The fallout for the superannuation industry from the calamitous state of investment markets to the end of 2008 continues to worry everyone. The nails of officialdom are being chewed to the bit.
In recent weeks, we’ve seen the government consider suspending rules about minimum pension drawdowns, to allow people to protect how much money they have in super and not have to sell assets at huge losses, and continued concern about DIY super funds being too easy to start up. (We’ll come back to the latter.) And, possibly most disturbingly, we’ve got the coming together of superannuation enemies.
When the wagons start circling and you find the person who is defending your back is your sworn enemy, times must indeed be interesting. If you sawPaulKeatingandJohnHewson, on the TV, standing arm in arm and singing from the same songbook, you’d turn up the volume to see what they were singing, wouldn’t you?
So what is it that has got the Financial Planning Association and the Industry Funds Forum to join forces? Normally, you wouldn’t throw these two in the same pot without expecting blood and black eyes.
Simply, it’s fear. And it’s far bigger than just these two. It involves almost all the big hitters in the super industry. They’ve all lowered their firearms and called a temporary truce. The other curious suspects are the Association of Financial Advisers, the Australian Institute of Superannuation Trustees, the ASX, the Association of Superannuation Funds of Australia, CPA Australia, Industry Super Network and the Investment & Financial Services Association
Between them, they’ve got the vast majority of the industry covered. (Although they hadn’t really invited representatives of the self managed super fund industry.) The seven organisations have come together as the “Superannuation Stakeholder Group”.
But why? They want to try to get a headstart on the coming tsunami of discontent that will flow when super funds start sending out their statements for the period to the end of December in the next month. They are going to show that 2008 provided the worst superannuation results for Australian members since compulsory super began early last decade.
And they’re hoping that they might be able to get their message out – that it’s not their fault – of understanding of how the global financial crisis has impacted on YOUR superannuation.
The SSG’s “communiqué” was issued last week, just a week or two before the first super funds will start the mail out of the statements. These statements are going to show plenty of red ink, either for the six-month period to December 31, or the one-year period that covers the whole of the 2008 calendar year.
The majority of balanced fund options will be down an incredible 20-26%. Those with funds in a straight (but diversified), growth fund (all shares and property) could be looking at balances that are down 30-40 per cent.
The SSG wanted to get a unified message out there. (With so many competing interests, it’s a wonder that they managed to agree on anything.) So, what does the industry agree on?
The four-page document, in essence, is trying to putAustralia’s investment markets into a global context. The 40% fall in the Australian share market for the 2008 calendar year compared to 31.3% for theUK, 38.5% for theUS, 42.7% forFrance, 40.4% forGermanyand 42.1% forJapan. In other words, we were thereabouts.
Volatility has been a killer. And because it has been so long sinceAustraliahas had a real crash, some people have begun to believe that (a) markets only ever go up, or (b) if they do fall, they tend to recover fairly quickly. Recent downturns have been this way, with the Tech Wreck in 2000,September 11, 2001, and downturns in the early 90s being relatively short-lived.
However, the SSG’s statement said that downturns in 1929, 1973, 1980 and 1987 had sustained low periods to follow. A survey by one of the group’s members showed that more than a quarter of Australians believe the market will have fully recovered within 12 months, while a further 39% believe it will take only two to three years.
“Every market downturn is characterised by a point in time when share prices fall too far and assets become undervalued,” the statement said. “At this time, professional investors start to buy back into the market which pushes share prices up and builds overall market confidence. When other investors see market confidence return, they too invest … and so begins the recovery.”
As we’ve pointed out in this column recently, switching to a more defensive investment style in bad times and back to more aggressive investments in good times will be a losing strategy because you’re selling and taking losses when asset prices are depressed and buying back in after they’ve already recovered.
The SSG also reiterates that super is a long term investment – even for those who have retired. The average life span for man is 79 and for women it’s 84. If a worker is retiring at 65 to take a super pension, a male would still, on average, have another 14 years for their super to last them, while a female would have about 19 years.
It also pushes the usual messages that super is a low-tax environment, that once you pull money out of super, it can be difficult to put it back in, and medium- to long-term returns (five years plus) are actually still quite healthy for most funds.
There’s nothing too out-of-the-box from the communiqué. What it does mean, however, is that the industry, which has not had to explain bad results for a considerable period, is ready to deal with the likely queue at the complaints department.
So, isSenatorNickSherrylooking to legislate for a minimum amount of funds required before trustees can open their own self managed superannuation fund?
Officially, there’s no comment. The Government announced a review into the SMSF industry about a year ago, but a spokeswoman for the minister said there was no defined time period for that committee to report back, or for the minister to take any tough decisions that he might be considering. Given everything else that’s going on, its importance has probably dropped.
SenatorSherryraised the issue a year ago – that he was concerned that too many trustees were being allowed to set up SMSFs with too little idea of what they were doing, too little money to put into their fund and that were paying fees that simply could not justify the small amounts in the fund.
Parts of the industry admit that there is a growing problem of people being recommended to set up their own SMSFs when they don’t have enough money, skill or interest to do a SMSF justice.
Recently, I have come across a number of trustees with around $100,000 in a brand new SMSF. Why are they starting super funds with this amount of money? It has usually been at the recommendation of a trusted professional (in my experience, this has predominantly, but not solely, been the trustees’ accountants). Why are they starting super funds with less than $100,000 to kick it off? The trustees themselves usually don’t know. They were following advice.
Who wins in this situation? Not only can it cost more than $1000 to set up a fund, but the ongoing accounting and audit bill will usually be between $2000 and $4000. Those fees never end. Once a fund is set up, accountants (at whichever firm) can look forward to pulling in these fees each and every year.
The continuing expansion in the number of SMSFs suggest the issue is only getting worse. Far be it for this column to recommend governments increase restrictions on SMSFs. But there are clearly some interests out there that need to be reined in.
Bruce Brammall is a financial adviser with Stantins and author of Debt Man Walking – A 10-Step Investment and Gearing Guide for Generation X.