Annual policy adjustments, which have become an unfortunate feature of federal budgets, are hampering citizens’ efforts to confidently plan for their financial future. This runs counter to the government push for individuals to assume greater personal responsibility for funding their retirement, thereby reducing pressure on an unsustainable age pension regime. Ultimately, an untoward loss of confidence in superannuation risks prompting a large-scale exit – or Suprexit – from the system.
A Suprexit among working age contributors could take the form of ceasing all voluntary contributions. Limiting contributions to the minimum SGC (Superannuation Guarantee Charge) would be sub-optimal, as this is already far too low.
Among those who have attained their preservation age and retired, Suprexit could entail a complete withdrawal from the superannuation system. Instead of rolling their accumulated savings into a pension, they may opt to withdraw. In response to ad-hoc government policies, these funds then risk being directed to unsound and ultimately unwise investments.
Super shrink me
A large-scale outflow of funds from superannuation would represent a loss-loss situation, in which individuals and the country would be worse off.
Investment within a diversified fund is a proven method of steadily accumulating wealth. For example, the March 2016 Quarterly Report for the Mercer Growth Fund shows a five year return after fees of 7.2 per cent. This significantly outperforms bank savings accounts, and is similarly ahead of inflation, thus maintaining investors’ spending power. Moreover, diversified fund investment is historically an ideal method of wealth creation for people who don’t have the time, skill or inclination to manage their investments themselves.
If people exit the sound investment environment of superannuation, they risk making poor investment choices. Such choices will impact individuals and may increase reliance on the age pension as a social safety net. Vulnerable investors may be attracted by the lure of more speculative investments, that have the superficial appeal of currently being tax efficient and potentially lucrative. However, these typically deliver neither of these over the long term, with characteristically weak fundamentals further undermined by regulatory and policy risk.
Unsound investments primarily impact individual investors. There may also be a systemic effect associated with a renewed reliance on the public pension system, which is contrary to the objective of superannuation. Tax-driven property investment, in particular for investor-funded apartments, is a case in point. A scenario of rising interest rates and tighter bank lending criteria could force highly geared property investors into arrears. If such arrears exceeded the banks’ provisioning levels there could be systemic implications.
A form of sovereign risk
Another impact of funds leaving the superannuation system is the diminished potential for infrastructure funding. In 2014, the Financial System Inquiry noted the “importance of the superannuation system for national savings and funding economic activity”. Reflecting their long-term investment horizon and diversified asset allocation strategies, superannuation funds typically allocate a portion of their funds to infrastructure investment. These investments provide return benefits to members, and also enable the construction of infrastructure that is vital to Australia’s future prosperity.
A potential loss of faith by superannuation funds in the merit of investing in Australia’s infrastructure may prompt a similar reaction from foreign investors who are a vital source of investment capital. This represents a form of sovereign risk, a term not normally associated with OECD economies such as ours. However, as with other forms of risk, once fund flows turn away due to a feared greater regulatory burden and instability in rules, it takes substantial time and effort to entice them to return.
Hence, for the benefit of individual investors, and Australia as a whole, it is time to cease the ad-hoc political tinkering with superannuation policy. Furthermore, I urge both sides of politics to adopt a considered and more holistic view of the superannuation tax provisions that won’t lead to the implementation of policies with unintended consequences.
David Gallagher is the chief executive officer of CIFR