70% post-tax replacement benchmark used by the Organisation for Economic Cooperation and Development and the Mercer Global Pension Index to determine how much is needed in retirement.
Workers on median incomes who withdraw the full $20,000 will remain well above that benchmark, even with compulsory super contributions staying where they are, at 9.5% of salary.
The very highest and very lowest income earners will receive less extra pension to compensate, and will have less of a cushion.
Defaults such as compulsory contributions have to be set so they work for most of the population.
While around one in five Australians have accessed their super early, four in five have not. Policy makers can only justify forcibly lowering someone’s living standards during their working life – by lifting compulsory super – if they are protecting that person from an even worse outcome in retirement.
Our modelling shows workers on all but the highest incomes will retire on incomes at least 70% of their pre-retirement post-tax earnings, the so-called replacement standard.
The graph shows that many low-income workers will receive a pay rise when they retire, even if they withdraw the full $20,000 from super.
Of course, some low-income Australians remain at risk of poverty in retirement – especially those who rent. They struggle even more before they retire.
Boosting rent assistance would do far more to help them than would higher compulsory super contributions, and would do less to make them poor while working.
Before COVID-19, there were good reasons to abandon the planned increases in compulsory super; among them that it would do little to boost the retirement incomes of many Australians, that it would drain government tax revenues and widen the gender gap in retirement incomes.
Increasing compulsory super contributions in the midst of a deep recession would slow the pace of recovery. And that would be bad news for all Australians, regardless of how much we end up with in super.
Commercial properties include office buildings, shopping centres, hotels and warehouses.
They account for 8% of the assets of Australian super funds.
If their values drop (and they are falling) it will affect all of us, especially those about to retire or already retired.
Until COVID-19, commercial properties were widely regarded as safe investments. They offered both reliable income streams and capital gains as population growth increased the value of scarce real estate.
With the return on government bonds falling below 1% they ought to be becoming more attractive, but offices are empty, their future uncertain, high end shopping centres are receiving less traffic, and hotels have entire floors unused.
In July the number of mobile phones active in Sydney’s central business district was down 52% on January and February. In Melbourne’s CBD, before the stage 4 lockdown, mobile phone traffic was down 65%.
For super funds with 8% of their assets in commercial property, a decline of 25% in values knocks 2% off their assets — A$54 billion across the industry as a whole.
In the only other big downturn since the advent of Australia’s superannuation system, the global financial crisis, commercial property offered the funds stability while shares were volatile.
Not so this time. The value of the commercial property is diving along with the stock market with just as uncertain a future.
A significant number of wealthy individuals have used the ability of self managed super funds (SMSFs) to borrow for property and other investments to supercharge their funds.
It is not something done by retail and industry funds.
According to freedom of information documents obtained by the Australian Financial Review, in 2018 the largest 100 self-managed super funds had borrowings averaging around A$10 million each.
Given the tax benefits granted to superannuation, this exploitation of the system by Australia’s super-wealthy is scandalous, albeit legal. In 2018 more than 200 members of those biggest 100 self-managed super funds were members of the Financial Review Rich List.
Along with other members of the 2014 Australian Financial System Inquiry chaired by David Murray, I voted enthusiastically for a recommendation to ban borrowing by funds.
Unfortunately, after intense lobbying from the self-managed super fund sector, the Coalition government rejected that recommendation.
I am sure that each of the panel members put different weights on the arguments as to why “no leverage in super” would be good policy.
I focused on two.
First, leverage can lead to funds taking excessive risk, and it also enables some to “rort” the system by getting more assets into the tax-preferred status of super at the expense of the taxpayer
The second argument is about financial sector stability. Leveraged (indebted) financial institutions can be at risk of insolvency and exposed to runs by creditors. A highly levered financial system with lots of interconnectedness can face problems of fragility. Keeping super “un-levered”, as is generally the case for institutional super funds, would be good for stability.
But even funds that can’t borrow, such as retail and industry funds, face problems if there is a “run” of members wishing to withdraw money.
That could arise because, believing that there are legislated limits on when members can access funds, they have invested significant amounts in longer term, illiquid assets such as toll roads, airports and office buildings in order to produce superior long term returns.
Changing the rules on when members can withdraw funds, such as with the current change to allow withdrawals of up to $20,000, pressures funds to sell off assets they had planned on holding to generate enough cash to meet withdrawals.
Between $30 billion and $50 billion may have been pulled out already.
It isn’t a good time to be selling assets. Depressed sale prices mean the value of all members’ accounts will be further depressed.
Super funds could borrow to obtain the cash needed to meet withdrawals. But that would expose their members to considerable risk if asset prices fell further. They would have to have to pay back the loan from assets that were worth less.
But if the liquidity problem is purely temporary, brought on by a temporary change in legislation, borrowing might not be such a bad option compared to a forced sale of assets.
While I have not changed my view on prohibiting borrowing in general, I think current circumstances warrant a limited exception.
That exception is that where there is a temporary liquidity problem, brought on by a government change in rules, the institutional super funds should be able to borrow from the Reserve Bank.
Banks can borrow from the Reserve Bank in emergencies. Why not super funds?
In this regard, I am at variance with commentators like David Murray and indeed the Reserve Bank itself. Moreover, I think there are reasonable arguments for making access to the Reserve Bank ongoing.
Bank access to the Reserve Bank, often referred to as the Reserve Bank being a “lender of last resort” is not about bailing out insolvent institutions. It is about providing temporary liquidity, at a price, to solvent, but illiquid institutions.
And the current issue is one of illiquidity, not insolvency. In principle at least, unlevered accumulation funds can’t go insolvent. If the value of assets falls, liabilities (amounts due to members) fall correspondingly.
When an unexpected policy change creates a liquidity problem for super funds, it behoves policy makers to find a solution that avoids the need for funds to generate cash by selling assets at depressed prices.
Allowing super funds to borrow from the Reserve Bank using repurchase agreements would be such a solution. And since the need for liquidity is a consequence of the policy change, those borrowings should not attract a penalty interest rate.
It is important to note that these borrowings are different to the type we argued against in the financial system inquiry.
There, we were concerned about funds increasing the size of their portfolios by borrowing and taking on additional risks.
Here, the borrowings would enable funds to avoid shrinking their portfolios and enable them to reduce the risks and costs they (more precisely their members) face.
My suggestion is that while borrowings by super funds should generally be prohibited, accessing temporary liquidity support from the Reserve Bank should not be part of that prohibition.
If access to such a facility is made ongoing, there would be a case for offering it at penalty interest rates and subjecting funds to liquidity regulation. But those are questions best left for reasoned discussion in more settled times.
Oh, and there has to be a severe crackdown on the ability of wealthy individuals to rort the tax benefits of super by borrowing through their self-managed super funds.
For the government to allow such borrowings but not support institutional funds by allowing borrowing from the Reserve Bank in times of crisis seems, at best, anomalous.